Whether you’re “scaling up” your existing innovation program or trying to take it to the “next level,” the value of your program needs to be measured and demonstrated in order to continue to garner support from the business. Sometimes, the measure of true value of innovation can be elusive. Traditional financial metrics used in other parts of the business (ROI, NPV, etc) don’t always capture the momentum or traction that your innovation program is gaining.
I recently had the opportunity to facilitate a workshop on this topic at the Frost & Sullivan 7th annual Innovations in New Product Development conference in San Diego (http://bit.ly/qwtVzz ).
Participants in this interactive session discussed ways to apply meaningful metrics they can use in their business no matter what level of maturity. The discussion uncovered a wide variety of potential metrics, and I’d like to share my observations, and then ask you to continue the discussion by commenting on this blog and interacting with others in this community.
This conference brings in a fairly broad group of innovation practitioners, mostly in the areas of new product development and strategic marketing. I wanted to get a feel for the level of maturity in the group and I discovered a fairly equal mix across two domains.
First, the participants came from companies whose innovation cycle or product development cycle varied from fast-moving (18 months or less) to medium (1.5 – 3 Yrs) to long term ( 3 years and up ).
Second, the participants were fairly evenly mixed according to the maturity of their innovation programs. The “Establishing” category represents participants who were just getting their innovation programs off the ground and who were attending the conference to learn from others. “Improving” represented those who had some early successes under their belts and were looking to scale their innovation programs to a more enterprise level, and finally “Validating” represented those who whose programs were well established, and were benchmarking against new entrants to remain competitive.
The group first established some of the key reasons why we should use metrics in innovation. More specifically, we made sure that the scope of these metrics was deeper than traditional business metrics of Net Present Value (NPV) and Return on Investment (ROI). Some of the reasons cited were:
- to drive alignment ( with strategy )
- to drive behavior – you get what you measure
- to measure what’s important – back to strategy
- to manage resources
- to manage portfolio
- to sustain enthusiasm
- to provide fulfillment
I personally liked the last two, because in many organizations, the sponsoring executives (the ones with the money) lose heart just before a breakthrough could be achieved, and the innovators, who often follow hunches and go down rabbit trails in search of answers, don’t receive the fulfillment that the failures along the way are contributing to the overall project.
What is a performing asset?
To put some intention behind the discussion of metrics, I wanted to establish with the group the concept of a “performing asset.” An asset could be tangible or intangible, but as Ocean Tomo reports each year, intangible assets provide a higher contribution to corporate value than that of tangible assets.
Since the goal of a good innovation program is to turn innovation opportunities into performing assets, the group came up with some interesting definitions of what a performing asset is: (or, how can you recognize one)
- a product that earns revenue & profit
- your brand
- your people, knowledge, process
- your partnerships, channel, suppliers, customers
- your corporate culture ( think Zappo’s )
- Intellectual property
The group immediately recognized that the above was devolving into a list of examples of assets, so they brainstormed some more and coalesced a very nice, broadly applicable working definition which served us well for the discussion that followed:
“anything tangible or intangible that is/could be providing material benefit in achieving strategy, meeting goals and objectives, gives you options, gets you in the game, builds awareness.”
Leading and lagging indicators of asset performance
With this definition in hand, the group began to identify how to measure the performance of an asset. We discussed the importance of having both leading and lagging indicators of performance.
Leading indicators are important because they happen while you’re on the journey to the destination. They provide risk management (early warnings) and optimization (of time, of innovation mix). Some examples of leading indicators cited by the group were:
- Number of days I brushed my teeth ( it was an illustration … you had to be there )
- Amount of spectrum purchased ( example given by a wireless company going into new markets )
- Patent diffusion ( how many products my patent has been used in )
- Speed of information deployment in an organization (given by a consulting firm who treats thought leadership as an asset )
- Cycle time
- Qualitative assessment of ideas (on strategy vs. off-strategy)
Lagging indicators then provide the way to assess the effectiveness of our actions, provide a basis for improvement, course correction, etc. Some examples were:
- Cavity-free dentist visits ( as above… an illustration )
- Average revenue per user
- Time to market
- Market acceptance of product
- Renewals (repeat customers)
- Customer satisfaction scores
Framework for turning innovation opportunities into performing assets
We finished up our lively discussion with a lesson from dogfighting (the kind with airplanes, not real dogs). John Boyd, nicknamed 40-second Boyd, was an air force fighter pilot-turned-instructor, who gained fame among fellow pilots in air warfare school because of a standing officers’ club wager. Boyd started out every sortie being pursued by a student pilot in another airplane. If Boyd couldn’t maneuver his aircraft and turn the tables on his dogfighting counterpart within 40 seconds, he would buy a round of drinks in the bar. Popular lore recounts that Colonel Boyd never had to buy a drink.
Years later, John Boyd retired from the Air Force and applied his techniques to corporate competitiveness, and he developed a framework for decision making which serves us well today.
It’s called the OODA loop, which represents the cycle of decisions that are made in the fighter cockpit on a micro level, or in corporations on a macro level. OODA stands for (O)bserve-(O)rient-(D)ecide-(A)ct. The important part of OODA is the feedback loop, where the results of your actions become the observations that re-orient you to make your next decision. To win a fight and stay alive to fight another day, one needs to “get inside of” their opponent’s OODA loop. In a military operation, these actions take place in seconds. In corporations, this process slows down when strategy is rigidly followed until the next years’ planning cycle. It is critical that the results of our actions inform our strategy to either validate that we’re on track, or to correct our course.
Our group reached the agreement that every strategic goal should be tied to a lagging indicator, and in turn tied to a leading indicator, and then management needs to have the courage to recognize when these indicators are showing them that a course correction is needed and then to act decisively.
By applying a bit of dogfighting principles to our innovation strategy, we can achieve a dominant position in our markets, and solve some of our society’s toughest problems. Tally-ho!!
Let’s keep the conversation going… feel free to comment on this page and share your valuable insights.