Business Metrics are important for any business, as metrics motivate employees to do the right thing for the business. Also, metrics help in understanding current business performance and in continuous improvement.
Senior leaders often question the need for separate metrics for innovation projects and established business. They measure both new innovation projects and established businesses using the same metrics. This approach will choke innovation and will lead to more sustaining improvements, and not disruptive innovations. In this blog I highlight the need for separate new innovation metrics.
First, new innovation focus is much different from that of established businesses.
As shown in the picture above, established business should focus more on scaling the business by building in capabilities focused around improving revenues, operating margins and asset efficiency. New Innovation’s focus on the other hand is around proving the business model and technology. So teams working on new innovations should focus on testing out markets and launching right technologies with right business models. Once they have tested and proved the market potential, they can start focusing on scaling the business and start measuring their performance using similar metrics as established businesses.
Second, new innovation projects cannot compete with the scale of established businesses. They always need more time to ramp up revenues and to justify costs for developing/supporting the products. Many of the efficiency metrics (such as Development/Production efficiency) look really bad for innovation projects when compared with established businesses. On the other hand, comparing metrics like quarter over quarter revenue growth % will put the established businesses to shame and will not portray the right picture.
Third, there is more uncertainty and risk associated with new innovation projects. And if innovation is measured using the same metrics as established business, mid-level managers will take the easy route to achieving business performance and their bonuses. They would put all their efforts in established businesses or on sustaining improvements to meet their business performance goals.
Right metrics tied to right performance incentives is the best way to motivate employees to deliver right results. Hence it is important to have the right metrics for every part of the business, and measure it diligently. In a future blog, I would share my thinking on the right innovation metrics. Hope you find this blog useful in separating the innovation metrics from rest of the business.
most innovation fails when you scale the wrong thing…or what could have been the right thing if the team was focused on figuring out what actually works in market vs. being focused on getting big. traditional metrics often are focused on things shareholders look at…and have to do with getting big fast. so those traditional business metrics introduce a fatal bias towards getting big fast vs. rapidly figuring out how to get the offering and business model right, so you then scale what can actually succeed. metrics for new innovation must focus on whether the target audience – however small at first (pilot, etc.) gets the outcome sought and on validating the big assumptions or hypotheses upon which success depends.
Very True Roy… Scaling the wrong thing is the worst thing to do… So Innovation should focus on figuring out the right product/offering first… And it could take many iterations to figure out the right product and business model that is appealing to the target audience… Till that puzzle is solved innovation should be measured using innovation metrics….
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