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Nov 29 2011

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Why Innovation Metrics need to be different from other Business Metrics?

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.

Permanent link to this article: http://www.jagannemani.com/2011/11/29/why-innovation-metrics-need-to-be-different-from-other-business-metrics/