Innovation remains a high strategic priority for most companies, and many see it as a strong contributor to growth even in the current economic turmoil. Yet many also struggle to measure the performance of their innovation portfolios. Senior executives when asked which types of innovations their companies pursue, which ones they measure and with what metrics, what goals they have in using metrics, and how satisfied they are with the metrics they choose.
Companies reporting the highest contribution to growth from their innovation projects tend to be more interested in pursuing and measuring their innovations as a portfolio and therefore use metrics across the whole innovation process. In the end, they are more satisfied than others with the ability of such metrics to help their organisations do everything from aligning individual performance incentives to improving innovation performance to communicating with investors.
Sixteen per cent of the respondents say that their companies don’t use any metrics to assess innovations. Among those that do, most are satisfied overall, though the findings suggest they aren’t effectively using these metrics as well as they could. Most notably, companies are much likelier to rely on metrics for outputs than for inputs, so they aren’t assessing the whole process of innovation. Forty-five per cent don’t track the relationship between spending on innovation and shareholder value. Further, although many companies are satisfied with their use of innovation metrics in general, far fewer are satisfied with specific uses, such as aligning individual performance incentives.
Innovation is a high strategic priority for most companies. The credit crunch and stock market turmoil had begun to reorder many companies’ priorities.
The kinds of innovation companies take up are diverse. Yet no matter what form of innovation they pursue, far fewer companies measure it than pursue it.
Although the goals of companies would suggest the need to emphasise the overall innovation process, that process is rarely the focus of the metrics companies use most. When asked which metric is the single most important among those used, executives are much likelier to cite a few simple outcome metrics than input metrics or performance metrics, such as time to market or time to breakeven. When respondents indicate the three metrics they use most, the order is the same. There are surprisingly few differences among companies in different industries or regions.
At companies that track the relationship between shareholder value and spending on innovation, the three most important metrics are all externally focused: revenue growth, customer satisfaction, and the percentage of sales from new products or services. At companies where innovation is the most important strategic priority, the top three metrics are a somewhat more comprehensive mix: customer satisfaction, the number of ideas in the pipeline, and R&D spending as a percentage of sales.
In addition, though companies typically assess their performance in most areas relative to that of their peers, many companies do not do so with innovation metrics. One reason may be that competitive data on the innovation metrics that companies use most frequently aren’t always available. In any case, 49 per cent of the respondents say they don’t benchmark themselves against competitors on any of the innovation metrics they use, while 43 per cent say that they do.
Regardless of the combination of innovation metrics respondents use and why, more than 70 per cent of them say they at least somewhat agree that their organisations are satisfied with the usefulness of these metrics. Most notable, though executives are satisfied overall, less than a third agree or strongly agree that they are satisfied with any specific use of these metrics. Companies may be tracking more innovation metrics than they can put to good use.
Just over half of all respondents say their companies are spending about the right amount on innovation, given its strategic importance. Interestingly, 7 per cent say their companies are spending too much. When asked how annual innovation spending is determined, the largest number of respondents say that their organisations consider the available opportunities.
Finally, high performers are satisfied with their use of metrics across a wide range of activities, including allocating resources, aligning metrics with individual performance incentives, and communicating with investors. These companies may be more satisfied because they make greater use of metrics that, taken together, assess the whole process of innovation.