How to Measure Innovation

BY BRUCE FISCHER | 6 MIN READ

Most people imagine that creativity is serendipitous—a lightbulb going on over the head of a cartoon character. Certainly, this can be true, but how does an organization create conditions where there are lightbulbs going on over the heads of employees with regularity?

The measurement of innovation is necessary to achieve an optimal innovation rate in an organization.

There is a saying, attributed to Peter Drucker, that “if you can’t measure something you can’t manage it.” This adage certainly applies to innovation. Innovation is frequently an ephemeral process that eludes quantification. But that is even more reason for measuring it. By monitoring the innovation process effectively, we can clearly see who or what influences innovation and act to increase it.

The big question is: How? How do we document the ideation process and give proper credit to creators? How do we quantify ideas regarding their costs and potential benefits to know if they are worth implementing?

Most organizations count their patents, and this is certainly one useful measure of innovation. (The value of individual patents varies widely, so it is important to include an estimate of the dollar value of each patent.)

But what about measuring the various types of innovations that aren’t patentable? The organization needs to measure all ideas generated to gauge the innovative effectiveness of individual employees, as well as the organization’s rate of innovation as an entity.

5 Steps for Measuring Innovation

Step 1: Collect and Track Each Idea

Step 2: Estimate the Costs and Benefits of Each Idea

It is important to make a “ballpark” cost-benefit analysis on a new idea as soon as possible. That will identify major cost barriers to the idea and determine if the idea is fiscally viable. If it is a small project, with less than $100,000 in potential benefits, a simple payback period analysis will be sufficient. This should show a return on investment of three years or less. For larger ideas, a discounted cash flow analysis should be made using initial costs, recurring costs, and the forecasted income stream. Of course, risk is an important factor that should always be considered in evaluating ideas.

Step 3: Measure the Implementation of Each Idea

Once an idea is approved and passes the necessary tests for technical feasibility and financial viability, it is ready for implementation; and it becomes a project. Measurement of the implementation of projects has been well established in the practice of project management. The planning stage of a project should involve detailed estimates of its time, cost, and scale. Execution should be tracked and that involves a detailed breakdown of tasks and responsibilities. When a project is completed, an analysis of the problems encountered should be made. The variance between the estimated and actual costs and benefits of the project should be calculated.

Step 4: Calculate the Added Value of Each Idea

As mentioned above, when an idea is approved for implementation, it should include an estimate of its potential value based on the cost-benefit analysis in Step 2. Note that some ideas, such as safety or customer service ideas, may not have readily apparent benefits in dollars. The organization should estimate the value of these ideas even if they are based on subjective assessments. This may be referred to as the estimated value of the idea until it is implemented.

Then, the actual value of the idea should be determined. When the calculation of the value of the implemented idea is made, the difference between the estimated value of an idea and its actual implemented value will give the organization useful information.

Step 5: Determine the Innovation Rate Across the Organization

An idea measuring system is an indispensable part of the management of innovation. First, it provides a measure of each employee’s ideation rate. Then the forecasted ideation rate for departments, divisions, and an entire organization may be readily calculated.

This information will provide a leading indication of the organization’s actual innovation rate: the sum of all submitted ideas over time.

As ideas move to implementation, they should be monitored until they become completed innovations. The implementation rate of ideas provides another key metric that will help in managing the execution of ideas.

Why Organizations Should Have an Innovation Measurement System

Some organizations have strategies that direct them to be leaders in innovation and others choose to be followers. But it’s hard to know if you are a leader if you don’t know when or how much you are actually innovating.

Reliably measuring ideation and the implementation of new ideas puts an organization on solid ground. Without such systems in place, organizations are apt to select people for pay increases and promotions based on more subjective measures such as political behavior rather than on results.

Meanwhile, rewarding the people who come up with new ideas creates a powerful incentive for further innovation. Unsurprisingly, once an idea measurement system is in place and employees are aware that it will influence their pay increases and promotions, many employees will respond by making a greater effort to be creative.

The future belongs to the innovative. Organizations need to take a systematic approach to innovation, and measurement is a key aspect of that effort. It identifies where there are opportunities and tracks the organization’s efforts to increase innovation. Most importantly, measurement provides the means for an equitable distribution of the recognitions and rewards for innovation and establishes the organization’s value regarding innovation.

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