A recent McKinsey Global Survey shows that companies are satisfied, overall, with their use of metrics to assess innovation portfolios—though many findings suggest that they shouldn't be. The companies that get the highest returns from innovation do use metrics well; these organizations tend to assess innovation more comprehensively than the others.
Even in the current economic turmoil, innovation remains a high strategic priority for most companies, and many see it as a strong contributor to growth. Yet many also struggle to measure the performance of their innovation portfolios. In a recent McKinsey Global Survey we asked senior executives which types of innovations their companies pursue, which ones they measure and with what metrics, what goals they have in using metrics, and how satisfied they are with the metrics they choose.
Companies reporting the highest contribution to growth from their innovation projects tend to be more interested in pursuing and measuring their innovations as a portfolio and therefore use metrics across the whole innovation process. In the end, they are more satisfied than others with the ability of such metrics to help their organizations do everything from aligning individual performance incentives to improving innovation performance to communicating with investors.
Sixteen percent of the respondents say that their companies don't use any metrics to assess innovations. Among those that do, most are satisfied overall, though the findings suggest they aren't effectively using these metrics as well as they could. Most notably, companies are much likelier to rely on metrics for outputs than for inputs, so they aren't assessing the whole process of innovation. Forty-five percent don't track the relationship between spending on innovation and shareholder value. Further, although many companies are satisfied with their use of innovation metrics in general, far fewer are satisfied with specific uses, such as aligning individual performance incentives.
What gets measured and why
Innovation is a high strategic priority for most companies (Exhibit 1). However, this survey shows slightly fewer senior executives either selecting it as the top priority or placing it among the top three than those who responded to a similar question last year:2 65 percent now, compared with 70 percent in 2007. This drop may reflect the fact that the latest survey was in the field after the credit crunch and stock market turmoil had begun to reorder many companies' priorities.
Respondents say that their companies use about eight metrics, on average, to assess innovations. They cite three main reasons for doing so: to provide strategic direction for innovation activities, to guide the allocation of resources to innovation projects, and to diagnose and improve overall innovation performance.
How metrics are used
Although the goals of companies would suggest the need to emphasize the overall innovation process, that process is rarely the focus of the metrics companies use most. When asked which metric is the single most important among those used, executives are much likelier to cite a few simple outcome metrics than input metrics or performance metrics, such as time to market or time to breakeven (Exhibit 3). When respondents indicate the three metrics they use most, the order is the same. There are surprisingly few differences among companies in different industries or regions.
At companies that track the relationship between shareholder value and spending on innovation, the three most important metrics are all externally focused: revenue growth, customer satisfaction, and the percentage of sales from new products or services. At companies where innovation is the most important strategic priority, the top three metrics are a somewhat more comprehensive mix: customer satisfaction, the number of ideas in the pipeline, and R&D spending as a percentage of sales.
In addition, though companies typically assess their performance in most areas relative to that of their peers, many companies don't do so with innovation metrics. One reason may be that competitive data on the innovation metrics that companies use most frequently aren't always available. In any case, 49 percent of the respondents say they don't benchmark themselves against competitors on any of the innovation metrics they use, while 43 percent say that they do.
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