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.
Over the past several weeks I have been writing about innovation measures and metrics. Some of these have been output measures, either real results or proxies for business results, others have been predictive or process health measures. Each has a place on an executive dashboard designed to provide a view of innovation engine performance.
Our continued exploration of innovation metrics brings us to a classic that has been widely adopted by leading organizations to measure the effectiveness and productivity of their investments in innovation. The innovation vitality index is most often calculated as the percentage of gross revenue generated from products that have been launched in the past three years. In its pure form it measures the turnover of the firm’s product portfolio to ensure that it is continually being refreshed.
The total amount of time required to turn an idea into a marketable product varies dramatically – and it should. Some ideas take longer to percolate while others need to simmer some while a market for them matures. Measuring total cycle time is not very meaningful nor helpful for the Chief Innovation Officer.