How to measure an organization’s capacity to innovate

Established organizations must innovate to stay relevant. The reality is: innovate or perish! 50% of the companies in the Standard and Poor’s stock index are predicted to be replaced by the end of the decade. (1)

Companies know they need to innovate. They have innovation teams, 20% time, hackathons and other ways to weave idea creation into their organization’s fabric. But are they able to innovate? By innovating I mean the process of turning ideas into value. Because without value creation, ideas are just that: ideas.

Organizations can get better at innovation by measuring their innovation process and its outcome. The following three measures help us do this.

First, the Innovation Chain is a process-oriented measure that focuses on the operational efficiency and frequency of the innovation lifecycle. It looks at two important aspects:

• The time from idea to value — that is the first sale.
• And, the frequency of repeating the idea to value cycle in a given time.

By the way, making the sale without putting the product or service into the hands of your customers doesn’t count. Customers have to be using it.

For example:

• It took a company an average of 18 months from idea to the first sale.
• And they were able to repeat this cycle 3 times over the past 5 years — they created three new innovations.

Next, the Innovation Monitor provides a snapshot of the financial impact of recent innovations, indicating the immediate economic value created by new products or services. It does this by looking at:

• The percentage of revenue that comes from products or services introduced within the past x years.

This will enable us to monitor innovation over time. When we compare this year on year and we can see: Are we trending up or down?

The “past x years” should be defined based on what makes sense in your industry. And do it in such a way that the amount of revenue from new products/services is between 25–50% to enable changes to be easily visible.

For example:

• Suppose in 2022, 40% of the company’s revenue came from products that are less than 3 years old.
• Compare this with 2021, where this was 38%.

We can see the Innovation Monitor is trending up. This could mean for example that new products/services are resonating stronger with customers, or our sales efforts and channels are more effective, or something else. You will be able to see changes and then dig deeper into what drives the change.

Finally, the Velocity of Innovation reflects the historical ability of a company to sustain innovation over time. It uses…

• The innovation monitor metric that we just looked at with — the percentage revenue that comes from products or services introduced within the past x years.
• PLUS for how many years the company was able to sustain that.

For example, Company A receives 100% revenue from products that are less than 3 years old. PLUS the company sustained this level of revenue generation from new products/services for 10 years. This means: Every 3 years, Company A has turned over its entire revenue base, and it has been able to sustain this for a period of a decade.

In contrast, Company C has innovated once 20 years ago. All its revenue still comes from that one innovation. Their innovation capacity is standing still.

We can also calculate a score based on this. For example for Company A:

• 10 Years of sustained innovation
• divided by 3 years
• times 100% of the revenue created by these new products/services.
• This gives a score of 3.3.

We can then compare an organization against others, and understand the capacity of an organization to innovate again and again. How do we compare against competitors? Are better at innovating than they are?

In summary, we can measure different aspects of innovation for an organization:

• The Innovation Chain: Measures operational process efficiency and frequency of the innovation lifecycle.
• The Innovation Monitor: Measures the financial impact of recent innovations.
• The Velocity of Innovation: Measures the historical ability of a company to sustain innovation over time.

All three measures are important to create an innovation culture and internal processes that foster innovation.

Sounds nice… but measuring is hard?

We can only manage what we measure.
What we track stays top of mind, and drives behavior.
So, start evaluating your organization’s capacity to innovate,
to enable you to get better at it.

Are you already pro at tracking innovation? Or just getting started?
How are you measuring innovation? I want to know!
And how has this helped you remove barriers to innovation within your organization?

Please share your experience in the comments to help me and others measure innovation and get better in the process.

References:
(1) Charles O’Reilly and Michael Tushman, Lead and Disrupt (Stanford University Press, 2021).
(2) Thomas M. Koulopoulos: The Innovation Zone: How Great Companies Re-Innovate for Amazing Success (2011)

Image credit: Nick Fewings