5 Easy Metrics to Improve Your R&D Innovation Performance and Increase Short Term ROI
It has been for too long that corporate innovators have been losing their sleep… well, better yet, their budgets, to other business units in board meetings, simply because innovation “doesn’t generate short-term revenue”, or “is only accounted as a cost and liability”, and my favorite one: “is more of an art than a science that can be measured”.
This might have been true in the past but in the data-driven world we live in today, that is no excuse. The good news is that it is fairly simple to start bringing up strong arguments to counter the ones above during board meetings and fighting for that corporate innovation budget with a little more grit. And I’m gonna tell you how.
The main issue that flows around, especially in R&D labs, is that you can’t really tie short term revenue to crazy ideas being generated from the innovation lab. Most of the times you only have a general “rule of thumb” that one out of ten ideas becomes successful. Which isn’t necessarily wrong, but why use a patient’s testimonial to describe an acute migraine when we can have an MRI scan?
One of the reasons why we can’t trace innovation efforts back to ROI properly is that we are looking at it from the wrong angle. We tend to look only at the overall innovation budget, the cost of a project, and the return generated. What about the savings you make when you fail and shelve projects early?
Let me explain. Let’s say you’ve got approved a total budget of $3 million for three distinct innovation projects of $1 million each, to take them from concept to market. If two fail and one succeeds, giving you a 12x return, you have an innovation ROI of 4 ($1 million x 12 / $3 million).
For the other two projects, all that goes into the books is a $2 million loss. This means that you had an average validation cost of $1 million or a validation ratio of 1 (it took an entire budget to validate a project).
Now, using a Lean approach to build ventures (if you’re not doing Lean yet, you should) you start not only to test more ideas with smaller budgets and kill unsuccessful projects faster but, most importantly, to measure what is the amount of cash being saved by doing so. And that is a metric everyone understands, love, and is tied directly to your innovation ROI.
Let’s go with the same example above. But now, the two $1 million projects that failed were invalidated in the early stages, after spending $200k. This means you just narrowed down your average validation cost to $467k and your validation ratio to 0.47. With the one successful project capturing the same 12x return as above, it automatically more than doubles your ROI to 8.6.
Saving $1.6 million isn’t as sexy as making it, but it sure has the same effect in your ROI.
So if you are using a Lean approach, here are a few more metrics for you to consider:
- Average validation cost
- Validation ratio
- Experiment Velocity — # of experiments happening per week
- Validation velocity — # of validations/invalidations per week
Experiment Velocity and Validation Velocity indicators are team performance metrics. You can aggregate them into monthly metrics and understand if your team is getting stuck (what I like to call the ‘Stuckiness’ Indicator’).
With these measurements in place, you start to differentiate project performance from team performance. If a team is failing projects fast, this means they are contributing to your portfolio ROI, even if they haven’t reached a “breakthrough” yet. The same way, if a team is advancing in product development, MVPs, etc, staying on track with the original budget expenditure, but is taking too long to get market validation, this means the project is advancing, but the validation ratio remains high and the average return to risk ratio of the portfolio is potentially decreasing.
Like the example above, saving resources by failing ventures fast is a very simple way to tie lean innovation directly to your short term ROI. But that is just the first level of benefits a performance innovation approach can bring to your R&D pipeline.
Companies applying a disciplined approach to innovation management like this have proven that, on average, you can double the speed of your time to market, with half the budget. But it doesn’t stop there. (And please, don't go cutting the budget in half because of this either! 😅).
Now we’re freeing space to have more ideas coming in at the top of the funnel to be tested. With more ideas being tested (and failing fast, etc), you start to increase your portfolio’s overall success probability and go into the second level of benefits: you begin to increase your idea-to-market success rate.
These are just some of the metrics we can apply in your organization to improve your R&D innovation performance. If you would like to start a conversation with us about your business's innovation needs, we would be delighted to share our expertise. Just reach me at firstname.lastname@example.org