Innovation Metrics that Matter

A Retailer's Guide to Measurable Success

I remember one shift as a store manager the executive in charge of stores came to visit me and asked me flat out why I have metrics other than sales up back of house.? I answered, “because I want to measure the stuff that makes sales happen, not just the sales bit”.? He gave me a quizzical look and then kept going with his “inspection”.? I got some fairly harsh marks in my review (another article coming about the difference between “head office” and “central support”).? One of the comments was “sales targets should be the only metrics that matter”.? This made no sense to me.? In my brain, the idea of not managing the behaviours and actions that led to sales meant that we aren’t managing sales at all. How do we get better if we don’t understand how we are going in doing the ‘things’ that led to the sale?? At the time I had no clue what I was talking about, and embarrassingly, I took down my metrics to comply.? What I now know I was doing was something that had been happening in business for a long time: managing input metrics, not output ones. The output metrics aren’t the thing we can control.? The input ones are.? Essentially, the idea here is that if we keep experimenting with how we can influence the controllable input metrics (customer greetings as a % of total traffic, open ended questions per discovery conversation, closing the sale %), then we get those higher and close more sales.? It’s no different to the idea that great customer experience drives revenue.?

Now I work with senior leaders of retailers all over the world and one of the biggest challenges they face is how to measure the success of innovation.? Well, like sales, input metrics are king in innovation systems.? They allow you to understand the controllable behaviours and actions and draw a direct relationship between them and the result you want (revenue growth, cost reduction, etc.).? This is known as innovation accounting, and I’m going to explain how we interpret it in case you’ve never heard the term before.?

"Innovation accounting is the process we use to hold innovators accountable. It turns innovation into a science by measuring progress and showing us what's working and what isn’t." – Eric Ries (The Lean Startup)

Innovation Accounting is a systematic approach designed to measure and manage the progress and success of innovation efforts within an organization. Traditional accounting methods focus on financial metrics and performance indicators, which don’t exactly work for evaluating innovative initiatives that often involve uncertainty, experimentation, and long-term horizons. Innovation accounting tries to bridge this gap by providing metrics that reflect the progress, learning, and potential impact of innovation projects, and not just the results of those ideas that make it.

So how does it work?!

It’s a really challenging thing to implement, especially in large organizations, as it kind of flies in the face of what we’ve always been taught.? But I’ve done my best to define the elements it in a nutshell. ?

Defining Hypotheses and Assumptions:

The whole system can be broken and useless if you don’t have a clear definition of what you’re trying to achieve.? Start by articulating clear hypotheses and assumptions about the innovation. These might include assumptions about market needs, customer behavior, or the feasibility of a new technology.? Go granular here and make sure it uses shared organizational language (i.e., even if it’s a digital idea, broaden your hypothetical impacts across business units, customer types and channels).

Establishing Learning Milestones:

Now it’s time to think about what your best information says will happen as you progress.? This means you need to identify key learning milestones that will validate or invalidate these hypotheses. These milestones serve as checkpoints to evaluate whether the innovation is on the right track.? These are known as learning agendas and are posed as questions or statements.? “We will know how quickly adopted this new ‘thing’ is by the end user”.? “We will have a list of technical integrations required for it to be successful”.?

Tracking Leading Indicators:

Now it’s time to start looking at those pesky input metrics.? Here we need to focus on leading indicators rather than lagging financial metrics. Leading indicators might include customer engagement metrics, prototype testing results, or early sales figures from pilot programs.? Be as specific as possible here and make sure you’re including the proposed way to measure them.?

Experimentation and Iteration:

Just like those High School science experiments, we need to implement a structured process of experimentation and iteration. You need to clearly define the way you’re going to do it, and the results (or learning agenda items) you are going to close out at each phase of the project.? Use techniques like A/B testing, MVP (Minimum Viable Product) launches, and customer feedback loops to refine the innovation as it goes from early idea to fully embedded.? Don’t forget post deployment! This plan should include answers to questions like “when will I know it is fully embedded into the business” and “when do I turn off early-implementation support”? ??

Learning Metrics:

Throughout each of these you should be as measured as possible.? Yes, numbers.? Just like my instore example, what are the numbers along the way that suggest things are working and going well.? These are called learning metrics, and they are used to measure the insights gained from each experiment. Metrics can include things like, the rate of hypothesis validation, customer feedback scores, adoption rates among early users, usage rates of early-implementation support etc.

Decisions Points:

In our book, Retail Innovation Reframed, we refer to these as parachute points.? Basically, at which key parts of the project do you agree to continue, to pivot, or to parachute out.? Based on the data collected, make informed decisions about whether to pivot (change direction) or persevere (continue on the current path), or parachute out (exit). This decision-making process is critical to managing innovation risk and is just-plain smart to avoid continuing expensive projects that aren’t likely to achieve their business case.? Pro tip: if you have your learning metrics set up well, you can use them to overcome the objections of that key executive that has taken on this project as their own and is always looking to make sure it looks successful (or fail)!

"The key to growth is not just to create new ideas but to create an environment where innovation can be measured and managed effectively." – Clayton Christensen (The Innovator's Dilemma)

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Tips and Tricks when Implementing Innovation Accounting

I’m not going to lie; this is a steep change management curve for an entire organization to go on.? I recommend starting with key teams first to build the value and work outwards from there.? The value is clear and well worth it, but it is a lot of changing the way people think about their projects.

Here are some ways we’ve seen it successfully deployed in larger organizations:

1. Create a Culture of Learning: Encourage Experimentation: Foster an organizational culture that values learning and experimentation. This can be achieved through leadership support, training and outside learning opportunities, and celebration of adoption of some of the key elements of innovation accounting. Promote Psychological Safety: Ensure that employees feel safe to take risks and fail without fear of retribution. This encourages open sharing of ideas and honest reporting of results. This one is hard, as most core performance management systems (especially those in retail) are performance focused, so failure is seen as a pathway to a warning, rather than a successful learning story.
2. Integrate with Existing Processes: Align with Business Goals: Ensure that innovation accounting is aligned with the overall business strategy and goals. This helps in gaining executive support and integrating innovation efforts with core business operations.? Remember the golden rule: all innovation ideas should have a clear link to improving (or not decreasing) customer experience, improving (or not impacting) business performance, and aligned to the purpose of the organization.? If one leg of the stall falls, it all comes tumbling down.
3. Use Technology: Leverage data analytics and digital tools to streamline the process of tracking and measuring innovation metrics. Implement platforms that facilitate real-time data collection, analysis, and reporting, and more importantly, encourage digital collaboration platforms to constantly share learning and performance towards the innovation accounting metrics.
4. Establish Clear Support Structures from Leadership: Define Roles and Responsibilities: Establish clear roles and responsibilities for innovation teams, who is the executive supporting their success, and who is challenging the metrics as you go.? ?It is also important to ensure that project managers (or whoever is most appropriate) sees innovation accounting as one of their core responsibilities.
5. Set Up Review Systems: Implement regular review mechanisms to assess the progress of innovation projects. These reviews should involve cross-functional teams and senior management to ensure alignment and accountability.? However, don’t let it fall into a governance meeting where the person with the most stripes on their shoulder is there to give their blessing.? This is all about learning and input of ideas and there should be no hierarchy.? Also, where possible, include your store teams (or better yet, customers) to help you in the room.?

So now what?!

By adopting innovation accounting, you can systematically manage your innovation efforts, reduce the risks associated with new initiatives, and ultimately drive sustainable growth and competitive advantage.? More importantly though (to me anyway), is that the teams themselves have the guiderails needed that removes some of the “scariness” of running innovation projects.? They are generally chartering the unknown and that takes a lot of mental effort.? Having a clear map to success defined from the start (albeit it will require constant updating as you go) helps the team feel more comfortable and understand the job ahead of them.

So, I totally understand why we as an industry are obsessed with financial performance outcomes (read: sales & cost) targets, and that shouldn’t change.? They are the core success factors for a retailer.? What we do need, though, is a way to understand the work we are doing to achieve them. ?We need to understand and measure the core behaviors, actions, and effort that we are putting into the work to know that we are on the right track, and innovation accounting is a great way to do it.

Andrew is a co-founder and Managing Partner at ThinkUncommon, a boutique retail consultancy focused on innovation as an organizational skill, find out more at www.thinkuncommon.com