According to McKinsey’s senior partner Erik Roth, and associate partners Guttorm Aase and Sri Swaminathan, by combining two simple metrics, companies can gain valuable insights into their innovation performance.
Often, when people think about measuring innovation performance, they think of things like the number of patents the company has registered or the new-innovation pipeline. “When a client addresses that subject,” Roth says “they typically are concerned with the activity of R&D and innovation, as opposed to the output and the impact of that output on performance. Often Clients are interested in scorecards that are measuring the number of ideas, ROI [return on investment] on a specific project, the number of projects, and any assorted metrics trying to look at how well their organization is performing.”
“What’s interesting,” says Roth, “we rarely see an organization taking a thoughtful approach to how it actually measures the outcome of its innovation in R&D performance over time.”
Brown says: “Why do you think no one has used these two metrics before?
Roth responds by noting that: “I think no one has used these particular metrics before because a lot of innovation-measurement activity, or -measurement focus, has been largely on “upstream” activity: the inputs into what makes innovation happen… a lot of quantification of the number of ideas and the size of the portfolio. Oftentimes an organization will get very caught up with patents and the number of patents that they are filing. While all of those are interesting inputs into innovation R&D, they don’t necessarily understand or measure the monetization of those investments in your R&D and innovation activity.”
“And as companies have explored ways to try and understand how to measure the output, or the outcome of their R&D investments,” continues Brown, “they’ve struggled largely because there are not a lot of common metrics across industries or across organizations that capture what our two metrics capture, which is both the investment side and the outcome side in the form of profit margin for the resulting impact of what R&D investments and innovation investments may have.”
“Part of the reason we think that’s the case is, one, companies don’t typically release a lot of information about their R&D investments, so there are very few commonly described metrics. And two, the belief has always been, if you really want to understand how to measure R&D and innovation activity, you have to have so much internal proprietary knowledge around what activities are going on, what capabilities are associated with those activities, and the nature of the projects themselves.”
The conclusion Brown reaches, is “In many ways the reason why no one has used these is because the belief has been that it was just too complicated; it was just too hard to do.”
To continue visit McKinsey here: