I just finished a bit of research on measuring innovation, based in part on Davila, Epstein, and Shelton's excellent book, Making Innovation Work - How to Manage It, Measure It, and Profit from It. As you might assume from the title, the authors see innovation as a prime contributor to an organization's profit.

Now a newly released study is stirring up the cyber chatter. It's matter-of-fact title: No Relationship Between R&D Spending and Sales Growth, Earnings, or Shareholder Returns (Booz, Allen, and Hamilton website, Oct. 11, 2005). The researchers conclude:

"It's the process, not the pocketbook. Superior results seem to be a function of the quality of an organization's innovation process—the bets it makes and how it pursues them—rather than either the absolute or relative magnitude of its innovation spending."

Excuse me, but... well... DUH! It only makes sense that, as Davila, et al put it, "Innovation, like many business functions, is a management process that requires specific tools, rules and discipline -- it is not mysterious." My obvious corollary here is that "innovation, like many business functions, can be mismanaged". The study is fascinating not because it concludes that mismanagement can happen, but that it quantifies how often it IS happening.

Within the actual study (vs. the press summary) the authors offer advice for getting more value from your innovation investment:

• don't spend too much or too little (page 7)
• adopt open innovation practices (page 8)
• prioritize and develop process improvements for ideation, project selection, development, and commercialization (page 11)
• collaborate across functional areas (page 11)
• enlist program management and knowledge management skills to successfully manage the innovation pipeline (page 12)

While an enlightening view of corporate innovation, the data is not without some flaws. The study was based on R&D spending (the R&D-to-sales ratio, to be exact) as the sole input measure of the innovation process. This certainly understates an organization's investment in innovation, since in reality innovation can occur in any department and not just within the formal box of R&D. Numerous outcomes were analyzed for correlation to this measure, including metrics related to financial value, shareholder value, and market value growth. Six years worth of data was analyzed - a time frame that might be too short to get a full picture of the outcome of some R&D efforts. In a separate study cited within the report, patents were evalutated as one of the outputs of the innovation process, but no correlation to profitability was found.

3:32:00 PM    
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