Getting a Grip on Innovation – Pros and Cons of Measuring Innovation with Key Performance Indicators (KPIs)
Measuring innovation is not an easy thing to do. The first issue, of course, is defining what you are measuring, and then just what DO you measure to determine whether your enterprise is innovating sufficiently or falling behind the pack?
Justin Speake, CEO of independent research firm Bloor, suggests that key performance indicators (KPIs) can be useful in measuring innovation, but with one caveat. Speake notes one should be: “Looking at KPI’s for innovative/transformation projects not innovation itself.”
Don’t Seek to Measure Innovation Itself, Instead Measure Results of Innovation
Every business has some means to measure business outcomes. More sophisticated businesses are able to track business outcomes at a fine-grained-enough level to be able to relate these outcomes back to specific investments they made to promote innovation.
Resting on one’s laurels is not an option in the modern business world. Innovative/transformative projects should be nurtured at every enterprise of any size for the long-term survival of the organization.
Identifying specific KPIs for innovative projects is where the rubber hits the road.
According to Klipfolio, “A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs may focus on processes or employees in departments such as sales, marketing or a call center”
The process of choosing KPIs is multi-factorial, and every situation is unique. Note that KPIs can be financial or non-financial, and can relate to just about any aspect of business outcomes. Also keep in mind that “composite KPIs”, which can’t measured directly (created from a combination of directly measurable KPIs), are often more valuable indicators than easy-to-measure KPIs.
You also need to have a definite idea of what you mean by “innovation” in order for your innovation KPIs to be valuable. Given the reasons for “innovation” may be very different from organization to another, unless you have defined both the objective and the results expected, you will not be using a meaningful performance measure.
Balanced Scorecard Approach
You might consider the Balanced Scorecard approach to develop your innovation KPIs.
One KPI discussed in the Balanced Scorecard approach is Return on Product Development Expense, or RoPDE. Theoretically, RoPDE is a comprehensive KPI that can adequately measure the performance of product/service innovation and development:
RoPDE = (GM – PDE) / PDE
where (GM) is Gross Margin, and (PDE) is Product Development Expense
One other approach is to consider lower-level KPIs for measuring the innovation process; here you are measuring the process rather than the outcomes. Not all expert sources agree regarding the value of measuring the process, and some argue that accurately measuring the outcomes is sufficient for the purpose. But then again, what does it hurt to measure both?
One could also track the number of new ideas being considered (the raw stuff of innovation).
Another lesser-known KPI of interest is the number of different skills/experiences in the innovation team (those with similar skill-sets and experiences often come up with the same solutions). If this KPI is dropping quarter over quarter for more than two or three quarters, you should start to get seriously worried.
You could also develop a KPI relating to the number of existing-solution constraints being actively considered. You can think of this KPI as insurance against so-called “ivory tower” innovation that never gets off the ground.
In general, your KPIs should be designed to measure the effectiveness of innovation, that is, whether the innovation is actually delivering anything you can use or not.
While it is true that innovation is often spontaneous and its form cannot be predicted, a business that plans to grow must manage innovation, and that means finding a reasonably accurate method to measure it.
Last but not least, remember that the trick in managing innovation is encouraging constant evolution among your employees without stifling their creativity.
Also published on Medium.