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Know Your Return on Innovation

Endless ideas and prototypes don't mean anything if they're sitting on shelves. Get your innovations out there, and then get tracking.
November 17, 2008
URL: http://www.entrepreneur.com/article/198588

Eight months ago, employees at Handango had tons of concepts and plans but only few completed projects. "Very little was actually getting out to the consumer," says Bill Stone, 40, CEO of the 9-year-old Irving, Texas, company that provides content for wireless devices. "We suffered from too many ideas."

Welcome to 21st century innovation, where companies aren't lacking for ideas but are having trouble turning these ideas into profits. Only 43 percent of 332 executives in a recent Boston Consulting Group survey said that their companies track innovation as rigorously as their core business operations and business processes. "But what's interesting is that 3 out of 4 said 'We should,'" says James P. Andrew, a senior partner at The Boston Consulting Group and co-author of Payback: Reaping the Rewards of Innovation. "So there's an acknowledgement out there that we need to be doing a better job of more rigorously managing innovation."

So how exactly are companies measuring innovation? The three most popular metrics are: 1) customer satisfaction, 2) percentage of sales from new products and services, and 3) overall revenue growth. The problem is that these metrics may not tell the whole story. A different BCG/BusinessWeek survey, released in August, of nearly 3,000 executives found that only 43 percent were happy with the returns on their innovation spending--a 9 percent drop since 2006--and fewer executives wanted to increase spending on innovation. "That's a real concern," says Andrew.

Company leaders are searching for the one innovation measurement that will tell them everything, but Mark Johnson, co-founder and chairman of innovation strategy consulting firm Innosight and co-author of The Innovator's Guide to Growth: Putting Disruptive Innovation to Work, thinks businesses tend to break down when they obsess over a single metric. "So many companies will say, 'Well, what are the gross margins?' and they'll be laser-focused on the gross margins and everything else [becomes] secondary," he says. "They'll be focused on too short a list of metrics."

Stone has come to rely on two metrics: First, he looks at Handango's return on investment for future product development. Second, he compares the company's "business as usual" scenario to the potential revenue from new projects. Ideas that make it past the brainstorming and prototyping stages are managed to meet small milestones that keep everyone motivated and deliverables on track. "What I see in the innovation process is that people lose interest in the execution," says Stone, who projects sales of more than $1 million this year. "You have to have milestones and celebrate them."

Measuring decision-making speed, how much time employees spend on innovation and the time it takes to reach project checkpoints can be easy ways for small firms to see how they're doing. Trying too hard to measure everything, however, gets in the way of innovation. "If you have 20 innovation metrics, you have none; nobody is actively tracking 20 things in their brain," says Tom Kelley, general manager of industrial design and human factors firm Ideo and co-author of The Art of Innovation. "You want the kinds of things that everybody in the company can hold in their brain when they show up for work in the morning." BCG's surveys have found that most companies follow no more than five innovation metrics.

Stone wishes a single number could tell him everything about Handango's innovation efforts, but measuring the right things is most important. "We'll pick two or three metrics that make sense," he says. "They've got good strategic fit with what we're trying to do. We'll look at it, make a decision and go."

Chris Penttila is a freelance journalist in the Chapel Hill, North Carolina, area.