Rethinking the measuring of innovation

I’m a little tired of the lack of original thinking that goes into measuring innovation. Most trot out the same old chestnuts, including ‘return on investment’ as always, as near or at the top.

Leaders want to hear this, the sad truth is getting a ‘decent ROI’ for innovation constructed (note constructed) is really hard. If the innovation is new to the world, how can it have a clear financial return on investment until much later, much becomes an ‘educated’ guess?

We need to appreciate new innovation balance sheet thinking

Why a balance sheet thinking? There are hard and soft measures to measuring or judging our innovation. It goes way outside financial numbers. Would we have seen the emergence of Facebook, Apple Watches, Uber etc etc if those that were determining success from their investments had actually insisted on guaranteeing the ROI before launch or within short time frames, that many of our established organizations insist upon? No it was the belief and ‘seeing’ the potential that encouraged those investing to make the initial investment and then continue on ‘future’ returns.

There was a growing recognition that a ‘flexible’ and broader set of metrics was needed, to permit time and critical mass to continued to accelerate away, so the eventual returns on the emerging business model would have the time to evolve and provide the valuation potential expected. It was the measuring of value- potential and realized – that along with the beliefs and response provided by the owners that gave ‘investor confidence’

My first thought: do we know enough about the thinking for VC’s on how they judge investment?

Venture Capital is a driving force behind entrepreneurship and innovation. It fuels the economy, creates growth opportunities for companies large and small and, it funds the business development strategies of major corporations. What can we learn to apply in established organizations for judging innovation differently so “risk” becomes higher in factoring in so as not to reject ideas far to early in their life but to encourage them.

Thankfully the venture capital community has a different set of measures to judge the longevity and potential. Clearly financial returns always loom within the thinking, possibly even more so, as those investing funds are highly focused and demanding returns. Yet it is more considered by the VC on where to invest venture capital to gain real ‘return’ becomes a portfolio of investments.

There is this continued recognition that many investments made are lost in a portfolio of risky investments. The thinking is based upon how we assess ‘our’ investment, in how many ventures as ‘we’ recognize many will be losses before we hit the jackpot and recoup all the investment over the one winner to cover all the numerous losers and make significant returns on top.

Why do we not measure the health of our innovation investment far more?

In many ways our established organizations can move far more into a portfolio of investments as they should have the confidence in their knowledge, competencies and people to make ‘greater’ investment. The problem is they most probably don’t have this confidence and part of this reason does lie in a narrow range of measurements they are taking of the ‘return’ on their investments and not looking much harder at the ‘heath’ of the organization to give this confidence.

Why do established businesses ignore the investment rationale for delivering real innovation winners that can change the fortune of their business? They often leave this ‘venturing’ to others to search and achieve transformational solutions, ones that can even radically alter existing business value propositions and then we hear them ‘crying’ over being disrupted or ‘we’ did not innovative enough? Something needs to change.

But while Venture Capital is an integral part of the global economy , the unique inner workings of venture capital firms and their processes are sometimes suggested are a well-guarded secret, so we need to tease these out and find ways to adopt many of them in our established organizations thinking as well. There is perhaps no ‘secret sauce’ just investor confidence and the imperatives to make returns or be themselves out of business.

I know some of our established organizations are attempting to do this ‘venturing’ yet we do need to ‘pool this thinking’ to open up the measurement for innovation investment in the future to be part of each organizations mind-set for measuring success.

Here are my contributing thoughts to take the health of innovation as more central in our measures.These are not VC related but underscore believe, commitment and the drive towards structured learning, in a more balanced way.

Measuring more of the ‘health’ of innovation within established organizations

Shown below are a list of the factors I feel can be major contributors (far from exhaustive), firstly into the soft side of our balance sheet that is made up of culture, climate and environment as our creative and engagement capacity. This side of the innovation balance sheet gives the commitment and sense of belief that can encourage investment, as the people side equates to the measurement of the team within a new venture. It determines much of the belief this is worth investing in.

Some of these initial suggestions of course are inter-changeable or become reliant on each other, but it gives a decent understanding of what makes up the balance sheet needs we all must have in place to have a thriving innovation organization. It needs to address the creative, engagement and relationship part that innovation always needs.

Informal mechanisms (the contributors to the left side of our innovation balance sheet)

Those that are leading to improving the softer aspects of innovation (our left side of the innovation balance sheet) that would contribute to its build and health.

• Uncovering good and emerging practices in innovation
• The value of good leadership & distinct culture creating the linkages
• Targets and partner identification for relating and collaborating
• Skill of working together effectively – team building, encouraging diversity
• Integrating external parties to leverage through networks and relationships.
• Framing ambitions and plans of strategic targets and relating those to individuals
• Engaging the outer peripheries to capture insights and needs to drive engagement
• Exchanging expertise and seeking synergy in exchanges
• Story telling/ narratives, those relating and explaining, sharing and extending
• More bottom up engagement in formulation – sharing and informing
• Seeking individual insights, encouraging an open learning environment
• Developing the agility to quickly react to changes, effective and decisive intent
• Work on speed, external orientation and improvisation,flexible and adaptive
• To promote “doing more with the same”, less rework.
• The CEO acts as the central source of encouragement and determination
• Encourage informally at all levels in exchange

The formal mechanisms (the contributors to the right side of the innovation balance sheet)

Those that contribute to the make-up of the harder aspects of innovation or our right side of the innovation balance sheet that build this part, beyond ‘just’ financial.

• Ingraining innovation as a corporate function
• Determining how you lead and manage this, how you develop this out in its parts
• Identify the constraints , articulating the resolutions, recognizing the boundaries
• Optimizing the process and structures, constantly reviewing to improve
• Determining the allocation of funds to offer the balance needed to achieve the goals
• Innovation portfolio management designed
• Type of openness to innovation flows to encourage and drive outcomes
• Embedding technology and capacity for rapid experimentation, and discovery
• Rapid ideas, discard failing ones & triple investment on good ideas
• Distance from Customer – determining the importance and setting about the connecting
• Ingrain as a corporate functionality the need to always be conscious of greater alignment
• Determining how you lead and manage through governance and design.
• Identify the constraints and boundaries, pushing and probing
• Optimizing the process and structures on an ongoing basis
• Determining the allocation of funds into the different framing activities
• Innovation portfolio management, striving for value, impact and return
• Type of openness to innovation flows and external engagements needed
• Embedding technology and capacity for rapid results and early wins
• Rapid ideas, discard failing ones & triple investment on good ideas, experiment and explore
• Involvement from both Customer and other stakeholders within your innovation process

Irrespective, for me, the health measuring equation you decide to follow has to be robust

It clearly has to account for a more holistic view of innovation – a more balance view of what ‘makes up innovation’. We need to constantly focus on the outcomes, less on the inputs or outputs, as although these are valuable to measure the effort being put in, it is my believe we should be mostly focusing on measuring the outcomes, those that are successful in learning and advancement, ones that lead to real new innovation outcomes. Those outcomes that give return, both immediate and for the future.

This can offer a different risk and opportunity assessment that can be underpinned by this ‘health’ innovation that builds what is ‘sound’ and ‘solid’ to invest onto as the metrics build more on the dynamic innovation capabilities.

This measuring of the ‘health’ of our innovation across a balanced view will give a growing confidence by the board to invest, by providing more leading indicators and engagement justifications will potentially encourage investment into a more riskier level of initiatives. Confidence grows with learning, discovery and engagement.

Pushing  for more ‘measured’ risk it certainly makes a ‘innovation portfolio’ more demanding to manage but potentially far more rewarding in its total returns in learning, in advancement, in capability and capacity building and in growth potential. Having measurements that ‘push’ learning and discovery can reveal more distinctive and radical innovation potential through greater engagement. The outcome is relating more by looking  out into the world. providing solutions that customers relate too and are more prepared to provide the stronger financial returns we want from innovation, as they see the different increasing value that is being offered.

Yes, our measurements do make a difference, it is time we took a fresh look at providing new ways to measure the health and potential to encourage greater innovation investment we need.