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How should small businesses measure innovation?

We have always subscribed to the concept that “If you can’t measure it you can’t manage it”. This, of course, speaks to KPI’s and ways to set these, with the most simple overall business metric being profit divided by headcount.

The fact is that any business, large or small should be measuring the return on all business and staff investments and that includes innovation. But we must keep it simple otherwise the metrics can become bogged down in a mire of numbers that usually do little more than confuse. We have observed this in the past with 360-degree staff surveys that in some cases spawn entire departments in large companies.

So, is innovation measurable?

The first question to be asked when looking at any measurement is, “What are we trying to achieve?” With innovation, the obvious answer, of course, is company survival and growth but more critically, improved profits.

This, of course, leads us to question the very meaning of the word innovation? If we adopt the definition of innovation as “Change that Adds Value” things become a little easier. The simple idea underpinning this definition is that the lowest risk way of building a business is not to create something new “out of thin air”, but instead to build on existing well-adopted creations. Indeed there are few absolutely new creations (perhaps the light bulb, the laser and the transistor man be some) but by and large, most products are created by a process of evolution, or indeed, innovation.

What’s most important is to keep the process of measurement simple.

Creating innovations – and a case study

We are working on an assumption that some formal time that can be measured is devoted to innovation. A recent case study on a company in Victoria delivered $0.5M in pure profit on the back of less than 60 hours of work. Yet another competing team innovated a product they make and ship worldwide that delivered over $3M in machine downtime savings for their customers, of course now locking them into that customer relationship for the foreseeable future. Again this was achieved on the back of a similar 60 hours of investment effort.

What are we Innovating – Product or Process?

  • Measuring Process innovation is simple:

Process innovation is aimed not so much at delivering revenue growth, but in fact profit growth on the back of improved processes for the same revenue. Done properly, process innovation carries no risk at all and is guaranteed to improve profits. It’s a pity more companies paid so little attention to this simple pursuit.

The simplest metric is the cost of hours devoted plus any equipment investment required added to any manufacturing downtime during implementation. With process innovation the cost-benefit or ROI can usually be calculated well in advance of any significant investment.

  • Product Innovation

Of course, product innovation has the risk that the new initiative will not win the expected market. This risk is largely mitigated by the knowledge that you are simply making better a product that is already well established in the market place. Possibly the most graphic example of this can be seen with the Dyson air hand dyers. These have taken the business of companies that persisted with virtually no innovation with the tediously ineffective nozzle types that have now been rendered obsolete.

In this case, a simple measure again maybe the money spent on time with innovation teams plus the spend on tooling and manufacturing costs, compared with profits delivered on sales over a specified period.

Now whilst this may be seen as all too simple, the clear fact is that time and cost devoted to product innovation is about delivering profits and both can be easily measured.

Well-staffed innovation departments will defend their turf with arguments of the complexity of innovation, the need for Culture creation, market and customer perception (indeed this is the only reason many large companies have a department labelled as “innovation”) and the message that research takes time and has uncertain outcomes. In fact, if we differentiate innovation from research, which by its very nature has uncertain outcomes, the true measurement of innovation can be greatly demystified.

What’s the message?

  1. If you can’t measure it you can’t manage it so don’t invest in hope, it’s outcomes that matter.
  2. Ensure metrics are simple and avoid being buried in expansive spreadsheets that too often hide the real message
  3. Make sure your innovation people are truly delivering innovation and have not been hijacked for special projects and are no longer innovating. This is what commonly happens, especially in large companies
  4. Check your innovation spend against profits delivered, this the ultimate test.
By contributing editor Roger La Salle, CEO - Matrix Thinking
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