Send to a Friend
Add a Comment
Innovation strategy: Is ROI the wrong question?
By Joyce Wycoff
It just happened again. One more person asked me how to prove the ROI of innovation to a numbers-oriented superior and all the dominos of my patience began to collapse. How do you answer a question that is inherently illogical? Innovation means doing something new, something that has never been done before, something that you think will create value but you really don't know.
Therefore, the return-on-investment is somewhere between Zero and Zillions. What was Chester Carlson's return on investment when he invented xerography or 3M's ROI when Art Fry had a brainstorm that resulted in Post-It® notes? What was the ROI of Michael Dell's idea of going directly to the customer? Or Petco's ROI when it's idea of going directly to the customer failed? Or the ROI on Enron's creative partnership scheme? Or Polaroid's revolutionary approach to photography and then ultimate demise?
ROI is commonly used as a go/no-go decision criteria … we'll do Project X if it has a ROI of 30% but not if it's only 20%. It's also used to prioritize projects, Project X with its 30% ROI has priority over Project Y with an ROI of only 20%. It's a useful tool when it's applied to specific, measurable projects but not as useful when it's used to evaluate the entire question of innovation.
Robert D. Shelton, Vice President with the former Arthur D. Little consulting firm includes the ROI question in his symptoms of an anemic internal market for creativity and innovation. He says that organizations that use only capital-return tools such as ROI or discounted cash flow tend to have a week innovation culture. "Moreover," he states, "Appropriate measures don't exist to evaluate creativity or potential projects in which there is uncertainty or ambiguity."
ROI is the wrong tool to measure innovation
Innovation cannot be justified by the same tools we use to justify the purchase of a new piece of equipment. We don't have the same level of information available. While the results of implementing a new piece of machinery can often be known to the fine detail, innovation by definition means we do not know the outcome.
Imagine this conversation:
Manager: I think we should invest in innovation.
VP: What's the ROI?
Manager: Uh … I don't know but I'll see if I can find out.
Actually, this isn't a conversation at all. It's a one-act play. The Manager is trying to be an innovation champion but doesn't have the confidence, and perhaps the understanding, necessary to sell the concept. The VP is using the ROI sledgehammer to avoid making a decision and possibly a mistake.
Imagine another version:
Manager: I think we need to deepen our capability to innovate. We have very few new products in the pipeline and our revenue from new products and services has dropped dramatically in the past few years.
VP: What's the ROI on innovation?
Manager: I'm not sure that's the right question. Here's some different questions we might ask:
- At our present rate of new product and service development, where will we be in five years? Is that good enough and where do we think our competition might be?
- How much new business do we need to generate and how are we going to do that? What resources and capabilities do we need to develop to generate that new business?
- What new business or technology might actually put us out of business? Where might that come from?
- If we looked at ourselves from the eyes of our competitors, what would we do to put us out of business?
VP: So what should we do to address some of these questions?
Conclusion
If you believe that it's important to continue to improve customer value through better products and services, better methods of getting products and services to the customer and better ways of administering the millions of details involved in running a company, then you believe in innovation.
If you believe in innovation, then you have to be committed to the idea of helping everyone in the organization know how to innovate. At that point it becomes a mandatory part of the budgeting process and the review and evaluation cycle. It becomes a focus of conversation at all levels of the organization and the true question, the one that replaces "What's the ROI of innovation?" emerges:
How can we help everyone in the organization develop more of the competencies necessary for innovation?
Joyce Wycoff is a co-founder of the InnovationNetwork, an organization focused on helping organizations develop a core competency of innovation. She has a broad background in management and marketing and a deep understanding organizational innovation. Joyce is the author of several books on innovation and creativity, including Mindmapping, Transformation Thinking, and To Do … Doing … Done!
Published on 4/30/2004
|
