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| Assessing innovation metrics: McKinsey survey | | MCKINSEY GLOBAL SURVEY RESULTS |
| Strategist Team / New Delhi Dec 02, 2008, 00:25 IST |
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 Even in the current economic turmoil, innovation remains a high strategic priority for most companies, and many see it as a strong contributor to growth. Yet many also struggle to measure the performance of their innovation portfolios. In a recent McKinsey Global Survey,1 we asked senior executives which types of innovations their companies pursue, which ones they measure and with what metrics, what goals they have in using metrics, and how satisfied they are with the metrics they choose.
Companies reporting the highest contribution to growth from their innovation projects tend to be more interested in pursuing and measuring their innovations as a portfolio and therefore use metrics across the whole innovation process. In the end, they are more satisfied than others with the ability of such metrics to help their organisations do everything from aligning individual performance incentives to improving innovation performance to communicating with investors.
Sixteen per cent of the respondents say that their companies don’t use any metrics to assess innovations. Among those that do, most are satisfied overall, though the findings suggest they aren’t effectively using these metrics as well as they could. Most notably, companies are much likelier to rely on metrics for outputs than for inputs, so they aren’t assessing the whole process of innovation. Forty-five per cent don’t track the relationship between spending on innovation and shareholder value. Further, although many companies are satisfied with their use of innovation metrics in general, far fewer are satisfied with specific uses, such as aligning individual performance incentives.
What gets measured and why
Innovation is a high strategic priority for most companies (exhibit 1). However, this survey shows slightly fewer senior executives either selecting it as the top priority or placing it among the top three than those who responded to a similar question last year:2 65 per cent now, compared with 70 per cent in 2007. This drop may reflect the fact that the latest survey was in the field after the credit crunch and stock market turmoil had begun to reorder many companies’ priorities.
The kinds of innovation companies take up are diverse. Yet no matter what form of innovation they pursue, far fewer companies measure it than pursue it (exhibit 2).
Respondents say that their companies use about eight metrics, on average, to assess innovations. They cite three main reasons for doing so: to provide strategic direction for innovation activities, to guide the allocation of resources to innovation projects, and to diagnose and improve overall innovation performance.
How metrics are used
Although the goals of companies would suggest the need to emphasise the overall innovation process, that process is rarely the focus of the metrics companies use most. When asked which metric is the single most important among those used, executives are much likelier to cite a few simple outcome metrics than input metrics or performance metrics, such as time to market or time to breakeven (exhibit 3). When respondents indicate the three metrics they use most, the order is the same. There are surprisingly few differences among companies in different industries or regions.
At companies that track the relationship between shareholder value and spending on innovation, the three most important metrics are all externally focused: revenue growth, customer satisfaction, and the percentage of sales from new products or services. At companies where innovation is the most important strategic priority, the top three metrics are a somewhat more comprehensive mix: customer satisfaction, the number of ideas in the pipeline, and R&D spending as a percentage of sales.
In addition, though companies typically assess their performance in most areas relative to that of their peers, many companies don’t do so with innovation metrics. One reason may be that competitive data on the innovation metrics that companies use most frequently aren’t always available. In any case, 49 per cent of the respondents say they don’t benchmark themselves against competitors on any of the innovation metrics they use, while 43 per cent say that they do.
Regardless of the combination of innovation metrics respondents use and why, more than 70 per cent of them say they at least somewhat agree that their organisations are satisfied with the usefulness of these metrics (exhibit 4). Most notable, though executives are satisfied overall, less than a third agree or strongly agree that they are satisfied with any specific use of these metrics. Companies may be tracking more innovation metrics than they can put to good use.
Following the money
Just over half of all respondents say their companies are spending about the right amount on innovation, given its strategic importance. (Interestingly, 7 per cent say their companies are spending too much.) When asked how annual innovation spending is determined, the largest number of respondents say that their organisations consider the available opportunities (exhibit 5).3
Less than a third of the respondents’ companies track the relationship between spending on innovation and shareholder value (and nearly a quarter don’t know whether or not they do so). However, innovation is generally seen as a strong contributor to organic growth (exhibit 6), probably indicating that companies find their innovations worthwhile overall. This interpretation is consistent with a finding from another McKinsey survey on innovation, in which 58 per cent of the respondents, when asked about a single major innovation at their companies, said that the innovation had been very or extremely successful.
Innovation, metrics and growth
One group of respondents both reported higher organic growth rates than their competitors did and said that at least 31 per cent of their organic growth comes from innovation. These respondents have a somewhat different approach to using innovation metrics. In general, they have a greater interest in pursuing and measuring their innovations as a portfolio: they are more likely than other respondents to pursue and measure all types of innovation, and nearly a quarter (far more than other executives) say that creating a balanced portfolio of innovations is one reason they use metrics. High performers are also much less likely — 29 per cent, compared with 37 per cent of other respondents — to say that they base their innovation spending on the relative attractiveness of individual projects.
These high-performing organisations use, on average, only one more metric than all respondents do. But they are likelier to use metrics across the whole innovation process, such as assessing the number of people actively devoted to innovation, the number of new ideas sourced from outside the organisation, and the percentage of innovations that meet their development schedules. Like the companies of most other respondents, the high-performing ones also track the financial returns from innovation in general and customer satisfaction with specific innovations.
Finally, high performers are satisfied with their use of metrics across a wide range of activities, including allocating resources, aligning metrics with individual performance incentives, and communicating with investors (exhibit 7). These companies may be more satisfied because they make greater use of metrics that, taken together, assess the whole process of innovation.
Looking ahead
Companies that use innovation metrics are, on the whole, satisfied with their use. The many companies that don’t track their innovations can probably gain a better understanding of their innovation performance just by introducing some of these metrics.
Many companies would gain a deeper understanding of their innovation performance if they paid more attention to input metrics as well as output metrics, benchmarked themselves against their competitors, and dug into the relationship between innovation spending and shareholder value.
Although executives are on the whole satisfied with the way their companies use innovation metrics, the findings indicate significant room for improvement in many individual applications—most notably, aligning metrics with individual performance incentives and using them to communicate effectively with investors.
Notes
1 Conducted in October 2008, the survey had 1,075 respondents, all C-level or other senior executives, representing a full range of regions and industries.
2 In September 2007, a McKinsey Global Survey asked, “Over the next three to five years, how important will innovation as a major driver of growth be on your leadership team’s agenda?”
3 This is consistent with one of the 2007 survey’s findings: only 27 per cent of senior executives said then that their processes for planning budgeting, strategy, and growth (including innovation) were fully integrated.
About the contributors
The contributors to the development and analysis of this survey include Vanessa Chan, an associate principal in McKinsey’s Philadelphia office; Chris Musso, an associate principal in the Cleveland office; and Venkatesh Shankar, the Coleman chair professor at the Mays Business School, at Texas A&M University.
This article was first published in November 2008 on the The McKinsey Quarterly Web site, www.mckinseyquarterly.com. Copyright © 2008 McKinsey & Company. All rights reserved. Reprinted by permission.
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