Measuring Innovation

Includes video.  Standards of measurement are always useful.

Taking the measure of innovation   By Guttorm Aase, Erik Roth, and Sri Swaminathan

Don’t overlook the insight that two simple metrics can yield about the effectiveness of your R&D spending.

You’ve probably heard the old joke about the two economists who saw $20 on the sidewalk. “Look,” exclaimed the first economist, “a $20 bill!” “It can’t be,” the other economist answered. “If it were a $20 bill, someone would have already picked it up.”

We were reminded of this story when we began to notice a pair of innovation metrics that seemed so intuitive that we assumed they must have been conspicuously applied and rejected before. So far, however, we’ve found no indication of widespread use—and a reasonable amount of evidence suggesting that, at least for most industries, the measurements work.

R&D conversion metrics for innovation performance

We call these indicators R&D conversion metrics: R&D-to-product (RDP) conversion and new-products-to-margin (NPM) conversion. Their core components—gross margin, R&D, and sales from new products—are not new, but combining them can reveal fresh insight on the relative innovation performance of business units, within an organization and relative to external peers (Exhibit 1). The first metric, RDP, is computed by taking the ratio of R&D spend (as a percentage of sales) to sales from new products. This allows organizations to track the efficacy with which R&D dollars translate into new-product sales. The second metric, NPM, takes the ratio of gross margin percentage to sales from new products, which provides an indication of the contribution that new-product sales make to margin uplift.  .... "