Companies need innovation more than ever. Here's how to measure it

In a recent survey of more than 200 organizations, 90% of executives said they expected the pandemic to fundamentally change the way they do business over the coming five years. This means that innovation will be driving growth for the near future. But even before the pandemic, executives said that the difficulty of quantifying innovation was one of the main reasons they were reluctant to invest in it. In the absence of an established methodology for measuring innovation, it often takes the market a long time to recognize it.

Across different fields - from biotechnology to cloud computing and artificial intelligence - many innovations have historically had long and flat adoption curves. A successful company like Tesla, for example, took a decade to become profitable, as electric vehicles were seen as a curiosity. Many companies apply the same performance measures to innovation as they do for other areas. This often paints a distorted picture, which either limits investment in innovation, or channels investments into the wrong areas.

So how can we get better at measuring innovation?

It is important to recognize that innovation comes in many shapes and sizes. Every company has its own flavour and its own definition. This means that the indicators used to measure it need to vary, too. There are, however, some underlying universal principles that could help companies to quantify, and therefore to support and encourage, innovation.

1. The indicators used to measure innovation need to be recognized and accepted by the whole company

A common metrics framework will help everyone understand what their focus should be, across departments and locations.

2. The indicators need to take into account intangible aspects of innovation

This might include patents, brand, organizational culture, and unique processes. Successful enterprises distinguish themselves by securing a sustainable competitive advantage, which in some cases is heavily influenced by intangibles. For instance, Netflix’s customer recommendation algorithm, combined with other elements, differentiates Netflix from other content streaming companies. Most of these kinds of strategic resources and growth assets are not reported in the financial accounting system. Some might even be viewed as costs, such as employees' salaries, training programmes or diversity or cultural development programmes.

3. Innovation shouldn’t be measured using one single indicator

It requires a comprehensive system of indicators, which complement and support each other. They need to show how an action in one part of the organization may have a result somewhere else. Using one single indicator often results in one part of a company taking decisions that backfire in other parts.

4. Innovation indicators need to take into account the risk of disruption to the company

Many industries are at risk of disruption from the reduced cost of high-end technology, and the increased speed of technological progress. But disrupting an industry means more than startups gaining market share from incumbents. Disruption is a change in business as usual, which brings a new wave of competition to a stagnant market.

5. The indicators need to help drive improvement

A good indicator changes behaviours. The ecosystem that supports innovation in a company encompasses human resource capabilities, partnerships and culture. The role of an innovation accounting system is to show how inputs affect outcomes. The system will deter investments in low-impact activities; ultimately, the goal of an innovation accounting system is to help a team, a manager or a CEO make better decisions.

We are in the early stages of a corporate innovation revolution. The principles outlined above form the foundation of a new way of managing growth through innovation, based on fact rather than faith. It is an approach that puts evidence in the centre of the decision-making process, and addresses the shortcomings of the financial accounting system when it comes to measuring innovation.

Dan Toma is co-author of The Corporate Startup & Innovation Accounting.