In their excellent book, Making Innovation Work, authors Tony Davila, Marc Epstein and Robert Shelton present an approach to metrics that they call “the balanced scorecard for innovation.” Here’s how it works.

In their excellent book, Making Innovation Work, authors Tony Davila, Marc Epstein and Robert Shelton present an approach to metrics that they call “the balanced scorecard for innovation.” Here’s how it works:

“A basic tenet of the balanced scorecard is that the measurement system is only as good as the underlying business model. The business model describes how the company will be innovative and how it will generate value from innovation… The richer our understanding of the innovation processes, the better our business model will be and the deride measurement system will provide a more informed management of innovation. In making the business case for innovation investments, managers can integrate innovation impacts into their business strategies.”

The balanced scorecard of innovation employs a business model that focuses on 4 key areas:

Inputs: resources devoted to the innovation effort. Examples include people, money, equipment, office space and time, plus intangibles like motivation and company culture. It may also include the organization’s existing innovation structure (interest groups and corporate venture capital), innovation strategy, the firm’s external network (including partners, lead customers and key suppliers) and innovation systems (including systems for recruiting, training, continuous learning, execution and value creation).

Processes: combine the inputs and transform them. These are real-time measures that track the organization’s progress toward the creation of outputs, and which can be used to help keep its innovation initiatives on course. Examples include creative processes (tracking the quality of ideas, the ability to explore them and the conversion rate of ideas into projects and value), project execution (tracks the evolution of projects currently underway in dimensions such as time, costs, technology performance and estimated value generated), integrated execution (which tracks the aggregate performance of all projects) and the balanced innovation portfolio (which tracks the mix of projects within the innovation matrix and its alignment with the company’s strategy).

Outputs: are the results of the innovation efforts. Output measures describe what the innovation efforts have delivered, and are focused on key characteristics such as whether the company has superior R&D performance, more effective customer acquisition or better customer loyalty. It includes measures such as technology leadership (number of patents, seminars, technology licenses and percentage of technology adoption in the business model), project completion (measured against expectations or competitors), new product introduction (number of successful products, their acceptance versus competitors, market share and sales), business process improvement (improvement in processed metrics) and market leadership (customer acquisition, customer share and customer loyalty).

Outcomes: while outputs describe quality, quantity and timeliness, outcomes describe value creation. These measures capture how the innovation effort has translated the outputs into value for the company and the net amount of the value contribution. Often, this is calculated by way of a financial measurement called residual income (profits – capital employed x cost of capital). Key outcome metrics include project profitability (estimated value generated during the life cycle compared to similar projects or expectations), profitability of customers and products (estimates the overall value of innovation from a market and product perspective), return on investment (the current profitability of the organization) and long-term value captured (estimates the value captured to the life of the product or product family).

The authors stress that the business model needs to vary based on different types of innovation and business processes. For example, metrics for an incremental innovation within a manufacturing environment would obviously be much different than those for a radical innovation within a software company. In any case, the business model needs to explicitly outline what resources are required, how they are combined to create innovation and how the specific innovation translates into business value.