Well designed metrics programs enable firms to focus on what is important and what really adds value for themselves and for their customers. However, designing and executing a metrics program requires work and effort. At the same time, it is too easy to misuse the metrics. You have probably seen these classic examples of metrics gone bad, and have plenty to share of your own.

• Scott Maxwell on his post highlights the 10 best ways to lie with metrics.
• Dilbert tackles the challenges of establishing software metrics where Wally writes himself a new minivan.
• Joel Spolsky shares his customer service experience and the impacts of measuring customer service representatives based on the number of calls taken per hour.
• Yet another airline is proud to achieve successful on-time gate departure, while you sit on the tarmac for the next 2 hours before the actual take-off.

As valuable as the metrics are, falling into common traps can result in dysfunctional behavior, cultivate the wrong intents, and ultimately hurt the firm, its customers and shareholders. Here are some of the most common metrics mishaps:

• Too many (or too few) metrics — Your metrics should be aligned to support your strategy. Too many metrics is a clear distraction, not to mention a ton of work. At the same time, too few metrics will not help track the real issues or progress. Your metrics should be insightful and actionable, and not become your self-imposed prison.
• Ill defined metrics — Your metrics should not be left to interpretation by your team, and create additional confusion. They should bring clarity to your strategy, and to your performance measures. Take the time to explore and define your intents and objectives with your metrics, especially when it comes to measuring intangibles such as building an innovative culture, delivering quality products, and even increasing customer satisfaction.
• Conflicting metrics — Your metrics are the levers you will use to maximize the performance of your company. So, beware of conflicting metrics, as they will send mixed messages to your organization: are we cutting cost or becoming more innovative? Where needed, you can use weighted methods to prioritize your metrics.
• Lack of communication and training — Metrics have the power to build teamwork by pulling everyone in the same direction. However, this requires the leaders of the organization to clearly communicate the strategy, explain the purpose of the metrics program, and provide the needed training to support the teams.
• Inaccurate metrics — You may have your metrics well defined, but are you measuring them correctly and accurately? As an example, before you celebrate the large number of visits you received on your web site, ensure that you are not counting the search engine crawlers, or the number of comments you received do not include spams (my latest headache…).

So, what do you do, and where do you start? I have recently finished reading Bob Phelp’s Smart Business Metrics: Measure What Really Counts & Manage What Makes The Difference. This book is a good reminder of measuring what really counts, along with several case studies that discusses the process of building these metrics. In the past, I used Balanced Score Card performance metrics, which is a good management tool for aligning your organization top to bottom. However, I enjoyed the simplistic approach Bob shared in his book for building metrics program to specifically address the business issue at hand, and ensure that it is aligned with the business strategy. He refers to this as the value web: “a framework for the sort of measures that are needed to guide a business and its managers.”

Since the value web framework is focused on building value for the organization, the process starts by identifying a few key output metrics: things that really matter and should be measured as the output your business produces or wants to produce. Once you have determined your output metrics and ensure their alignment with your organization’s strategic direction, the next step is to determine the value drivers (factors that drive present value) and value builders (factors that drive future value) that impact the output metrics you identified. This clear separation of roles in the value web framework brings clarity, focus on what really counts and ensures present and future value is included in the metrics. Once the value web is built, the next step is to identify process improvements to support the objectives: reward and recognition programs, communication programs, training programs, etc. It is important to note that creating the value web requires in-depth analysis of drivers and their impact on the value whenever possible, using tools such as variation analysis, decision trees, regression analysis, or conjoint analysis.

However you build your metrics, make sure your metrics are clear, actionable, supports business objectives, and based on data and facts. Also remember, metrics drive behavior, so understand how your organization’s behavior might change before you launch into your next metrics program.

Technorati Tags: Bob Phelp, Smart Business Metrics, metrics program

A recent post at Business Performance Coaching on success inspired this blog. Greg pointed out Richard St. John’s 3-minute show from TedTalks on what leads to success. In summary, these eight elements are: Passion, Work, Focus, Persist, Ideas, Good, Push, and Serve.

In simple terms, innovation is the introduction of something new, and a new way of doing things. Innovation is about the successful adoption and application of new ideas, approaches and processes. Innovation is not about managing the status quo — it is about change, and managing the change. It is about failing, learning from failure and persisting.

Given all the challenges of innovation and innovating, we are encouraged to celebrate the successes as well as the failures. We know the eight elements that lead to success, but how do you define success so you know that you have achieved it? I like the Wikipedia entry: “Success: Has no meaning in the world we live in.” (I would be curious to see when/if that entry gets updated…) However, I most resonated with Jim Canterucci’s definition (Personal Brilliance: Mastering The Everyday Habits That Create A Lifetime Of Success): “Success is the choices that are available, and the opportunities that can be created.”

Unfortunately many firms fail at innovation before they even start, mainly due to the aggressive goals and expectations set for the innovation. We seem to forget that innovation is a marathon.. A journey. Yes, the end result does matter, but the end does not justify the means. Utilizing the innovation lifecycle, and understanding where you are within it, can help calibrate your definition of success.

I have been investigating ways to best define the innovation lifecycle. I stumbled across the InnovationPoint’s whitepaper on innovation lifecycle as a combination of technology S-curve and Market Adoption Curve based on Jeffrey M.’s model from Crossing the Chasm. Though it is product and technology focused, I believe the concept supports other types of innovations. Please comment on any innovation lifecycle models that work for you.

I can pick up some immediate success goals by looking at this model:

• Early adopters are technology enthusiasts continuously looking for better perceived performance. However, the focus is not just on developing the technology but also moving it towards the inflection point where the basic needs would be met by the good enough technology. So, how do you find those customers that will dig the trenches with you on this journey, and how do you work closely with them?
• As the technology continues to emerge, others will enter the space. Potentially there will be a race to become the dominant design. How do you set your baseline comparisons, and ensure you attain the dominant design in the market place?
• Growth is wonderful, but are you ready for it? Can you scale your technology and your organization to support the needs of your ever growing customer base? How are you doing on your process innovation initiatives to support you as you start to slow down, and your technology matures?
• Eventually maturity hits… And customer demands change: low cost, better quality and reliability is now the focus. Incremental innovations (such as process innovations) can lengthen the innovation’s life before the inevitable decline is observed. However, this is also where new disruptive technology candidates will start to emerge. Are you ready for it?
• With the decline of the market did you already retire your product, or still flogging it for diminishing returns? It is OK to cannibalize your products — better you than your competitor…

Overall, I think the most important point about success is not falling in love with your own ideas and plans, but to continually re-analyze and question your assumptions. With that, and the eight elements that leads to success (Passion, Work, Focus, Persist, Ideas, Good, Push, and Serve), be sure to celebrate both your successes and failures.

As research from IBM and the Boston Consulting Group captures, in today’s competitive environment, CEOs are looking at innovation to bring top line growth. In my recent “Innovation and Profitability” article posted at KiteTail.com, I discussed how different innovation types could contribute to the bottom line of the firm. Granted, there are more innovation types than one can throw a stick at, and the terminology might be different from one to the other, but it does demonstrate the linkage between innovation and profitability. However, there is still the question of how does one measure innovation and innovation’s impact, and does innovation really pay off?

It is difficult to measure the impact of innovation. The challenges stem everywhere from agreeing on common definitions, such as what constitutes a new product, to the fact that it takes on average one year to commercialize an idea while the full life cycle of the innovation is anywhere from two to five years, and that innovation is a system and should be measured as such. As with any given measurement system, having the data and the metrics is not sufficient, there is a need to incorporate how the metrics relate and impact each other. Regardless, a proper measurement system will not only provide the current state, but also highlight the areas that need improvement.

As I mentioned before, innovation is about the implementation of a new idea for the purpose of creating value: value for the firm, and value for the consumer. Given that the innovation is a system, proper measurement of innovation should incorporate every phase in the innovation cycle: from ideation thru development, commercialization and life cycle management, along with supporting systems that enable innovation to be successful: management, people and culture. Without proper support, including management, funding and innovation networks (internal and external partners), many ideas fail to make it to the market. And others that do make it might fail to bring the expected returns on the innovation investment. Boston Consulting Group’s (BCG) 2006 Innovation Survey highlights that though companies are strongly committed to innovation, and recognize it as being critical to their success, there is doubt that they are earning sufficient return on their investment. Yet, research shows that effective innovation does pay off, as highlighted in BCG’s innovation research:

Companies are increasing their emphasis on innovation for good reason, it turns out. Innovation, our research shows, translates into superior long-term stock-market performance: the 25 most innovative companies (as defined by our survey respondents) had a median annualized return of 14.3 percent from 1996 through 2005, a full 300 basis points better than that of the S&P Global 1200 median. The driver of that outperformance was these companies’ ability to expand margins at a superior rate without sacrificing growth: innovators increased median profit margins by an annualized 3.4 percentage points per year over the ten-year period, versus 0.4 percent for the median Standard & Poor’s Global 1200 company. And they did this while keeping revenue growth on pace—9 percent per annum—with the index median.

Along the same lines, Booz Allen Hamilton’s “Global Innovation 1000” looks at the impact of R&D on corporate performance, and shares their findings on “high-leverage innovators”:

Analysis of the performance screens revealed that 94 companies within the Global Innovation 1000 – our high leverage innovators – consistently outperformed their peers over the five-year period, while spending less on R&D as a percentage of sales than their industry median.

In summary, though it is difficult to measure innovation, effective innovation does pay off. And this is definitely one area that starting with a few relevant metrics wins over finding the perfect mix: just do it! Continuously monitor and check on your metrics to determine what is working and what is not. With that, here are few thoughts on implementing your own innovation measurement system.

• In determining your metrics, make sure to align them with your innovation strategy. I discussed this briefly in my “Innovation and Profitability” article. Manage your innovations as a portfolio process: know where you are spending across range of initiatives, how your resources are allocated, and using regular portfolio reviews determine if the investment is still aligned with the strategy given the latest market and business conditions. Metrics have a way to influence behavior and norms, so make sure you are walking the talk.
• Focus on all aspects of the innovation cycle from ideation all the way thru post-commercialization. Analyze your innovation cycle effectiveness both on idea generation, but also on the overall process effectiveness: idea selection, resource investment and allocation, cycle time for moving the ideas through the innovation cycle, collaboration with your innovation network (internal and external partnerships), time to market, number of new products launched, number of products that embed the idea, as well as number of ideas killed and where in the innovation cycle.
• Remember, the goal is to measure your innovation effectiveness, so focus on the metrics that matter: investment vs. the return on investment. Potential metrics could include your innovation investment’s impact on the margin (percent gross margin, impact to operating profit, innovation as percent of revenue), post-launch performance of expected vs. actual realized value of your innovation, and return on your patent portfolio.
• Don’t be self-centered: make sure you innovation metrics include measures to compare how well you do against your competitors or your industry.

With that said, don’t go metrics crazy: collecting and managing metrics takes effort, and there is a point of diminishing returns. At the same time too little may not provide the right insight. Though I don’t believe that there is a magic number for all situations, a range of four to eight is a good target. Here are additional articles on the topic of measuring innovation. Good luck!

• “Measuring Innovation 2006”, Boston Consulting Group
• “Measuring Profitable Growth and Innovation”, Accenture
• “Smart Spenders: The Global Innovation 1000”, Booz Allen Hamilton