Lax measurement is driving much of the frustration with innovation payback, BCG experts say. While most executives (66%) say innovation is a top-three priority, and even more (67%) say their companies will increase innovations spending, only 46% are happy with the returns on innovation investments.
“Companies would do well to make measurement a much higher priority,” said BCG Senior Partner James P. Andrew, who oversaw the study and reports. “Poor measurement practices translate into bad or incomplete information, wasted spending and, ultimately, a lower return on the investment in innovation. And when the majority of companies are already less than satisfied with that return, lack of measurement makes things much worse.”
Andrew, who leads BCG’s Innovation practice and is co-author of the recent best-seller Payback: Reaping the Rewards of Innovation (Harvard Business School Press, January 2007) with Harold L. Sirkin, said that in order to produce higher returns on innovation spending, companies must make sure they are measuring what needs to be measured.
Following are key findings and insights from Measuring Innovation 2007:
Executives Admit to Discipline Deficiency When It Comes to Measuring Innovation
* Three-quarters of executives said they believe innovations should be tracked as rigorously as their companies’ core operations. Yet fewer than half of executives said their companies do so.
* Only 37% said they are satisfied with their companies’ innovation measurement practices.
Too Few Innovation Metrics Are Utilized
* Most executives (60%) said their companies use five or fewer metrics to track the sum total of innovation efforts. “This is well short of the number necessary to do a comprehensive job,” noted Andrew.
* Pharmaceutical, biotechnology and health care companies represent an exception: A third of them use between six and ten.
Metrics That Companies Overlook May Be the Most Important Ones
* The most commonly used innovation metric is “total funds invested” (employed by 71% of respondents).
* The least commonly used innovation metrics are ones that could help track and shape innovation profitability and inform what changes are needed. They include “the extent to which new offerings cannibalize existing offerings,” “the percentage of ideas funded,” and “the number of projects killed or tabled at each milestone.”
R&D Effectiveness Isn’t Tracked Much
* Only half of the executives said their company tracks the effectiveness and efficiency of the innovation process.
Companies Are Top-Line – Not Bottom-Line – Focused When It Comes to Metrics
* While companies pay close attention to sales that result from innovation efforts and base their behavioral expectations on that, they’re not likely to zero in on profitability, the ultimate indicator of innovation success. Only 15% of executives said return on innovation spending is a factor that affects opinions or changes behaviors within the company.
Companies Fail to Link Incentives and Rewards with Innovation
* Only 28% of executives said their companies consistently tie incentives and rewards – formal or informal, monetary or non-monetary – to innovation metrics.
To move a company’s innovation program in the right direction – so that it produces higher returns on innovation spending – Andrew offers the following advice: “A good starting point is to consider four key factors: start-up costs (or prelaunch investment), speed (or time to market), scale (or time to volume), and support costs, which include post-launch investments. These factors can be mapped onto a ‘cash curve,’ which will help the company depict cumulative cash investments and returns, both expected and actual. That depiction, in turn, supports smart, disciplined decision-making,” he said.
