Innoramblings #17: Measuring the Right Metrics for Innovation

Innovation is the lifeblood of any forward-thinking company, but how do you measure its success? It’s easy to get caught up in vanity metrics—things that sound good but don’t necessarily drive the bottom line. The real challenge lies in identifying the right metrics that truly reflect the impact of your innovation efforts. After years of navigating this challenge, I've found that two metrics stand out above all others: increased Gross Profit due to innovation and the Innovation Returns Multiple.

1. Increased Gross Profit Due to Innovation

The most important metric for evaluating innovation is the increase in Gross Profit directly attributable to your innovation efforts. This metric quantifies the results of your innovation actions, whether through additional profitable sales or improved efficiency in your product realization processes.

For example, if you’ve launched a new product that has significantly boosted sales or if you’ve implemented a process improvement that reduced costs, the Gross Profit increase from these initiatives is the best measure of their success. By tracking this metric, you can clearly demonstrate the financial value of your innovation efforts.

2. Innovation Returns Multiple

Once you’ve measured the increase in Gross Profit, the next step is to evaluate the return on your innovation investment. This is where the Innovation Returns Multiple comes into play. Simply divide the increased Gross Profit from innovation by the total amount spent on innovation. A good target for this metric is a 10X return.

For example, if your innovation spending was $1 million and your initiatives led to a $10 million increase in Gross Profit, you’ve achieved a 10X Innovation Returns Multiple. This is the kind of result that turns even the most conservative boards of directors into enthusiastic advocates for increasing innovation spending.

Aligning Teams and Finding Consensus

These metrics are not just tools for impressing the board; they’re also powerful for finding alignment with department heads and team members. When everyone understands that the goal is to drive Gross Profit and achieve a strong Innovation Returns Multiple, it creates a shared focus and a common language for evaluating success.

Innovation can sometimes feel intangible, but these metrics ground it in financial reality. They provide a clear way to measure the impact of innovation and justify further investment.

Managing Innovation as a Portfolio

It’s important to remember that innovation is like an investment portfolio. You can’t expect every project to succeed, but the best projects should make up for the ones that don’t. The temptation is often to try and calculate the return at the project level, but this can lead to short-term thinking and an aversion to risk.

Instead, focus on managing innovation as a portfolio. Look at the aggregate results across all your innovation efforts. The projects that succeed will provide the returns needed to cover both the successes and the failures. This mindset allows you to take calculated risks and pursue more ambitious initiatives without being paralyzed by the fear of failure.

Conclusion

Measuring innovation isn’t just about tracking ideas or counting patents. It’s about quantifying the real financial impact of your efforts and making sure you’re getting a strong return on your investment. By focusing on increased Gross Profit due to innovation and the Innovation Returns Multiple, you can drive meaningful results and build a compelling case for further investment in innovation.

How do you measure the success of your innovation efforts? What metrics have you found to be most effective? Let’s continue the conversation and share our insights!