The Right ROI of Innovation for Your Firm
Innovation as investment is a simple three-step process. First, figure out the risk-tolerance level, which allows you to get real with your expectations, roles, resources, and metrics. Second, come up with a mix based on the risk-tolerance level of your culture. Third, formalize the assignment – and kick off all projects with visible executive leadership support. This executive support is critically important.
Let’s demonstrate in broad strokes. You and a core team are assigned to make innovation real at XYZ firm, a mid-market health manufacturing and product company in the B2B 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, growth seems possible – more growth than five or seven percent a year. Also, the board has been inquiring more insistently about innovation and wants XYZ to reach double-digits growth and to 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. Eighty 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 (cost savings) not yet realized. Incremental innovation requires the least amount of change and spending but traditionally brings the smallest returns. New metrics and a few committees are created for existing product managers, engineers, marketing and R&D, and a small budget is set aside.
Fifteen percent is focused on bringing something new to the firm. We will classify this as a Disruptive Innovation. The firm reassigns a product manager as an innovation manager, allocates a small percentage of a multidisciplinary team to this 15 percent effort and creates metrics for new ideas. 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 1.2 million to 2 million in 18-24 months.
The remaining 5 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 5 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.