Innovation Measures #10 – Innovation ROI

The final measure in this series is ultimately the one that really matters: Innovation Return on Investment. While most of us are seeking growth from innovation, we must also compete for investment capital and be good stewards of the firm’s resources as we pursue that growth. The innovation ROI metric attempts to demonstrate that we are delivering returns on capital in the form of incremental margin. The simplest form of the metric is incremental gross margin from innovation divided by total investment in research and development.

If measured properly over a sufficiently long period of time, the metric tells us whether our investments in R&D are paying off. I recommend only looking at this figure on a trailing twelve month basis, although if spending is relatively stable, you could get value from a quarterly figure. Anything shorter than that and you are comparing apples and oranges since gross margin dollars will lag R&D investment by several months, if not quarters.

This metric suffers from the same measurement challenges we have mentioned before, such as isolating incremental gross margin from innovation, determining how long to count those dollars as incremental, and netting out the effect of cannibalization. Not to mention the Herculean task of just getting the information out of patchwork ERP systems spread around the globe.

Driving high rates of Innovation ROI is the job of the Chief Innovation Officer. Getting a snapshot of how this metric has performed historically and setting expectations for improvement is a key strategy for transforming innovation engine performance.