There has never been a better time to invest in innovation. Markets are not growing. Investing overseas might be too risky and/or too expensive. Innovation for profitable differentiation has become the name of the game while firms wait for a sustained market recovery. At the same time, shareholders and top executives expect greater innovation ROI and regularly request to see innovation dashboards to gauge the payback of large innovation investments. One question I frequently get from innovators is “What key performance indicators to include in an innovation cockpit?”
Besides the usual and basic innovation metrics, I frequently recommend to include innovation rate as a percentage of sales. Wikipedia defines innovation rate as:
“A measure that indicates how innovative a company is in terms of new or improved products, services or processes. Measures the portion of the revenue with new/improved products or services in comparison to the total revenue. Innovation Rate = (Gross Revenue-Earned of New Products or Services) / (Gross Revenue – Earned)”.
Not all innovation rates are created equal though. Many companies jumped on the innovation rate band-wagon after 3M started reporting it many years ago. Many of these firms report a high innovation rate to do “window-dressing” for their boards and to try to excite their customer base. There are many ways to manipulate innovation rate levels and this is why I frequently recommend to measure true innovation rate. It really all depends on what firms are trying to use an innovation rate for. It also depends on how they define, calculate and track it.
- What do you count in the innovation-derived sales? You have to be clear with what constitutes an innovation. Do you include products, services, and processes? Do you include all levels of innovation (disruptive, advanced incremental, basic incremental/me-too)
- How far back do you go to track new product sales? 3 years, 5 years? 10 years? That makes a big difference on the calculation and the result.
- When do you start counting? First $ sales ? Or when the product is truly commercial? Do you have a long commercial cycle? Do you incrementally deploy innovations region by region?
Here is a step-by-step recommended approach:
1. Benchmark best-in-class companies in and out of your market space:
Identify their innovation rate and establish a relevant industry benchmark. Gage how these companies calculate their innovation rates: rules, timeline, scope, etc.
2. Set the calculation rules in total and by innovation level (1, 2 and 3):
Establish your calculation rules and your scope by consensus. Ask the Innovation Council to define these parameters and to make a recommendation to top management. There is not right or wrong in this step. Make sure your innovation rate calculation and measurement process is consistent, systematic and relevant to your firm and to your industry.
3. Analyze your true existing innovation rate:
You have to start somewhere. Start by measuring innovation rate in percent for the current quarter and the past year. The result might be positively or negatively surprising. This is usually where breakdowns start happening. Some leaders will reject the initial rate and question the calculation methods.
4. Have mindful and candid discussions about the what, when, who and why of the innovation rate:
Firms and their leaders should resist the temptation to manipulate the innovation rate and to make it look better than it is. In the end, it all depends on what their try to accomplish with that specific metric. Do they truly want to inject more innovation and push for a higher rate? Or do they want to report high numbers and pretend that innovation is alive in their organization.
5. Measure and report Innovation Rates Quarterly:
Measure, measure and measure. Even if you start from a low innovation rate, measuring and reporting improvement can provide a morale boost.
6. Deploy programs and activities to truly drive innovation rates and match the goals of the organization:
If you have a 30 percent innovation rate as an organization goal, you might have to invest heavily in the front end of innovation depending, of course, of where you start.
There is no silver bullet with respect to how to define and measure innovation rate. When using it as a key innovation metric, it is important to be honest and realistic about how and why it is measured but also what it means in terms of innovation strategies.
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