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.

The post Rethinking the measuring of innovation first appeared on Building Your Innovation & Ecosystem Intelligence.

I often think of the parable of “The Elephant and the Blind Men” when I get into discussions about measuring innovation.

What are truths, what are the fallacies?  The parable implies that one’s often subjective experience can be true on your need, but not necessarily the other person’s view of their understanding of value.

You get, as the end result, a failure to account for other ‘beliefs’ or capture the real value and miss providing broader motivations to encourage the innovation elephant along.

Establishing the right metrics that motivate and yield the result you are looking for is sometimes a tough challenge. You should always start with the bigger picture, organizational needs and then design the metrics and cascade these throughout the organization.

This part of the series explores the Innovation Work Mat

In a series of articles I will be looking at each of the seven components within the executive innovation work mat to raise questions to probe and prompt the necessary thinking that needs to be made in organizations at different management levels determined to build a lasting innovation competence and structure.

Within this work mat series I’ve already offered some opening thoughts on the role of Governance and Innovation, and also the Environment for innovation matters to innovate followed by the innovating conditions for your Culture and Climate.

This is the fourth article aimed at deeper engagement and understanding of the connected parts within innovation management on Metrics and Motivations.

Raising some initial thoughts here.

We really struggle to describe, then measure and then find the right motivations and reward mechanisms and then achieve broad agreement, on something as important as innovation.

If we link metrics into the reward and compensation structure then we release all the energy, passion and anguish and these can serve in many contrary ways.

Linking compensation into all the competing motivations to manage and reward innovation activity is fraught with problems and can have many negative consequences.

Again my elephant comes back into view wandering around in your board room – it can disrupt everything as it charges after the results that it wants, trampling much that is good in its path.

Today’s particular trend of focusing on short-term performance can limit innovation significantly and has innovation consequences.

Let’s look at metrics and motivations with greater connected awareness.

At the end of the story on the elephant and the blind men, a wise man was passing; listened to all the different views of why no one could agree on what they thought the elephant was like. The wise man then replied “All of you are right; you were touching different parts of the elephant so the elephant has all the features as you all said”

Metrics and motivation can really make innovation happen

The value of the measures lies in resolving these eight different questions: 1) are they clear and simple 2) are they relevant to you and the central issues 3)are they timely in what can be achieved, 4)are they credible to the stakeholders involved 5) do they relate to the importance of the goals or trivial, 6) can we act upon them 7) are they consistent to the strategic message and aligned, and finally, 8) are all the investment in these measurements and motivators to capture and analyse, seem sensible and affordable, and lead to real impact in aiding innovation to achieve the goals required.

We do need to focus on the future innovating purpose surely?

The innovation links to any measurement system I would argue should point towards the organization’s strategic need and the innovation outcomes required. Within this there are broadly three parts: 1) knowing the organization’s future-orientated vision and the general direction that innovation needs to take, 2) along with the strategic carriers in types, priorities, functions, the indicated mix of innovation activities and then 3) the growth gap that exposes the organizations’ challenges, so as to bridge these knowledge and resource gaps.

These can build innovation capacity today for future innovating outcomes as they are focused on future work to be done.

For me the output intention of the Integrated Executive Innovation Work Mat should be driving the business case for how innovation contributes and offers the what, where, when, and why within the communications for others to be mobilized into actions and build out build upon this strategic working document.

Then we set about communicating it to the organization

I have written before about the cascading effect and communicating value that can support this. Then our metrics begin to cascade down to bring people, the process, and the innovative design of inputs and outputs turn into successful alignment outcomes can come into play. I’ll broaden out my thinking on this area in the next post.

It is within the leadership of organizations to become intimately involved in what is important in innovation for their organization, otherwise, we are back to the elephant and the blind men. All others simply believe they have the answer. Leadership needs to really engage in where it ‘expects’ innovation to yield its results and then ensures it links reward to this set of outcomes.

So what does success look like?

We should start with the ideals that our innovation activities should be pervasive, to be sustainable and we need to deliver clear business results mapped to known and potential unrecognised customer needs as our primary incentive points.

We need to layout the building blocks to ‘group’ management and employee identification with what is innovation success. It can begin to motivate all the stakeholders involved. This gives us the opportunity to evaluate appropriate resources, provide the workable benefits related to learning, encourage the identification of problems and encourage the identification of solutions and set about communicating to all involved the understanding of what success can look like.

Building the innovation metric and motivation scorecard there are hundreds of measures you could bring into anything; the skill is you need to find only the right few that focus upon the results you really need achieving. They need to somehow “talk to each other” so they are mutually reinforcing and all involved are pulling in a similar direction.

What gets measured should connect and matter – an example

I like one I came across some years back, by Cap Gemini, which firstly suggested you define what innovation was going to be about. Their example was “a robust creative process that turns out very distinct outputs with significant impact in the market place” and then worked on a scale for assessing the degree of innovativeness on a three-dimensional grid of Impact, Distinctiveness and Creative Process.

This then becomes the measuring and motivation barometer tied to the strategic need of an organization of what is expected out of innovation. That sort of complete picture can only come from the senior managements full committed to “wanting distinct outputs of significant impact in the market place”

I think Bain & Co offered also a really valuable performance measuring framework.

This framework offers a really good structure to begin to measure and link the organization. I think it can stimulate initial thinking well.

(click to enlarge)

There is a case for approaching measurement differently through the intangibles that make up most of our capital.

Measuring attempts need to take into account the many intangibles that make up innovation and make them tangible. Understanding the relationships within our intangibles allows groups to benchmark, diagnose, allocate resources, inform others and compensate employee’s efforts through their ongoing knowledge learning. The understanding of our intangibles is for me vital to crack.

Getting this right is increasingly important as the intellectual capitals are being recognized as the real value creation intersections. Establishing the metrics that focus on generating valuable innovation also helps extend ambition and future goals, pushing future innovation strategies as you grow in confidence and understanding of these dynamics.

To end we go back to avoid the story of the Elephant and the blind men.

By taking the integrated approach through the work mat, senior leaders can  offer strategic guidelines into the measures and motivations, by laying out their beliefs and expectations from innovation. They can’t afford to leave this open-ended, just being hopeful, innovation activities need essential alignment.

If we continue to allow the ‘blind men’ to offer their separate opinions and then decide in isolation of the bigger picture, they ‘see’ only their part of the elephant.

I believe if you put in place that critical strategic innovation document, wrestled out of engaging across all the work mat parts, the metrics and motivators can ‘form’ around this strategic intent. This can drive innovation performance.

Seeing the whole picture is the team sitting on (at) the top, directing the innovation elephant along its journey to the destination where they want it to go. Metrics and motivations follow as the path is clearer to measure and travel. We need those wise men to clarify this.

The post Measuring and motivating the innovation elephant first appeared on Building Your Innovation & Ecosystem Intelligence.

I enjoy a lot of what Steve Denning writes and his series in nine parts on “Why Amazon Can’t Make a Kindle in the USA” (start here http://onforb.es/oK1Cxh ) has really hit home on the seriousness we are facing in Western countries over innovation capabilities.

He mentions the “decades of outsourcing manufacturing have left U.S. industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy”, as noted by Gary Pisano and Willy Shih in a classic article, “Restoring American Competitiveness” (Harvard Business Review, July-August 2009).

The pursuit of profit is killing innovation
Last Friday, 18^th November, he followed this series of articles with a further one on a talk given by Clayton Christensen entitled “How Pursuit of Profits Kills Innovation and the U.S. economy” (http://onforb.es/rZ7l8U )  and that so much of our basic thinking taught in business schools and promulgated by consultants is partly the cause.

So I was faced with a ‘double sit up’ not a double latte, of Denning and Christensen, and that did more to wake me up than the caffeine intake I was having.

The bottom line is that major segments of the US Economy have been lost, in many cases, forever and that equally applies in Europe.

On the other side of the Pond- the EU and its Innovation Union.
Máire Geoghegan-Quinn, Commissioner for Research, Innovation and Science and Vice- President Antonio Tajani, responsible for industry and entrepreneurship have said: “As we emerge from crisis in the teeth of fierce global competition, we face an innovation emergency.

If we do not transform Europe into an Innovation Union, our economies will wither on the vine while ideas and talent go to waste. Innovation is the key to building sustainable growth and fairer and greener societies. A sea change in Europe’s innovation performance is the only way to create lasting and well-paid jobs that withstand the pressures of globalisation. ”

With an ageing population and strong competitive pressures from globalisation, Europe’ s future economic growth and jobs will increasingly have to come from innovation in products, services and business models.

This is why innovation has been placed at the heart of the Europe 2020 strategy for growth and jobs.

The long list of ‘must do’s’ suggested within the EU recommendations all are shouting after the horse has bolted from the barn. In both Europe and the US we are losing our capacity to innovate as we are rapidly losing our knowledge and experience built up and we are facing a ‘knowledge deficit’ exported over many years to developing countries.

This will place these countries even in more a dominating position in years to come.

We may be in a series of financial crisis but the ‘knowledge deficit’ one will be even more damaging to our future prospects.

The real crisis is not the current financial one; it is knowledge application for job creation.
We are simply losing our knowledge to create things close to home we are being ‘forced’ to seek global collaborations as knowledge simply is found and extracted where it is best served. How can we reverse this for many nations needing revitalization as knowledge leads to jobs. For many, we need a massive bailout plan, not for our financial debts but for our growing knowledge deficits.

Any declines, closures and more importantly, as the business firms continue to push to go overseas and chase low cost manufacturing places simply sets off a powerful chain reaction. Expertise is lost, advanced research suffers as more trained people seek meaningful work that relates to their skills and qualification overseas, increasingly in countries outside the US or Europe.

In manufacturing, in significant decline in Europe and the US for many years, those daily interactions between process and engineering leads to new design, fresh thinking to solve problems so knowledge builds up in locations closer to the manufacturing point and then, more businesses are ‘forced’ to locate closer to where the action is. As Pisano and Shih state in their HBR article “

In the long term an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

The argument is we adopt a more strategic approach to innovation.

This I couldn’t agree more with. Innovation must become more of the overarching policy objective, it needs to go well beyond leveraging our strengths, and it needs to draw back in lost knowledge before it is too late.

We need to reverse the outsourcing policies driven by short term gain and not accounted for in the total ‘cost and benefits’ that society eventually pays.

We need to alter not only the measuring criteria spoken off with Clayton Christensen’s phenomenon of “driven by the pursuit of profit” in the above mentioned article, it lies in calculating a different ‘rate of return’ (IRR) so well put within this article.

This last article from Steve Denning (re Pursuit of Profits) sums it up

“Thus when a firm calculates the rate of return on a proposal to outsource manufacturing overseas, it typically does not include:

• The cost of the knowledge that is being lost, possibly forever.
• The cost of being unable to innovate in future, because critical knowledge has been lost.
• The consequent cost of its current business being destroyed by competitors emerging who can make a better product at lower cost.
• The missed opportunity of profits that could be made from innovations based on that knowledge that is being lost.

The calculation of the IRR based on a narrow view of costs and benefits assumes that the firm’s ongoing business will continue as is, ad infinitum. The narrowly-defined IRR thus misses the costs and benefits of the actions that it is now taking that will systematically destroy the future flow of benefits.

The use of IRR with the full costs and benefits included would come closer to revealing the true economic disaster that is unfolding”

Different mindsets and different solutions are needed for a better Innovation Union.

At a time when the external environment is highly dynamic, businesses that exist today (irrespective of where they locate) may be gone tomorrow. To survive in this world, a different kind of mindset is needed and if I may say- imposed.

The traditional ways we see our business, in isolation of the dynamics going on around us where profit maximization driven by management’s preoccupation on efficiency at often the cost of real innovation. The drive for cutting costs to meet the quarter and thus losing more knowledge that resides within, and then the consistent outsourcing, this relocating chase, is an eventual death-spiral for many economies.

Whole communities that had previously built around ‘knowledge clusters’ suffer and go rapidly into decline and over the long run, simply die and fade away, not relevant any more- gone overseas!

Our continued loss of knowledge, with our continued uneven recognition of the real value of innovation, will continue to feed this death-spiral unless we can somehow reverse these trends.

Moving more knowledge and the associated assets away from the US and Europe might seem sensible for today’s managers and financial backers but this is exporting knowledge and experience and this makes up innovation, it is where improvement, breakthroughs and future competitiveness come from.

We are rapidly losing know-how, it is what is happening that give me greater cause to worry for our long term prospects than the financial crisis. We are losing our competitive positions as any growth in the economy is in investing in knowledge for people to innovate.

How far can we go on this slippery slope as money does quickly follows where knowledge resides, and this is rapidly moving overseas, located increasingly in Asia.

Until we recognize this, we can ‘shout’ long and loud but the (knowledge) horse is fast galloping away from us and we will be left with simply pockets of incremental innovation, while others lead, we will simply follow along in their dust.

The post Innovation is simply in crisis near you. first appeared on Building Your Innovation & Ecosystem Intelligence.