Innovation ROI

Too many organizations try an innovation effort once, under resource it, then claim failure and never try again. This over-reactive tendency to dismiss innovation as “oh, we tried that eight years ago and it didn’t work” displays a lack of real ROI thinking at an organization. In fact, if you think of your innovation mix in the same basic mental framework as you think of an investment portfolio, you will be able to find a profitable mix while mitigating risks, stimulating value-creation, and making a few, well-placed bets on outliers that may drive more revenue than ever imagined.

Innovation as Investment is a simple three-step process. The first step is to figure out the risk tolerance level at a firm. Once you establish the essence of this point you can get real with your expectations, roles, resources, and metrics. The second step is to come up with a mix, based on the risk-tolerance level of your culture. The third step is to formalize the assignment—and kick off all projects with visible executive leadership support. The executive support is critically important; it’s importance is stated in another column (https://www.memphisdailynews.com/news/2013/jun/21/three-critical-ingredients-for-innovation/).

Let’s demonstrate in a broad-stroke Case Study. You and a core team are assigned to make Innovation real at XYZ firm, a health Mid-Market manufacturing and product company in the B-2-B space. Traditionally, XYZ firm has been risk-averse and managed with rigorous metrics. After one failed trial innovation project almost a decade ago, the leadership felt burned and buckled down to achieve operational excellence. Now that operational excellence has been achieved, growth seems possible—more growth than five- or seven-percent a year. As well, the board has been inquiring more insistently about innovation and wants XYZ to reach double-digits growth and explore innovation.

So, we know that XYZ firm has a low risk tolerance. Therefore, they can develop an Innovation Mix that works for their firm. XYZ decides on an 80/15/5 strategy.  80-percent of its innovation efforts will be incremental to their existing operating business and will include product augmentations, new products in existing lines, and some process optimization (identifying cost savings) that is not yet realized. Incremental innovation requires the least amount of change and spend, but traditionally brings back the smallest returns. New metrics and a few committees are created for existing product managers, engineers, marketing, and RND, and a small budget is set aside.

The 15 represents 15% of the total innovation efforts (resources and energy) and is focused on something that is new to the firm. We will classify this 15-percent as a disruptive innovation, as it disrupts the current flow of the business. They reassign a Product Manager as an Innovation Manager, allocate a small percentage of a multi-disciplinary team to this 15% effort, and create metrics for ideas new to the business. They will follow a Stage-Gate process and will be allowed to present new ideas for product suites and services four times a year to senior leadership. For a roughly 250K total investment, they estimate a return of 1,200,000-2,000,000 in 18-24 months.

The remaining five percent is the most aggressive and most risky investment, but necessary. This five percent is a conservative bet on a Breakthrough Innovation, something that will possibly redefine how the market thinks about a category while making the company that creates the breakthrough the market leader in the space. XYZ firm needs to not reject the ideas that come from this assigned five-percent of the Innovation ROI as outlandish or too wild as a matter of planning—it is their job to foresee trends and craft stunning ways to meet unmet needs for their customers. Therefore, they establish in their founding metrics that they will pilot at least one of these ideas within an 18-month period as part of a formal study.

Innovation ultimately is an investment. You must diversify and apply a mix that is right for your firm to make it a formal discipline.