Firms Fail to Measure Return on Innovation, says BCG

Apparently, a lot of executives have a mystical faith in innovation, believing that it will pay off somehow, even if they can’t see the results from previous investments.

That’s one conclusion from an analysis published today by local management-consulting leader Boston Consulting Group. Only 46 percent of executives BCG surveyed this year say they’re happy with the return on their innovation investments—yet a full two-thirds plan to increase spending on innovation.

But crossing one’s fingers probably isn’t a viable long-term strategy. The BCG report argues that companies should be more careful about how they measure innovation—tracking not just how much they invest, but also quantities such as the percentage of new ideas funded, the number of projects killed at each milestone, and (duh!) profitability.

“Poor measurement practices translate into bad or incomplete information, wasted spending and, ultimately, a lower return on the investment in innovation,” said James P. Andrew, the BCG senior partner who ran the study, in a statement accompanying the report. “And when the majority of companies are already less than satisfied with that return, lack of measurement makes things much worse.”

The report found that 60 percent of companies use five or fewer metrics to track their return on innovation, “well short of the number necessary,” in Andrew’s words. And only 28 percent of executives said their companies use these metrics to parcel out employee incentives and rewards.

The solution? Andrews recommends that companies use a “cash curve” model that tracks the cost of an innovation project over its entire lifetime, from startup (when expenses are largely determined by the time it takes to get a new product to market) through launch (when the time required to scale up to large volumes becomes the key factor) and postlaunch (a period marked by ongoing support costs).

Not coincidentally, the cash curve model is the subject of Andrew’s recent book Payback: Reaping the Rewards of Innovation (Harvard Business School Press, January 2007). Booklist, the book review publication of the American Library Association, called Payback an “infomercial” for BCG, but also said it offered “a disciplined and analytical approach to determining how much and where to invest” in innovation.

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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