Most companies in the innovation game can proudly point to their winners those new products/services that launched successfully and exceeded expectations for revenue/profit/market share. However, those same companies often express frustration or dissatisfaction with their overall return on innovation investment.
“We see three common issues that create dissatisfaction,” says Carl Cullotta, vice president and principal of Frank Lynn & Associates Inc., “metrics, project initiation and the innovation process.”
Smart Business asked Cullotta to share some lessons learned from the firm’s experience.
Why do even the leading innovators express frustration with the process?
Inappropriate metrics result in misplaced expectations. Even the most successful innovators should expect fewer ‘hits’ than ‘misses.’ Misguided project initiation clogs the development pipeline with so many low-probability projects that the winners can’t be funded properly. And poor process management sustains the ultimate losing bets in the pipeline for too long.
You mentioned metrics. What are the most appropriate metrics for the development process?
Most companies measure innovation based on the outputs. For example, a common benchmark demands that 20 percent of company revenues are generated from products/services launched in the last three to five years. This does not measure the effectiveness of the innovation process. (Even the poorest process can meet this revenue goal if enough resources are thrown at it.)
The most effective metrics provide actionable insights to the process of innovation.
- Revenue return/dollars invested. This measure provides an indicator as to how well you are allocating resources. Actions derived from this metric could include a change in the project staffing model or changes to the timing of the hard costs (patent application, field tests, etc.) to help lower overall project costs without affecting positive outcomes.
- Average number of projects/innovation employee. Often, so many development projects are started that the staff cannot devote sufficient resources to any to effectively move them forward. ‘Addition by subtraction’ can result by limiting, or even capping, the number of development projects allowed in the pipeline at any time.
- Average project duration. Companies that struggle with innovation have trouble saying no. The pipeline is clogged with too many projects, and the best-bet opportunities cannot receive the critical mass of resources they require to move forward. Even a goal to decrease average project duration by 10 percent will result in quicker go/no-go decisions and better overall resource utilization.
What is the best way to initiate projects?
Historically, companies tended to take an inside-out approach to innovation (i.e., ‘let the inventors invent’). The result was that the vast majority of projects had little direct relation to a market need. As the ‘market-driven’ buzzword took hold, many companies moved to the other extreme. Every development project had to have justification from the marketplace. This approach lost the ‘quantum-leap’ advances; too many projects resulted in small incremental improvements in features/benefits.
The most appropriate approach is a combination of the above extremes. We use a benchmark of 75/25: 75 percent of the projects initiated should be market driven, targeted from the outset to deliver a specific benefit to a specific market segment. The remaining 25 percent are less constrained. The inventors are allowed to invent and look for those quantum-leap advances.
What improvements to the innovation process itself would you suggest?
A world-class innovation process requires disciplined management by using the stage-gate process. Development projects are managed through a series of stages. Each stage culminates in a review and go/no-go decision. Only those projects that pass through this gate are funded to the next stage.
While the concept of a stage-gate process is easy to envision, what separates the successful innovators from the rest is the set of inputs used at each stage. Assessment of both technical and market feasibility are intertwined. At each review, a progressively tougher set of criteria assure the product/service can be scaled up to support commercialization, and the market opportunity is there to profitably launch and commercialize the innovation.
What does it mean for the company trying to improve its return on the innovation dollar?
If we look at the big picture, we find that the most successful innovators understand the importance of managing the process. These companies understand the importance of process-oriented metrics. They are driven to initiate projects primarily from the ‘outside in.’ And they are disciplined in managing the low probability opportunities out of the pipeline as soon as possible.
CARL CULLOTTA is vice president and principal for Frank Lynn & Associates Inc. Reach him at firstname.lastname@example.org or (312) 558-4823.