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25 KPIs for balanced scorecards for innovations
KPIs for innovation that go beyond simple R&D budgeting. Use an example of an innovation strategy card to describe your own innovation strategy.
Measuring innovations is a challenge
The Meriam Webster dictionary defines an innovation as "the introduction of something new". In a business context, I like how Jeff Bezos, CEO of Amazon, formulated the entrepreneurial vision of an innovation:
"Our job is to invent new options that no one has thought of before and see if customers like them."
Amazon CEO Jeff Bezos
Before we go any further, we should agree that we are not pretending to measure the creative aspect of the innovation, e.g. we are not going to predict here whether a particular innovation will be a success or not. What we can do is to ensure that a suitable innovative environment is created and that the most promising "aha’s" find their way into commercially successful products.
Why measure an innovation?
According to McKinsey  84% of executives recognize innovation as one of the top three business priorities.
You may be surprised that the main challenge is innovation not in generating ideas consists. Survey data says the opposite: over 50% of respondents said they have good ideas, but the problem is scaling them up and commercializing them - a “robust pipeline” for innovation is what many companies want.
- Innovation is a priority for many organizations, but it is not clear how to measure and manage it effectively.
Why old innovation metrics don't work
The traditional budgeting approach to measuring innovation doesn't work. A typical innovation is not a production line that translates ideas into commercial products; There are many stakeholders involved in it, and measurement efforts should take this into account.
Here are some typical KPIs that are used for innovation.
- R&D budget or similar budget metrics. We can't expect innovation to happen if there is no budget for it, or can we? Let's take any garage start-up. It would certainly be easier with good funding, but things often happen without significant investment.
- Key figures like Income from new products or Patent applications may be good for validating certain accomplishments, but their lagging nature makes them difficult to use in a short-term management loop.
- Key figures that try to quantify the leading part of the innovation, such as Innovative ideas or Number of active projects suggest moving in the right direction ("more ideas ->" more active projects "->" more income from innovations "), but they give no indication of how to get there. The result could be a portfolio of “innovative projects” that meet the annual innovation indicators but do not help the organization achieve its goals.
Innovation funnel and key figures for it
Now let's talk about building an innovation measurement and management system that can address the above challenges.
A brief estimate: where are you in the innovation landscape?
In the book about that 10-level KPI system I wrote about the importance of short estimates. Before we set up a complex measuring system, we should find out where we are currently and which measuring instrument is best suited.
Suggest that to your team List hypotheses (innovative hypotheses) that you recently tested to have. What situation are you facing?
|There were only "boring" ideas.||Maybe you need to look at the list of stakeholders and get more ideas from them.|
|There were some hypotheses but there was no budget to test / implement them.||Start with the basic budget metrics.|
|There were some ideas, but they were never hypothesized or tested.||Consider the innovative process (see below for more details). Look at the team's skills. They probably have to complete innovation training first.|
|There were some hypotheses, but they were only implemented on a small scale.||The problem is likely to be with top managers promoting the ideas. We'll get into this below.|
Stakeholder: Who can generate ideas?
Who is involved in the innovations? It's not just your R&D and management. Let's list some of the typical stakeholders and talk about their role in innovation.
|Stakeholders||Role in innovation|
|Employee||Generate ideas; Realize innovations|
|management||Generate ideas; set big goals; Assign resources; Lead teams|
|Customers (end users and internal)||Generate ideas; use the results|
|Business systems||Providing a pipeline for hypothesis testing|
|Culture||Determine the behavioral patterns (from the possibilities to develop the idea to the documentation of the results)|
|Competitor and Market||The source for competition and market research ideas|
|Events, networking, books, etc.||Other sources of ideas|
Innovation is not just about listening to customers
One of the trends related to innovation is a wrong focus on the needs / problems of customers and the alignment of innovation with those needs.
My position on this is as follows:
- Customers are the stakeholders who help to generate innovative ideas (see the example with Mercadona Co-innovation Centers)
- Customers will ultimately use the innovation and pay for it
- Customers are usually not qualified enough to formulate the innovation hypothesis, but your team is
In this context, it is appropriate to quote what Henry Ford allegedly said:
"If I had asked my customers what they wanted, they would have said a faster horse."
Measuring innovation - the easy part
An innovation process exists in every organization. Managers can measure the results (trailing part) of innovations relatively easily. We can measure:
- Funds spent on innovation
- The number of innovative initiatives that became successful in a given time
- Income from innovation
But what about the leading part?
Measuring innovation - the hard part
How can the leading indicators for innovation be formulated?
- How can we predict that the company will create these innovations?
Let's formulate the opposite question:
- What does the profile of a company look like, most likely will not be able to to be innovative?
These are the companies where:
- All new ideas will be rejected
- The hurdle for approving new ideas is too high
- Bureaucracy dominates over common sense
- Short term gains are more important than long term value to customers
- Employees are always busy fighting fires and simply do not have free time to think about something new, and in which
- Information silos restrict the exchange of information between departments
We can go ahead and list other behavior patterns that have a negative impact on the innovation potential. I mean to say that innovative company just the opposite will do. Do you need to measure how innovative your company is? Quantify and measure these behavior patterns.
Don't forget the stakeholders discussed above:
- Who could propose an innovation? Employees, partners, customers?
- Are the members of your team using your product or service as end users?
- How actively can your team experiment?
How innovative is your environment?
The basic metrics could be:
- The number of ideas proposed by the team over a period of time
- The percentage of ideas that were turned into experiments
- Defined time for the experiments
Where do these ideas come from? What could the inputs for the innovation be?
- Do the members of your team read the books in their area, do you attend conferences?
- Can we expect someone who has attended a conference to write down a list of 5 ideas for your team to try later?
It's easy when someone watches the presentations and networks with colleagues!
The Spanish Mercadona is an excellent example of how an effective innovative environment can be organized.
They invest in co-innovation centers where their “jefes” (the customers) have the opportunity to experience new products. According to a study by the Cerdà Institute , the success rate of products that have passed co-innovation is 82% compared to the industry average of 24%.
The measure of success in this case is defined as:
- Products that remain in the product line after the 1st year,%
This initiative is not a coincidental success, in fact the supermarket chain has a strong innovation strategy backed by investments in training for new hires (four weeks of training) and annual training (20 additional hours per year).
See the Learn and Grow perspective below for an example of how training initiatives can be aligned with the innovation strategy.
After discussing how companies innovate (and not innovate), we can create an innovation funnel. It will be something like:
- Insight> Idea> Discussion> Experiments> Prototype> Product> Commercial success or failure.
If you ask a business owner how many successful projects they have, what they will hear is that 3 out of 10 projects fail, 6 out of 10 perform poorly, and 1 in 10 perform excellently. What do these numbers tell us in terms of innovation?
To be successful with one project, your team must fail up to nine other projects.
And make sure your teams are really making an effort and not dismissing any random project as a failure.
KPIs for change management
A special case of measuring innovations is the measurement that is based on Change management is applied.
The difference between innovation and change
First, let's see the difference between innovation and change to discuss.
|Is primarily focused on ...||Unknown / inaccuracy||Known / certainty|
|It's about…||Testing the hypothesis, e.g. transition from a known A to an unknown B.||Execution plan, e.g. transition (for team and systems) from a known A to a known B.|
|Lead by…||Insights (hopefully related to the mission and strategy) that become hypothesized and eventually translated into best practices||Validated Best practicesthat need to be implemented on a larger scale|
|It helps with ...||Developing something new||The reorganization of something that already exists|
|Compared to each other||Innovation is always about change||A change is not necessarily an innovation|
KPIs for change management
In contrast to innovation is change more tangible. We work in the area of the known and implement them according to the previously tried and tested best practices, such as validated results of innovations.
In simple terms, change management is about reproducing previously tested best practices under slightly different conditions (new participants, natural changes in the environment, etc.).
We can divide change management into these phases:
- Phase 1. Preparatory phase
- Phase 2. Transition phase
- Phase 3. Results phase
KPIs for phase 1 - preparation
The main indicator in this case is Willingness to change,%. The index, which can be a combination:
- Resource availability and allocation,% Use the VRIO framework for formal analysis.
- System readiness,% The change might be obvious, but some dependencies could prevent you from starting work on it.
- Alignment between stakeholders,% Ensure stakeholders are on the same side in making this change.
- Total liability for the strategy,% Check that the proposed change and the way in which it is to be implemented is in line with the company's vision. Ideally, the change initiative should be focused on a goal on a strategy map, and the goal should be based on specific metrics.
Take improving the knowledge base as an example. There is an internal knowledge base that is used by customer care specialists. The change is about uploading more materials to the knowledge base and involving more support staff.
- In terms of adherence to the strategy. We have a goal on our strategy map - Improve customer experiencebased on the Customer satisfaction is measured. This goal also contributes to the financial goal Cost controlat.
On the one hand, the updated knowledge base will help the customer service specialists better serve customers as it contains some tried and tested response templates and reduces overall costs. On the other hand, template-based answers could be negative Customer satisfaction impact. We will track this metric as we analyze the impact of the change.
KPIs for phase 2 - transition
In contrast to innovation (where we deal with a hypothesis), change management is about a predictable process. Accordingly, we can use process metrics, such as
- Compliance with timeline,%
- Compliance with resource use,%
In most cases, change is about people and the acquisition of new skills. Accordingly, one of the key figures for the transition phase can be:
- Participation rate in the training,%
In our example:
- We can plan that the entire transition to the updated knowledge base will take 2 months. This gives us a target value for that Timeline compliance
- Once the new knowledge base is released, we will need to train all agents to use it. The goal for the Participation rate in the training should be 100%. We plan to achieve this within 2 weeks of the release date.
KPIs for phase 3 - outcome
In most cases, change management involves staff training and the adaptation of certain behavior patterns. The results of the change can be quantified at different levels. For example on these four:
- Emotionally - how your team perceived the change
- Skills - how the qualifications of the team members have changed
- Behavior - how the actual behavior of the employees has changed
- Impact - validate again whether the change affected overall performance as expected
For the plane emotionally we can consider the following:
- Change awareness,%
- Employee retention,% or Change acceptance,%
- Feedback Score,%
For the plane Skills can we track:
- Qualification level,% (e.g. according to the tests relevant for the change)
For the plane behavior we can look at:
- Behavior change,%. After implementing the internal knowledge base, for example, first line employees are able to answer a higher percentage of the questions without passing them on to the engineering team.
For the plane Effects we need to track the real business impact:
- Performance improvement or we can, for example, confirm that customer support costs have decreased over a period of time.
Let's look at how we can quantify the results of change for our example:
- We conduct an internal survey in which the support staff are asked for their opinion on the new knowledge base (emotional level).
- As part of the change training, we will carry out a competence test (skill level).
- Most importantly, we will examine how the actual behavior of the support staff has changed. For example, we can ask random questions and check whether / how the support staff are using the new knowledge base.
More importantly, we investigate how the actual behavior of the support staff has changed.
- Finally, we will plan to review the dynamics of performance within a quarter to ensure that the new knowledge base is actually helping us lower costs and improve overall customer satisfaction.
Measurement of change management in brief
Let's summarize how we can approach measuring change:
- Willingness to change index. Build your willingness to change index. Make sure that you know the context for the change (a goal on the strategy map) and that that context is measurable (through the goal-aligned metrics). Obtain the necessary political (stakeholder purchasing) and physical resources.
- Quantify the transition phase. As long as the change is about moving from a known A to a known B, the main metric of the transition phase will be process efficiency. Add training efficiency KPIs when the change implies the need for new skills.
- Validate results. Close the change loop with the help of validation metrics. Make sure that your team has emotionally accepted the change, has the necessary skills, and has actually changed their behavior. The long-term positive performance impact is implied, but it is better to track it.
Strategy map: everything summarized
Let us now summarize all the approaches discussed and create an example / template for a strategy map for innovations.
To achieve financial sustainability (increasing market share, increasing revenue, reducing costs, tapping into various sources of income), an organization must be innovative for internal customers (business units) and external customers (end users).
Which We need resourcesto generate, capture and test a hypothesis? Here are some possible metrics:
- R&D budget
- Hypothesis testing budget
- Idea generation budget
- Idea Review Budget
Which return we're expecting? Here are some possible metrics:
- Loyalty Revenue
- Income from new projects
Innovation needs to be recognized by customers (see the Bezos quote at the beginning of the article). We have to create:
- Value for the external customers. Which problem of the external customers (end users) could the innovation solve?
- Value to internal customers. Which problem of the internal customers (business units, partners) could the innovation solve?
How do you measure the value?
Regarding the measurement, a good question to ask is:
How will the customer perceive the value of the new offering?
Does something work faster, or is higher quality offered at a lower cost?
Sometimes it is difficult to quantify the specific value delivered.
For example, what value does Facebook offer? We can certainly compare the speed of photo publishing to that of a real world photo book, but it's obviously not the main value driver. It could be a great way to socialize or just get in touch with your connections. If you're interested in this particular example, just search Google for “What problem is Facebook solving? And I'm sure you will come across a lot of interesting value metrics ideas.
Internal processes perspective
To be innovative, we need certain business processes, such as a pipeline for innovative ideas and a resource allocation program:
- How the innovative ideas are generated and collected
- How the ideas are discussed
- How the hypotheses are formulated
- How the hypotheses are tested
- How the successfully tested hypotheses are scaled and implemented
With this innovation funnel in mind, we can start with conversion rate metrics, such as measuring the percentage of ideas that get from one level to another:
- Idea to systematic discussion rate,%
- Discussion of hypothesis rate,%
- Hypothesis to tested hypothesis rate,%
- Tested hypothesis on implementation rate,%
Quantifying the process in this way helps to identify where the performance bottlenecks are and to think about a prevention plan.
In addition, we can pack these key figures into an “Innovation pipeline index” indicator. The key figures that are responsible for performance bottlenecks should be given greater weight than the key figures that are responsible for the processes that run without problems.
Why it is not enough to have metrics for the process
The metrics for the innovation process are generally accepted by the team, but in many cases this does not give rise to new interesting ideas. There are two reasons:
- The idea pool is still limited to the ideas generated by the team.
- The team formally follows the innovation process but does not adopt the new patterns of behavior (or, if you prefer “culture”, “culture”) required for effective innovation.
Try to express these two goals explicitly on the strategy map.
Goal: involve stakeholders in generating ideas.
- Possible key figures: The number of points of contact at which the idea can be obtained from the stakeholder.
For example, customers are more likely to share their ideas in a short survey or during a personal phone call.
The lag indicator could be with the Diversity of ideas generally related, or you could set a specific goal to get at least 10 qualified ideas from clients each month. Find out more about diversity and inclusion as an innovation factor.
Objective: to develop behavior patterns that are geared towards innovation
A regular review of the behavioral patterns is a must:
- Instead of describing how you think you are innovative, ask a third party to review your innovation process and describe how it works in practice.
Such reviews will help identify areas for improvement. From the metrics point of view, we can quantify:
- The number of Improvement pointsthat were found during the check (leading part) and
- A Behavior change indicator (faster turnover of ideas, less bureaucracy, broken information silos).
Learning and growth perspective
Finally, we need to understand the gap between the team's current skills and the skills required to innovate effectively.
- On the Management-On the other hand, the goal could be to spread a culture of innovation (to allow and support experiments).
- On the Department level the skill gap could be addressed through training innovations as a separate discipline.
Possible key figures:
We have already discussed the ways in which training effectiveness can be tracked . The key figures could be:
- % of employees who have passed innovation training
- Apprenticeship engagement index,%
- Minimum number of points in training exams,%
- Change index of innovation training behavior
From the leadership perspective:
- Training metrics (similar to above)
- Innovation engagement and sponsorship index (basic key figures are: time spent discussing supporting hypotheses; available instruments and resources)
Creation of a strategy map
Now we can create a strategy map that describes how the organization will approach the innovations.
It makes sense to look at the list of stakeholders and ask a question:
"Which business system (and later which skills) do we need to be able to work effectively with this stakeholder?"
For example, “customers” were named as stakeholders who contribute to the generation and validation of the ideas. What does this mean for your organization's strategy?
- Is there a good way to get an idea of the customers? Such as, for example, proprietary surveys?
- Is there a quick way to validate new ideas with customers?
- Does your team have enough skills to “read between the lines” of the customer's needs?
Framework for business growth and high-level innovation
Above we discussed examples of some specific metrics for tracking innovation efforts. If you are looking for a more general framework that would help organize your high-level business growth considerations, take a look at the ideas of McKinsey's Three Horizons Framework.
A roadmap for measuring innovation
Here are some ideas for a roadmap for measuring innovation.
- diagnosis the current situation in your organization (see section "Brief assessment").
- Design one Innovation pipeline, visualize the way an innovation transitions from the idea level to the commercial product level.
- Create a Strategy map for innovations in your organization. The map discussed in this article might be a good place to start, but be sure to customize it to suit your needs.
- Make sure the Innovation strategy is not a stand-alone product, but part of a company's strategy.
How such an approach helps
What can we expect if we follow this disciplined approach to innovations?
- Understand readiness for innovation at the level of business systems and teamwork.
- The ability to better justify certain activities
- Shift the focus from the trailing financial metrics to the leading skills and business system metrics.
- Find performance problems and fix them early.
- Filtering innovations that do not fit the overall strategy.
- Access templates. Sign up for a free subscription to BSC Designer for instant access to 28 scorecard templates, including Innovation scorecardwhich is explained in this article.
- Professional knowledge. Free video tutorial for the balanced scorecard. Master your strategy planning and execution skills with strategy execution training.
- Automate. Learn what balanced scorecard software is and how it can make your life easier by automating strategy execution, metrics, and strategy maps.
More examples of the balanced scorecard
Do you know of an interesting case about measuring and managing innovation? Don't hesitate to leave a comment!
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