KPIs for Innovation – Managing Innovation for the Mutable Business
I’ve been thinking about KPIs for innovation initiatives in the Mutable Business. It’s a business, so resources devoted to Innovation must be managed; but, obviously, insisting on an ROI analysis before thinking about anything is going to kill innovation. On the other hand, you encourage blue sky innovation in the context of constant evolution only because you expect some sort of positive business outcome from it.
Justin Speake (Bloor’s CEO) suggests that one should be: “Looking at KPI’s for innovative/transformation projects not innovation itself. So [to Justin] the KPI’s are pretty similar to those when people went from a dial-in interface to a web interface or from a catalogue to an online shopping environment, or from phone support to community support”.
I think that this is more-or-less in line with my view that if you can’t measure business outcomes and relate them back to your investment in innovation, then you might be headed down the tubes. Nevertheless, I also think there is some need to make sure that “innovative/transformation” projects are encouraged (or, at least, not discouraged) in an organisation. Useful innovation can be a business goal, I think.
In general, I’d consider that identifying key performance indicators for innovative projects in the mutable business is a good idea. “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” – from here. There are other definitions (e.g. Wikipedia).
I’d just like to point out that choosing KPIs is important (you get what you measure); that they can be financial or non- financial; and that composite KPIs that you can’t measure directly (derived from a combination of directly measurable KPIs) may be better indicators than easy-to-measure KPIs.
You had also better think about what you mean by “innovation”, if your innovation KPIs are going to be useful: “Do NOT skip this key step. The strategic intent of “innovation” can vary wildly from organization to organization. Until you’ve properly defined the objective AND the intended results, you cannot possibly develop a meaningful performance measure” – from here.
I rather like the Balanced Scorecard approach – you can all read the pdf as well as I can.
One KPI suggested in the Balanced Scorecard pdf is Return on Product Development Expense, or RoPDE. It is claimed to provide a comprehensive KPI for measuring the performance of product/service innovation and development:
RoPDE = (GM – PDE) / PDE
where (GM) is Gross Margin, and (PDE) is Product Development Expense
Note that RoPDE is NOT the same as ROI.
Obviously, there isn’t just one possible Innovation KPI, but I do think that “useful” innovation needs to be distinguished from innovation that never gets implemented – without stifling innovation by discouraging “blue sky” thinking.
Another suggestion, from elsewhere, is to look at lower-level KPIs for the innovation process – measure the process, not the outcomes. This is the approach here. I like this, although not everyone agrees that you should measure the process, and perhaps measuring the outcomes will be enough. Personally, I think you need to measure both.
Perhaps one could look at the number of new ideas being considered (the raw material for innovation). Any idea should count, as you can (probably) control “gaming” of the idea counts with peer pressure, if you have a mature innovation culture. Perhaps you’ll need a KPI for cultural maturity as well.
- An interesting KPI is the number of different (unrelated?) skills/experiences in the innovation team (people with the same skill-sets and experiences tend to deliver the same solutions). If this KPI is falling over time, you are probably entering failure mode.
- And perhaps you should track, as a KPI, the number of existing-solution constraints being actively considered (you can’t break out of a box unless you know it is there). This KPI may help you avoid “ivory tower” innovation that never gets implemented.
- I’d have also thought that metrics for social media penetration, in key (informed) fora (possibly in-house) might form a basis for KPIs. The wisdom of crowds – if people aren’t talking about your innovation, it may not be worth much. So, track the number of posts, numbers of comments on posts in your social media platform. This is particularly easy to “game”, however, unless you have that pesky “mature innovation culture”.
I think one needs to focus on the “effectiveness” of innovation – presumably, it matters whether the innovation is actually delivering anything usable or not. And, as I’ve said, innovation may mean different things to different people.
So, taking Blockchain as an example, innovation (in my opinion) isn’t really about building more Blockchains, it’s about attracting customers for applications that wouldn’t be possible, or wouldn’t have any customers, without Blockchain.
In conclusion, it is all very well seeing innovation as artistic and free, but a responsible business must manage it, and “you can’t manage what you can’t measure” – but choosing appropriate metrics is vital. The leaders in mutable business will manage innovation and constant evolution without stifling employee creativity.