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The Best Metrics for Innovation
Danny Nathan
December 01, 2024 • Estimated Reading Time: 12 minutes
Innovation is the lifeblood of any forward-thinking organization. Yet, many companies struggle to effectively measure their innovation efforts. The metrics that work well for traditional operations — like Return on Investment (ROI) or Return on Net Assets (RONA) — often fall short when applied to innovation. To truly foster a culture of innovation, companies need to adopt tailored metrics that guide and measure their efforts without compromising long-term growth.
In this week’s edition, we'll explore why traditional metrics aren’t a great fit for innovation teams as well as some new metrics that may align more closely to innovation needs. Here’s what you’ll find:
This Week’s Article: The Best Metrics for Innovation
Case Studies on Successful Disruptors
3 Must Reads
Your Perspective Wanted
The Best Metrics for Innovation
Understanding the Need for Innovation Metrics
Innovation drives growth and helps organizations stay competitive. However, traditional financial metrics hinder innovation by focusing too much on short-term gains. Metrics tailored specifically for innovation efforts are essential to ensure alignment with both current and future goals. These metrics need to account for different types of innovation — efficiency, performance-improving, or market-creating — and recognize that each requires a distinct approach.
The simple, but difficult truth is that there isn’t a one size fits all solution for innovation metrics. With that in mind, we’ll dive into some ways to measure innovation quantitatively.
Key Metrics for Measuring Innovation
R&D Intensity
R&D Intensity, or the percentage of revenue spent on research and development, is a critical metric. It reflects a company’s commitment to future growth through innovation. It’s important to differentiate between input and output metrics. For R&D Intensity, focus on both the resources allocated (input) and the impact on new products or services launched (output). For example, track the percentage of R&D budget used for breakthrough innovations versus incremental improvements.
Innovation Pipeline Strength
The strength of the innovation pipeline is another vital metric. This metric measures the robustness of a company’s innovation pipeline, including a measure of the number of projects in various stages of development — concept, prototype, testing, and launch. Inputs might include the number of ideas submitted or resources dedicated to early-stage development, while outputs could track how many of those ideas successfully transition into viable projects. A strong pipeline indicates that a company is consistently working on new ideas and is not overly reliant on a few projects. This balance between risk and reward ensures that the company is well-positioned for future success.
Time to Market
Time to Market measures how quickly a company can bring new innovations from concept to launch. This metric is crucial because it balances the need for speed with the need for quality. Companies that can reduce their Time to Market often gain a competitive advantage, allowing them to capture market share before competitors catch up. However, the trade-off may be reflected in the maturity of the product which will also impact adoption.
Another consideration is the efficiency of the process itself — such as the time taken to achieve specific milestones within the development cycle, which can serve as an input metric. The number of revisions or iterations before a product is finalized is another important metric.
Percentage of Revenue from New Products/Services
This metric tracks revenue generated from products or services introduced in the past three to five years. It’s an indicator of how well a company is innovating and meeting market demands. Companies with a high percentage of revenue from new offerings are often more resilient to market changes and can adapt quickly to new opportunities. It’s important to link this output metric to strategic goals, ensuring that new products align with broader business objectives. For example, if your goal is to lead in a new market segment, the metric should not just measure revenue but also market share gained from new products.
Innovation Accounting
Innovation accounting is a structured approach to measure and manage innovation, particularly in uncertain environments where traditional metrics may not apply. It breaks down into three levels:
Dashboard Metrics: Tracking actionable and measurable items, like customer feedback or the number of successful prototypes.
Leap of Faith Assumptions: Testing core assumptions, such as customer willingness to pay, before scaling.
Long-term Metrics: Using financial indicators like Net Present Value (NPV) to gauge the long-term viability of innovation efforts.
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Balancing Input and Output Metrics
It’s imperative to balance input and output metrics to get a holistic view of innovation. While outputs (e.g., revenue, market share) are essential, they are often lagging indicators. Inputs (e.g., R&D investment, employee training) provide actionable insights earlier in the process, allowing teams to course correct faster. A balanced approach helps avoid the trap of metric overload while ensuring that you’re not just measuring what’s easy but what truly matters.
Challenges and Considerations
While the right metrics can drive innovation, companies must also be aware of potential pitfalls:
Balancing Short-Term and Long-Term Metrics
One of the biggest challenges is balancing metrics that show immediate financial returns with those that support long-term innovation. Short-term pressures can often lead companies to favor efficiency innovations, which improve current processes but do little to drive long-term growth. Companies need to be patient and maintain a strategic vision when evaluating innovation outcomes.
Avoiding Metric Myopia
It’s important not to focus too narrowly on specific metrics, which can lead to a phenomenon known as “metric myopia.” This occurs when companies become so fixated on meeting particular metrics that they lose sight of the broader innovation goals. To avoid this, companies should ensure that their metrics are aligned with their overall innovation strategy and periodically reassess them to ensure they are still relevant and effective.
Conclusion
Innovation is essential for long-term success, but it requires the right metrics to guide and measure progress effectively. By focusing on tailored metrics like R&D Intensity, Innovation Pipeline Strength, Time to Market, and others, companies can foster a culture of innovation that drives growth and competitiveness. It’s time for organizations to reassess their current metrics and adopt those that truly support innovation.
Successful Uses of Innovation Metrics
3M
The “30% Rule”: A cornerstone of 3M’s innovation strategy is the “30% rule,” which requires that 30% of the company’s revenue come from products introduced in the last four years. This forward-looking metric forces the organization to constantly prioritize new product development and rapid commercialization. By integrating this target into their annual goals, 3M ensures that every business unit maintains a strong focus on innovation.
R&D Investment as a Leading Indicator: 3M consistently allocates 6-7% of its revenue to research and development (R&D), a level significantly above the average for its industry. This investment feeds their robust pipeline of new ideas and ensures a steady stream of products moving through their innovation funnel.
Idea Submission and Conversion Rates: Employees at 3M are encouraged to submit ideas through formal innovation programs like the “15% rule,” which allows employees to dedicate 15% of their time to passion projects. Metrics are tracked not just for the number of ideas submitted but also for the conversion rate of these ideas into prototypes, projects, and market-ready products.
Product Success Rate: 3M monitors the success rate of its new products based on market adoption and profitability. Products are evaluated against benchmarks for performance, customer satisfaction, and contribution to overall company goals, reinforcing a disciplined approach to scaling innovations.
Employee Engagement in Innovation: Another metric used is the participation rate in innovation programs. By tracking how many employees actively engage in ideation, prototyping, or development, 3M ensures that innovation remains a company-wide endeavor, not confined to R&D teams.
Market Diversification Metrics: 3M innovates across multiple sectors, from healthcare to industrial adhesives. The company evaluates the percentage of revenue generated in different industries by products developed in the last four years, ensuring that its innovations align with emerging market demands.
Customer-Centric Metrics: 3M collects data on customer feedback for new products and tracks metrics like Net Promoter Score (NPS) and repeat purchases. This ensures that innovation delivers real-world value and addresses user needs effectively.
LEGO
LEGO’s turnaround story is one of the most notable examples of how innovation metrics can drive transformation and success. During a period of declining sales in the early 2000s, LEGO redefined its approach to innovation. This transformation positioned the company as a leader in the toy industry by developing clear, measurable goals that aligned with its overall strategy:
Time-to-Market for New Product Lines: LEGO streamlined its development processes to reduce the time it took to bring new products to market. By adopting agile methodologies and focusing on cross-functional collaboration, LEGO cut its development cycle significantly. This allowed the company to respond quickly to market trends and capitalize on opportunities, such as partnerships with franchises like Star Wars and Harry Potter.
Revenue from New Products: LEGO set clear targets for the percentage of revenue generated from new product launches. This metric not only emphasized the importance of fresh, innovative products but also ensured that the company stayed competitive in a rapidly evolving market.
Customer-Centric Design Metrics: LEGO implemented metrics to measure customer engagement, such as feedback on product designs and usage patterns. The company also introduced co-creation programs, inviting fans to contribute ideas for new sets. Successful fan-inspired products like the LEGO Ideas series have become a profitable segment of the business.
Cost Efficiency in Innovation: In addition to creativity, LEGO focused on cost-related metrics, such as the profitability of new product lines. This approach ensured that innovation didn’t just drive sales but also contributed to overall financial health.
Brand Health and Market Penetration: LEGO closely monitored its brand perception through metrics like Net Promoter Score (NPS) and customer loyalty. They also tracked market penetration for new product categories, such as LEGO video games and digital experiences, ensuring the brand remained relevant to modern audiences.
Sustainability Metrics: LEGO aligned its innovation goals with broader environmental initiatives. Metrics like the use of sustainable materials in new products and the reduction of carbon footprint during manufacturing helped reinforce the brand’s commitment to long-term sustainability.
3 Must Reads
Which metric do you believe is most critical for driving successful innovation in your organization? |
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