How does your company measure your innovation efforts? Do you have a firm set of innovation-related Key Performance Indicators (KPI) in place to systematically track your innovation progress?

Conventional wisdom in management circles knows: “What gets measured gets done.” So how can you approach this topic for your firm? First, understand that there is no “one size fits all” approach to innovation and to how to measure it; you have to devise your own innovation KPI system that fits your business focus and firm. Secondly, go beyond the standard measures and think about unusual measures that wouldn’t necessarily come out of the hard-wired brain of an accountant. Finally, systematically track INPUT, PROCESS and OUTPUT-related measures to gain the full picture of your innovation efforts.

1. Input-related Innovation KPI

At the front end of your innovation measurement system, track how many resources you commit to innovation.

• A popular finance-related practice is to measure the Total R&D cost spent (or related indicators such as R&D cost over sales or Outsourced R&D cost ratio). Here bear in mind to link your expenditures to what comes out in the end — that’s why you need to measure your innovation input, process and output, look at your complete innovation KPI-system and then gain true intelligence of your innovation activities.

• People-oriented measures track the Number of people committed to innovation (absolute or relative as % of total staff). One word of caution: What matters as much as — or even more than — the number of people committed to innovation is the right selection of players for your innovation team (considering aspects like the appropriate mix of personality types, areas of expertise and business functions).

• Another common input indicator is the Number of ideas suggested by employees over a certain period of time. Don’t solely rely on this number if your aim is to produce breakthrough innovation, as most of these suggestions tend to rather produce valuable incremental improvement than the next iPod.

• An example of an unusual KPI for your HR team is to follow the Number of different expertise areas prevalent in the total workforce to measure the important cultural innovation dimension of diversity.

2. Process-related Innovation KPI

Process-related innovation-KPI are rather sparsely covered in the literature. Here are some suggestions for what you should monitor:

• Set and monitor quotas for critical deliverables at the different stages of your innovation process. If we go into an idea project with THINKERGY using our X-IDEA process, we first set a quota of 50 novel insights gained in the Exploration phase. Then we specify the Number of ideas that move from one subsequent project stage to the next: e.g., a team needs to produce 1,000 ideas in the Ideation stage; 300 of these move to the Development stage; 50 good ideas go into the Evaluation stage; and finally 3–5 great ideas that are pitched and prepared for real-life implementation in the Activation stage.

• A common time-related approach is to gauge the cycle times of its innovation process, both for certain parts of the process or for its entire duration (e.g., Time to market).

• Particularly once moving toward the final evaluation and activation stages, many firms also count the Number of new promising innovation projects and the Total or Average expenditure per individual innovation project.

• Renowned innovation leaders recommend or practice some unusual measures in their firms. So observe the Average number of laughs per employee per day, determine the % time that a manager talks in a meeting (the lower the better according to IDEO founder David Kelley), or invite employee experimentation at work by introducing a new KPI: % of employee work-time used for individual pet projects (20% at Google for all employees and 15% for R&D staff at 3M).

3. Output-related Innovation KPI

Not surprisingly, most innovation-KPI suggested in the literature focus on the output side.

• The two measures % Revenues from new products (services) over total revenues and % Revenue growth from new products (services) over total revenue growth lead the armada of output-oriented innovation-KPI. Beware of two pitfalls here: each ratio goes up when overall sales go down (trap 1); and managers can easily manipulate the result by counting line extensions as new products (trap 2).

• Other popular indicators on the output side are Number of new products (services) launched, % New products over overall products (beware again of trap 2), Innovation ROI, Cannibalization of existing product sales by new product sales, Total revenue growth, and Operating margin growth.

• Some companies also assess the Overall number of patents filed and the Number of new patents filed in a certain period. Here don’t forget that patents only lead to tangible innovation if they are used in cash-generating ways.

• Finally, an example of an unusual KPI to evaluate your firm’s innovation output is to count the amount of media coverage for your products (services).

© Dr. Detlef Reis 2008. This article was published in parallel in the Bangkok Post under the same title on 31 January 2008.