How to Measure Open Innovation Value – Part 1

An act of faith

Firms spend billions on innovation – between 7-8% of turnover in traditional industries and 12-15% in high-tech sectors. But is this seen as an investment or a cost? The sobering fact is that only 37% of company execs are satisfied with the way they measure innovation (BCG 2007). The measures that do exist rely overly on keeping tabs on spending. Compared to capital investment, overheads or even marcomms, innovation can seem more like an act of faith than a business process. It is more in hope than certainty that companies continue to throw good money after bad to discover the next big thing. In the frontier of open innovation, we have an opportunity to start afresh. A true appreciation of the new benefits and costs of innovating with others will help these collaborations make the transition from marginal to mainstream.

Strategy, what strategy?

The whole subject of metrics might seem like one for the Inno-nerds. In fact, it is key for the survival of every business. The more sophisticated your process for measuring innovation, the more you can control the apparently uncontrollable. Setting goals and measuring progress towards them enables you to flex your tactics before mistakes become expensive, or great ideas are buried – all within the comforting context of an overall plan. Our Open Innovation Challenge project for Procter and Gamble is an example of such a strategy. The goal for return-on-investment was clearly defined as $100m new products from the wellness and laundry sectors. Together with P&G and BDI we also set expectations for the number of entries, the short list and the sorts of partnership models we were aiming for. As another measure of efficiency, P&G remarked that it would have cost them four times as much to source ideas of such quality using their usual methods.

Of course, one of the most exciting things about innovation is its unpredictability and many will argue that too much measurement stifles it. So can metrics tell you which innovations will go on to be successful? Accurately picking winners is largely impossible, but setting a strategy will at least help you control the I of ROI and maximise the R, giving better value. And as innovation is a cyclical process you will also be arming yourself with benchmarks for future R’s – and also establishing whether you are getting better at innovating.

Does your company measure up?

If only a minority of firms are happy with their innovation measures, what do they actually look at? The evidence that firms don’t treat innovation as an investment is that those actually measuring it are most likely just to control costs. The most widespread measure of innovation is total funds invested in growth projects (71% of firms, BCG 2007). If the Marketing Director relied on the simple cost of advertising campaigns to justify the expenditure, he or she would not have a budget for long. Those firms that measure more than cost do indeed look at a variety of metrics, such as profit, idea generation and selection and time to market. However, it’s not sophisticated – most companies have fewer than five such measures. No wonder that in constrained times innovation is one of the first activities to be cut. Perhaps if firms looked at innovation with more rigour and higher expectations it would be the last.

The concept of Innovation Value

Before we go on to look at the challenge of measuring open innovation, it might be helpful to introduce our simple new concept:

Innovation Value = Innovation Benefits/Innovation Costs

This builds on the idea of ROI but is less nakedly financial. The calculation will of course include new revenue and efficiencies. But wider and indirect returns should be taken into account and given monetary values or indices. Each business is unique but many will need to factor in stock value, increase in knowledge and IP, customer loyalty, brand reputation, price elasticity, product distribution and attractiveness as an employer. For example, breakthrough innovation not only generates profits but it increases a firm’s value by an average of $4.2m (Sorescu and Spanjol, 2008). How much credit does the innovation team get?

The other side of the equation is equally interesting. As we’ve seen, costs for R&D and commercialisation are often measured. Other costs are more subtle, most notably the cost of not innovating. What happens if you assume no innovation and your competitors carry on as usual? How much market share or customer loyalty would you lose if you ceased to innovate? The consideration of opportunity cost is in effect a measurement of the risks involved in a competitive marketplace and is rarely factored in when setting innovation budgets or evaluating programmes.

Our VJAM project with Virgin Atlantic exemplifies the Innovation Value approach. The key benefit we aimed for was fresh new apps for their web site but we also wanted an enhanced flyer experience, stronger relationships with their VFlyer lead user network, and to establish a new developer community. These benefits were delivered at a low cost – it would have cost 10 times as much to commercially commission the apps. The opportunity cost was also factored in; we were mindful of the leading role BA was taking in social media.

Innovation Value

Innovation Benefits

% sales and profit from new products
Sustainability of revenue
Diversity of innovation
Strategic alignment
Product quality and reliability
Idea generation and selection
Stock value
Increase in knowledge
Intellectual property
Customer satisfaction and loyalty
New customers, new segments
Reputation and brand image
Ease of recruitment
Product distribution
Price elasticity

Innovation Costs

Total funds invested
Ideation, R&D
Incentives
Time to market
Production
Distribution and marketing
Opportunity costs
Potential loss of share

Other Sophisticated Models

There are a few shining examples of a more developed approached. The Real Options methodology for evaluating potential (McGrath and MacMillan,2004) treats innovations like a financial option contract. It ascribes to each a dynamic value including likely competitive responses, the dependence on standards and the degree of uncertainty. A new tool for evaluating radical innovation portfolios (Paulson, O’Connor and Robeson, 2007) addresses the interrelationships in risk. For each innovation you invest in you have less for the rest. 3M has used an independent outside team to predict the probability of success for new R&D projects (Krogh et al, 1988), and prioritise the projects in which to invest. Some companies such as Apple search for ‘key value commodities’ (Dillon et al, 2005) to create products that meet unspoken need such as ‘coolness’, a commodity that Steve Jobs has been able to mass market.

Measuring Open Innovation

Measuring open innovation is a new field and consequently even less developed. To start a new debate I would like to examine three sets of factors unique to open innovation.

Firstly, aligning the metrics of both parties is important, so the partners continue to get what they need out of the relationship and remain keen.

Secondly, measuring the health and strength of the relationships is vitally important because this is the glue that holds collaborations together.

Thirdly, we must learn to value networks, and as we saw in the case of Virgin Atlantic, factor in the anticipation of future rewards from them.

In the next blog will we will examine these challenges and the opportunities we all have for leading a quiet revolution in how to value openness.

Benefits

Costs

% sales and profit from new products

Total funds invested

Sustainability of revenue

Ideation, R&D

Diversity of innovation

Incentives

Strategic alignment

Time to market

Product quality and reliability

Production

Idea generation and selection

Distribution and marketing

Stock value

Opportunity costs

Increase in knowledge

Potential loss of share

Intellectual property

Customer satisfaction and loyalty

New customers, new segments

Reputation and brand image

Ease of recruitment

Product distribution

Price elasticity

Comments

  1. I think you are right on the button in exploring how to measure innovation and especially open innovation. The nature of open innovation is proving value to enter into the organizations internal innovation pipeline. The simple but effective structure of attempting to measure appropriate inputs, process, outputs and outcomes can help.
    Your opening thoughts of measuring alignment between two or more parties is critical, same for health of the relationship and value networks.
    I call this Business relationship management where you are aiming to accelerate the interactions, add more value to networks and the connections made and dealing with often unique challenges (unknowns) effectively. For me the value of the work that Verna Allee has been working upon for a number of years really has enourmous value to explore around the Value Network. She talks of the three currencies of value- 1. the potential revenue you expect from these engagements is critical to assess as early as you can. 2) The knowledge value- exchanges, value to your core mission and objectives, 3)Intangible benefits- the exchanges themselves build sense of communities, connections, further opportunities and she feels these need to be mapped into a value exchange.
    The one most powerful aspect of her work is in Value conversion- taking often intangibles as negotiables and deliverables to achieve a (mutual) flow of values.
    Perhaps we should be building a whole new lexicon, not just for the sake of it, but because it is the inside world needing to meet the outside world and often this requires a (new) common language

  2. Thanks for your comment Paul and the reference to Verna Allee which I will follow up – do you have any particular work in mind? The quantification of all these factors is at an early stage in most companies and needs more rigour.

  3. קורס קידום אתרים…

    … קידום אתרים – אם קורס קידום אתרים חברה הממוקמת בשוק שלנו, גולשים,לקוחות קיימים,לקוחות שיתעקשו על דף האינטרנט. תגיות מטה לחיים – נכון, שמעתי כבר 1000 פעם שגוגל לא קורא תגיות מטה. איחסון האתר א… How to Measure Open Innovation Value – Part 1 – 100% …

  4. Sorry I have been really slow in responding. You will find on her site some useful frames, references and sharing ideas. You might want to consider her to talk, become involved etc as she has a wide knowledge that will help in approaching and thinking through many of the different aspects of open innovation.

Post a comment

Please complete this simple maths question to help us fight spam *