Too Many Ideas with Little Payback According to BCG Study
Although 90 percent of senior executives rate innovation as a top strategic priority, almost half admit to being dissatisfied with the return they get from their innovation dollars, according to a survey by The Boston Consulting Group (BCG) of more than 1,000 decision makers. A key reason is that most companies confuse ideas or inventions with innovation. True innovation must lead—directly or indirectly—to increased profits. And even when companies recognize this, they're generally unsure how to determine which innovation efforts are on the road to payback, and which are destined to become "cash traps"—projects that drain valuable resources that could be better invested elsewhere. That's according to Jim Andrew and Hal Sirkin, BCG senior vice presidents and coauthors of the new book, Payback: Reaping the Rewards of Innovation (Harvard Business School Press, January 9, 2007).
According to Jim Andrews, “Even at the best companies, up to a third of all innovation initiatives are wasting cash and human resources and will continue to do so. Cash traps in innovation portfolios are more damaging—and prevalent—than most companies realize." The challenge is to identify which projects need to be curtailed so ones with real potential can be focused on and brought to market faster—with a higher probability of success. According to Payback, the cash curve offers leaders a way to create a picture of any innovation effort—a "payback profile" of an innovation and its critical stages from the same perspective. The cash curve takes into account the four key variables that contribute to—or prevent—payback: start-up costs, speed to market, speed to scale, and support costs. "We call these variables the 'Four S's', and they're the levers that innovation leaders can use to fine-tune efforts. By analyzing these variables on a cash curve, companies can clearly see when to kill an effort, when to invest more, or when to speed up or delay a launch”
The "Right" Innovation Metrics Are Also Critical
Measuring innovation is another issue that companies struggle with. "Most companies are looking for a 'silver bullet' metric to help them predict or force a perception of profitability—or they're using a collection of metrics that aren't very valuable. What they really need is a set of metrics that provides not only a picture of the outputs of innovation—cash payback and indirect benefits—but also inputs, including time, money and people, as well as the overall effectiveness of the innovation process," says Jim Andrew.