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…