Over the years, I've tried every combination of metrics to measure the impact on an organization from their investment in innovation. Below are the 6 metrics that I found most useful to measure innovation success. My advice is to use them as a set and don't cherry pick one or two.
% of Revenue Spent on R&D
I'm not a fan of the R&D as a percentage of revenue but it's the one that Wall Street uses and one that public companies need to deal with. The mistake comes when this is the only metric used. One word of caution with this metric – don't look just at the % but also track and measure actual dollars spent. In fast-growth companies (i.e. Apple), revenue is growing much faster than R&D. If you just looked at the %, you may come away with the wrong conclusion that they are underspending. In the case of Apple, as the % has dropped, their actual R&D spending continues to increase.
R&D Impact = Gross Margin / R&D Spend
This is an “old” Bill Hewlett and David Packard metric they used to ensure a proper return for the R&D effort being invested. Why the gross margin? The theory is that if you build a better mousetrap, the customer will reward you with a margin premium which will show up in gross margin. Target: Benchmark your competitors and you want to be in the top quartile.
% of Revenue From Products Launched In The Last XX Years
This is what I call the “3M Metric”. 3M is famous for pushing their executives to embrace the new by putting in place a metric that reinforces the need to constantly re-invent itself. So what constitutes a new product? Rather that describe what it is, it's easier for me to describe what it isn't. It's not the next generation of an existing product (the next years model of a car or laptop doesn't qualify) or a line extension (a new flavor of soft drink doesn't qualify). Target: 10% to 15% is good starting target.
Some in the industry focus on total number of patents rather than the quality of patents. Quality is defined by how often your patents are referenced as fundamental technology in other patents (others are building ideas based on your work) and the value of the patent portfolio (how much would someone pay you for your patents). You may think that large organizations have the advantage here. This is not the case. A small firm is more than twice as likely to be found among the top 1% highest impact patents than is a patent from a large firm.
% of Time Executives Spend on Innovation
The key measurement of where the executive focus is to measure where they spend their time. Does your organization do a “once a year” look at innovation or do the top executives regularly schedule sessions where they put aside tactical/operational discussions and focus on strategy and innovation? Target: ~10%
R&D Spend – Follow The Money
Not all R&D spend is a good spend. In many organizations, there is a tendency to overspend in the current money makers (core) and starve the new ideas. Target: Varies by industry but a good starting point would be 70% to the core (existing products to existing customers), 20% to adjacencies (existing products to new customers, new products to existing customers) and 10% to New/New (new products to new customers).
For more background, listen to the Killer Innovations Podcast “Measuring Innovation Impact“. It’s from 2007 but still has some good background …
To manage innovation, measure an organizations investment in innovation.
Does your organization have a different set of metrics they use? What are they and do they work to measure innovation?
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