November 12, 2009 Sofus Midtgaard

innovation_dollars2Most people would agree that innovation is key to the future success of any companies – unless we speak of monopolies. Innovation has for years been hyped as the new black in the world of business.

From a narrow focus on product innovation we have with the years expanded our horizon and vocabulary to differentiate between product-, service-, sales-, financial- and process-innovation etc.

At Business Schools around the world we are taught the crucial difference between radical and incremental innovation by professors from Harvard or Stanford. At Innovation courses we learn how to build innovation funnels and State-Gate-processes.

And from the world of consultants new words like: innovation strategy, user driven innovation, open innovation, customer inspired innovation, crowdsourcing and co-creation – contributes to the buzz.

But exactly how does innovation contribute to the bottom line of a company?

Answer this question and you might get the Nobel price in Economics or at least the applause of thousands of CFO’s around the world. I’ll go for less in the following, with some ideas and practical advice on how to set goals for – and estimate the effect of innovation initiatives.

Setting goals for innovations projects

Setting and measuring project goals are usually much easier than tracing the effect of innovation. In my post: Measuring the effect of Open Innovation and Open Idea platform initiatives I give some examples of relevant project- as well as effect-goals for innovation projects.

Here I will try to take this approach a bit further and see if it makes sense to try to estimate the bottom line contribution of an innovation project.

Typical problems measuring the strategic effects of innovation projects

An innovation program or project’s effect on strategic goals like: Customer loyalty, Revenue from new products, Improved productivity etc. will normally first show long after the project is implemented.

Few organizations have the patience to wait 12-36 months for the data to arrive. And even if they do it is it very difficult to estimate what part of a 7% increase in costumer loyalty was due to a specific innovation initiative started two years later.

A way to link projects contribution to strategic goals

Inspired by feedback from Jens Poder on my earlier post on measuring the effects of open innovation & idea-platforms, I have developed a more pragmatic approach to help estimating the effect of innovation initiatives. This approach is based on a “less than perfect” approach to data. Instead of waiting for “real” (but in this case often useless) data, you rely on key employees estimates and judgments of a projects contributions to selected strategic goals.

A structured discussion about a projects expected effects and link to strategic goals, is often well facilitated by using a scorecard like the above. The relevant goals will differ depending on the type of project, the company and the industry – but here are some examples.

Using a scorecard structures the dialogue by forcing people to be specific. Filling out and having to agree on the scores in a group-session will often spur great discussion and create a shared understanding of the project. If an important dimension is missing – it can be added during the session based on the input of participants.

You can further break down the above into more measurable effect goals if you accept a “less than perfect” approach to data. Instead of waiting for ‘perfect data’ you rely on the perceived effect of a project by key stakeholders in your organization.

Examples of effect goals

  • Estimated increase of positive press coverage: TV, radio, articles, blogs, social media in % as perceived by Marketing/Communication people
  • Estimated increase in customer loyalty in % as perceived by Sales people
  • Estimated revenue increase from new/improved products in % as perceived by Sales people
  • Estimated % time saved due to more efficient processes as perceived by COO/CFO
  • Estimated increase in happiness/loyalty in % among key employees as perceived by HR people
  • Employer Branding – estimated increase in % of candidates that find company “attractive” or “very attractive” as perceived by HR people

If a project committee estimates projects on standardized dimensions, this will create a platform for benchmarking and picking the projects that best contributes to strategic goals. Few companies though master this ridgid and cross-divisional process. In real life politics between divisions and the CEO’s gut feeling often influence decisions. So beware wasting your time on fancy processes and project committees unless you have the full support of the CEO and CFO.

Evaluating the success of a project

At an appropriate and agreed upon time (0-3 months) after the launch of the initiative/project – key representatives from relevant divisions are asked to:

  • Estimate the projects expected effect on the agreed upon strategic dimensions (see above)
  • Give feedback on what adjustments can be done to improve the effect
  • Gather key learning’s for use in future projects and estimates of these

This approach would both help linking innovation initiatives to strategic goals and force project owners/steering boards to focus on the effect rather than merely project goals.

I real life though, few companies have the discipline to make systematic evaluations like this. It might be hard to find the time and gather people for an evaluation.  It might be overkill spending so much time evaluating smaller projects. But the most common cause in my experience seems to be that: very few managers like to dwell on and learn from less successful projects.

Making the CFO happy – estimating Return On Innovation

In times of economic crisis the CFO is god! You’ll need more than your usual charm to get through with an innovation project. If you wish to strengthen your individual proposal or make a better benchmark model to compare different projects, you could try to make a rough estimate of the total economic value of new projects. In the above case you’ll need to estimate and internally agree upon the $-value of say a 1% increase in:

  • Positive press coverage
  • Customer loyalty
  • Revenue from new/improved products
  • Productivity
  • Employee happiness or loyalty
  • Employer brand value

If you can agree upon the $-values and a standardized way of estimating cost, you’ll have an internal economic benchmark platform for innovation projects. Agreeing on the $ value though will become a highly political affair if the model is rigidly implemented in say a stage-gate process for project selection across divisions.

Think of this exercise merely as creating an indicator of the value of an initiative. There might be other intangible benefits that you miss in a rigid evaluation like this. Rather than a great economic forecasting method, the real benefits are that this approach forces you to:

  • Consider the link between innovation projects and your strategic goals
  • Creates a platform for discussing and benchmarking innovation projects

Truth is: Your CFO will probably never really be happy without a traditional P&L (Profit & Loss Statement) or a NPV (Net Present Value).

For more on estimating the Return on Investment (R.O.I.) on Social Media activities see my post: How does social media activities contribute to the bottom line?

For more on projects & effect goals of innovation projects see my post: Measuring the success of Open Innovation & Idea Platforms

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