This week, we look at an old show that has recently come up. It is a show I did in February of 2012 about innovation metrics. We'll discuss the core set of innovation metrics that every organization should use.
Before we get started, I want to address one thing: bad metrics. They are very prevalent and extremely popular in areas such as Wall Street and publicly traded companies. These metrics get defined by analysts who have never run any innovation efforts or businesses.
The most popular bad metric that Wall Street has is the percentage of revenue spent on RND. They try to rank organizations based on this metric. I have run tests and trials, collected data from public companies coached and mentored CEOs, and CIOs worldwide from various industries. This is a bogus metric that is not predictive of future success. If this metric was true, if I spent 50% of my RND revenue, I should be two times better than somebody who only spends 20% of their RND revenue. False. It varies by industry and company. I spent a lot of time trying to convince the board of directors at HP that this is a bogus metric and not useable.
When it comes to good metrics, I look at it from input, output, outcome, and impact. I spend the most time on input and impact. When it comes to innovation, the impact your innovation is making, and the input you are investing in is key.
Innovation Input Metrics
Let's look at what innovation input metrics you should consider having as part of your success measurement. The first one is the number of new ideas in the funnel. It would help if you kept the funnel full of ideas. This metric is about keeping your organization focused and continuously developing new ideas. At my current organization, we sit down twice a year and look at everything in the funnel. You want to find ideas that are reasonable for your organization.
The next metric is the acceptance/idea kill rate. Acceptance is the number of ideas that make it to the funding phase. You want that acceptance rate to be anywhere from 10-30%. The idea kill rate is when you decide to kill an idea rather than move it forward. At HP, we had a four-phase funnel to managing ideas and turning them into products. At each phase, there was about a 55% kill rate. We would start with ten, go to five, go to two or three, and finish with one. You need to look at your current acceptance and kill rate and set a target, possibly putting it into your Objectives and Key Results (OKRs).
The third metric is a balanced investment. This metric is how you will use your innovation spend to influence your organization. This metric has products and services across the bottom, and vertical is your customers and markets you serve. 70% of the innovation spend should be in the core. The 20% should be in new products to existing customers and existing products to new customers. And lastly, 10% in new customers, new markets, new technologies, etc.
Innovation Impact Metrics
The first one is the 3M metric, which is the percentage of revenue from new products. 3M has an innovation metric they have tracked for decades. The metric is what percentage of their revenue that comes from products produced within the last three years. The revenue percentage forces them to come up with new ideas constantly.
The second metric is the quality of your patents, which differs from the number of patents. When I first went to HP, Carly Fiorina was the CEO. She pushed us hard to ramp up the number of patents. Organizations get ranked based on how many awarded patents. She wanted HP to have as many patents as possible to get on the list. I argued that having a large number of patents does not add to your innovation value.
We eventually shifted the focus at HP to the quality of patents. Measured through the Chi Index, look at all your patents. Then look across your industry at other patents that referenced them. The more times your patent gets referenced, the more value it has.
The third metric is the innovation impact on gross margin. I got HP to replace the RND metric's revenue with this, which is the gross margin impact for every dollar spent on RND. Very important, because if you do good innovation on products, your customers will reward you with a margin premium.
Today we talked about the six-innovation metrics every organization should use. The input metrics are the number of new ideas in the funnel, the acceptance and the kill rate, and balanced innovation investment (70, 20 10). The impact metrics are the percentage of revenue from new products (3M metric), quality of the patents (quality over quantity), and innovation impact on gross margin. Look at these six-innovation metrics and figure out how you can apply them to your organization.
If you want to learn more about metrics and apply them to your organization, check out the Disruptive Ideation Workshops, now done virtually.
If you are interested in learning more about the innovation metrics or want information from previous shows, check out all the free downloadable material I put together here.
To know more about Innovation Metrics (KPIs), listen to this week's show: 6 Innovation Metrics (KPIs) Every Organization Should Use.