How to Measure the Short-Term ROI of Innovation

Innovation takes time. Thomas Edison built 1,000 prototypes and spent years tinkering before he landed on a version of the light bulb that would transform the world.

Henry Ford filed for bankruptcy twice before he managed to balance the books with a mass-produced motor car.

James Dyson built 5,127 vacuum prototypes before building something that could be sold. However, it would be another 10 years before his own company would make anything resembling a profit.

While these stories symbolize the importance of patience when it comes to innovation, most intrapreneurs cannot simply turn and utter the words “Thomas Edison" and expect board members and shareholders to nod in understanding.

The past decade has seen many tech companies that racked up enormous losses thanks to patient investors hoping to strike innovation gold. As of Q3 last year, Uber was losing money faster than any technology company ever and was on track to beat Amazon's previous record in 2000 when it reported losses of $1.4 billion.

Both Amazon and Uber went all-in to deliver generation-defining ideas. But the problem with such innovation is how to keep the confidence of shareholders during that murky period before the moment when a great idea turns into a profitable company.

That's where a focus on the right metrics comes in. According to McKinsey, more than 70 percent of corporate leaders tout innovation as a top three business priority, but only 22 percent set innovation performance metrics.

And Scott Kirsner, the founder of a company specializing in helping big businesses innovate, found that corporations tend to focus on the wrong things.

When surveying 198 business leaders on what metrics they used to measure success, the five most common were: revenue, number of projects, stage-gate specifics, profit and loss statements and the volume of new ideas being created. These metrics, he found, strangled innovation and creativity before it had a chance to develop.

Even worse, there's a real danger that wasting time measuring these metrics will suck up resources that would be better devoted to cultivating and testing new ideas.

“A lot of large companies are highly analytical," Mona Vernon, vice president of the data innovation lab at Thomson Reuters, told Harvard Business Review. “They find real comfort with reports and governance. Which means that you can spend all your energy measuring stuff if you're not careful."

A Different Way to Measure Innovation

Scott Anthony, managing partner of innovation at consulting firm Innosight, believes DuPont's analysis system provides a solid way for companies to begin to define innovation-friendly metrics.

He takes the company's innovation metrics further by breaking them down into three key areas:

1. Innovation magnitude (financial contribution divided by successful ideas)
2. Innovation success rate (successful ideas divided by total ideas explored)
3. Investment efficiency (ideas explored divided by total capital and operational investment)

By doing so, says Anthony, "companies that played it relatively safe could have a high success rate, low magnitude and high efficiency. A company could achieve the same returns by compensating for lower success rates with higher efficiency or magnitude."

Here's an example of how this can play out in the real world. Yum! Brands — the owner of fast food chains KFC, Pizza Hut and Taco Bell — wanted to increase its international operations and fend off stiff competition from local food retailers.

Traditional innovation logic would look to iterate on current product lines to provide incremental growth. In China, Yum! Brands took the opposite approach: It decided to innovate around the things it wasn't good at and didn't offer, instead of the other way around.

As a result, Yum! Brands started offering highly localized dishes, such as rice bowls and street food, areas other fast food chains never ventured into. The result: A jump in corporate profits from international sales from 20 percent to 70 percent.

Soren Kaplan, the author of two books on corporate culture, found in the example of Yum! Brands that there were data points that could be measured to get a sense of how innovative the company was being:

• Percentage of revenue or profit coming from international versus domestic markets
• Revenues from new products or services introduced in the past x year(s)
• Revenues from products or services sold to new customer segments

So how could these insights, derived from the CPG world, improve innovation in the tech sector? Here's how they could be implemented:

• Measure success over varying periods of time, to see how success rates change
• Focus on speed-to-market as a critical market advantage
• Pay close attention to how markets are responding

To increase the velocity of experimentation, a technology giant, for instance, can partner with agile, fast-moving startups. Successful outcomes may pave the way for deeper, more meaningful experiences.

Change the Input to Change the Output

One way to better align corporate innovation to ROI is to separate new and experimental business initiatives.

Coca-Cola has a separate venture arm that's responsible for finding and developing the company's future brands. To do that, it first needed to change its internal process of innovation. Coca-Cola now sponsors individual innovation teams, each with its own set of methods to go about finding new brands and ideas. The teams are deliberately different and are encouraged to use unconventional methods to find and identify customer needs.

To change the output, Coca Cola first changed the input. Samsung, Lufthansa Cargo, Jet Blue, and virtually every forward-thinking technology company follows this model.

Innovation takes time. But, as the examples above show, new ideas can survive and thrive even in more structured, less disruptive business — but need to be given the space to work and a flexible set of metrics to judge their success.