Presentation is loading. Please wait.

Presentation is loading. Please wait.

Innovation and Performance measurement Dr. Ashish Garg 9 January, 2009.

Similar presentations


Presentation on theme: "Innovation and Performance measurement Dr. Ashish Garg 9 January, 2009."— Presentation transcript:

1 Innovation and Performance measurement Dr. Ashish Garg 9 January, 2009

2 Page 1 Background – Ashish Garg (Thumbnail Sketch) Education: Ph.D in Economics from Harvard University (1997); taught graduate and undergraduate classes 7 years with E&Y. Total of 11 years as a management consultant Before E&Y was at McKinsey Inc. (led R&D type group on Strategy and Economics) Executive Director at E&Y since July 2008 Focus on Performance Management, Performance Measurement, Cost management, Finance Transformation etc Author of 50 article on Management accounting, Cost management, Performance management

3 Page 2 EY Perspective Agenda Importance of Innovation Managing Innovation Role of the CFO in encouraging Innovation Performance Measurement and Innovation Metrics Suggestions on Reasearch Agenda Innovation and Performance Management Practitioner Perspective Suggestions for Research

4 Page 3 EY Study: Balance Point (Innovation) Study Participants Interviews

5 Page 4 Senior executives from a variety of backgrounds participated in a global online survey regarding investment in innovation Source: Ernst & Young analysis; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152) Survey Respondent Titles (Number of Responses) Industry Sector (Number of Responses) SizeAnnual Revenues (Number of Responses) Geographic Location (Number of Responses)

6 Page 5 Importance of Innovation: Executives confirm innovation remains critical Managing Innovation: Companies struggle to manage investments Role of the CFO in encouraging Innovation : CFOs can bring new rigor to the process Performance Measurement and Innovation Metrics : Helps focus on drivers of success Research Agenda EY Study : Balance Point Bringing Discipline to Investment in Innovation and Growth Source: Ernst & Young analysis and executive interviews If we dont find a good way to address innovation and make use of innovation, then we will immediately fall behind in the competitive race.

7 Page 6 Executives concur that future success depends upon effective product and service innovation Innovation is our number one priority as a company. The core of what we do and the core of how we generate growth always boils down to big innovations. Innovation is always important. Always. Innovation is, of course the name of the game in our industry. Markets of the future will be developed by the skilled innovators of today who commit the right balance of internal and external resources to the innovation process. Henry Chesbrough In your opinion, what will be the top three drivers of your companys success over the next two years? Percent of Responses Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses); Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business School Publishing Corp., 2003

8 Page 7 Large and small companies have somewhat differing views on the relative importance of innovation, but there is general agreement that it is an essential process In your opinion, what will be the top three drivers of your companys success over the next two years? Percent of Responses Technology innovation is more important than ever in driving my companys success Large companies rate customer service higher than innovation, while smaller companies rank innovation as the top priority However, almost 90 percent of surveyed large companies indicate that innovation is more important than ever in driving success Its much easier to innovate as a small company because youre creating your own religion. Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

9 Page 8 R&D intensity has exhibited considerable volatility within segments of the technology sector over the past five years Note: R&D Spending (Percent of Sales) analysis was performed on a pool of 36 companies in five sectors. The minimum representation in a sector was five companies. Source: Ernst & Young analysis and executive interviews; publicly available financial data for selected global technology companies for the years 1999– 2004, via FactSet 10.10M, accessed 9 February 2004 In the past, we and most of our competitors would move R&D spending with revenue. The result was choppiness in the product coming out, and your products tended to come out about the same time as your competitors because you were all doing the same thing. R&D Intensity by Sector Communications Equipment Computers Conglomerates Semiconductors Software Sector Averages R&D Spending as a Percent of Sales

10 Page 9 Survey participants are committing substantial resources to their R&D activity Surveyed Annual R&D Spending Intensity R&D spending measurements do not include additional sources of innovation, including: Half of survey respondents are spending more than 10 percent of their revenue on R&D spending M&A activity Joint ventures and partnerships Externally sourced innovation and licensing fees recorded as cost of sales Product development expenses not listed as R&D R&D Spending (Percent of Sales) 50% Percent of Responses R&D spending must be smarter, not just increased. Firms must leverage the R&D investments of others, in addition to their own. Henry Chesbrough Source: Ernst & Young analysis; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses); Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business School Publishing Corp., 2003

11 Page 10 The communications, media, and entertainment industries provide an example of how new technology waves are coming more rapidly Suddenly, the rate of change has definitely increased. I see different changes and innovation paths all the time; their frequency has exponentially grown. Source: Ernst & Young analysis; Statistical Abstract of the United States, U.S. Census Bureau, various years; Historical Statistics of the United States, Colonial Times to 1970, Doc 93-78, , U.S. Census Bureau; Falling Through the Net II: New Data on the Digital Divide, National Telecommunications and Information Administration, 28 July 1998; Communications Industry Forecast & Report, Veronis Suhler, July 2003; Worldwide and U.S. DVR Forecast, IDC, March 2004; Media Trends Track, (citing Nielsen Media Research); Media Trends, Kagan, 2004; Consumer Devices and Services Europe, Forrester Research Inc., October 2003 Note: Adoption rates are all percent of U.S. households with selected technology, except Wireless phone, which is percent of U.S. population; Years to achieve 50 percent is number of years needed to reach 50 percent adoption, beginning when technology was adopted by at least 1 percent of U.S. households or population

12 Page 11 Technology companies are striving to align investments closely with customer needs, while also balancing the requirements of other key stakeholders My companys technology innovation investment decisions are aligned closely with the needs of our customers Percent of Responses Surveyed companies believe they are closely aligned with their customers but it is important to remember that customers are only one (albeit important) component of the entire value chain If you think only about the end-user and not about the value chain along the way, you might have the best product in the world, but it might never make it to market. To get ideas, you ensure that your engineers spend time out with customers, or in our case, our customers customers. When we talk about customers and being customer-focused, we usually mean the companies that we are selling our technology to. But our role with respect to innovation management is to make sure that we get to the end-user. Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152)

13 Page 12 Financial analysis indicates a positive relationship between R&D intensity and profitability, with some outliers Note: Each plotted point represents a sectoral view of profitability for one of five technology industries (computers, semiconductors, communications equipment, software, and conglomerates). Observed EBITDA margin is lagged two years (e.g., 2001 R&D intensity is compared to 2003 EBITDA margin). The R 2 of the trend line is R&D as a Percent of Revenue ( ) R&D Intensity versus EBITDA Margin R&D intensity (measured as a percent of revenue) appears to be correlated with lagged EBITDA margins You dont invest today for revenue tomorrow. You invest today for revenue thats probably quite a few years out. The bill for innovation is getting steeper. Im getting more anxious about it, and I cant tell for several quarters whether Im doing anything right. Were going to have to wait for a long time to find out. EBITDA Margin, Two-year Lag to R&D Spending ( ) Source: Ernst & Young analysis and executive interviews; publicly available financial data for selected global technology companies for the years 1998–2004, via FactSet 10.10M, accessed February 2005

14 Page 13 Importance of Innovation: Executives confirm innovation remains critical Managing Innovation: Companies struggle to manage investments Role of the CFO in encouraging Innovation : CFOs can bring new rigor to the process Performance Measurement and Innovation Metrics :Helps focus on drivers of success Research agenda I dont know that we have any best practices for managing innovation. It frustrates me a great deal. Source: Ernst & Young analysis and executive interviews EY Study: Balance Point Bringing Discipline to Investment in Innovation

15 Page 14 Many companies see room for improvement in their ability to manage investment in technology innovation Grade your companys current ability to manage its investment in technology innovation Percent of Responses My company uses disciplined processes to manage investment in innovation Percent of Responses Approximately 75 percent of surveyed companies indicate they have disciplined processes in place to manage innovation yet less than half indicate their ability to manage technology innovation investment is above average We have an integrated risk and opportunity management system. We dont have control of our R&D projects yet. Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

16 Page 15 Technology innovation management is an issue for both small and large companies Percent of Responses My company uses disciplined processes to manage investment in innovation Percent of Responses Grade your companys current ability to manage its investment in technology innovation Small and large companies report similar levels of innovation process discipline Larger companies are somewhat more confident in their management abilities, but over 40 percent still indicate they are average or below average Source: Ernst & Young analysis; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

17 Page 16 There is significant frustration over a general lack of best practices with respect to managing innovation investments Source: Ernst & Young analysis and executive interviews I dont know that we have any best practices for managing innovation. It frustrates me a great deal. The go-to-market side is usually forgotten in this industry. We are not good at the marketing and selling of innovations, so 80 percent of the patents that are filed never become a product that youll see in the market. We hide behind the claim that its impractical to come up with a process, or even a collection of processes to manage innovation investment effectively. It seems that the judgment of the wise man is just as good as any kind of processes you come up with. The hardest thing to do is to figure out return on R&D investment. Its hard to make improvements in managing innovation because theres an old culture right now that sort of works, so people ask, Why would I change this? Many companies report a lack of discipline in their end-to-end control of the innovation process but there is no clear vision of how to improve control The frustration over managing innovation investment creates an opportunity for a CFO to participate in the process in new ways

18 Page 17 Managing innovation is a challenge when failure is a commonand necessaryoutcome Source: Ernst & Young analysis and executive interviews The biggest problem with internal company innovation is the lack of tolerance for failure. I dont think corporations are well set up for people to fail at enterprises. We have 60 percent failures. If you measure yourself by the number of failures instead of return, youd feel terrible. Going into new areas, you have to start with ten initiatives to have one thats really successful. These are big bets that were talking about. And we know they wont all pay, and thats OKtheyre allowed to fail. Companies that are more sophisticated understand what control can do on the negative side. If it were up to me, I would introduce different mechanisms for managing my mature businesses and my new initiatives. Measurement must reflect the need for a certain amount of failure, especially when pursuing breakthroughs Not all innovation should be managed the same wayor innovation can be stifled If a company is not failing at some of their innovation investments, they may not be spending enough on innovation

19 Page 18 Mergers and acquisitions are increasingly a part of technology companies innovation strategies Companies are buying innovation in addition to developing it in-house... It used to be that technology companies did not look to acquisitions as a way of growing their portfolio. Now I think its an accepted strategic principle. Spin-in is another way of innovating, giving the financial motivation to the individuals in the spin-in.... but successful integration is the key challenge to merger success. Youre going to have to learn how to integrate. Adding an acquisition is almost like dealing with high growth. You have to be humble when youre an acquirer. Just because you happen to be fortunate enough to have the money to buy them, the fact of the matter is you didnt buy them from a position of strength [but] because you couldnt develop the capability internally. My company excels at integrating merger and acquisition deals to achieve planned benefits Percent of Responses Less than one-third of surveyed companies agreed that they excel at integrating M&A deals Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

20 Page 19 Effective risk assessment is a key part of the investment decision process Understanding and communicating risks is critical to success... People at the project levels think their project is the most important. You want them to be that way and have that kind of passion. But they dont always realize the damage that their lack of success may have on the company, or the risk the company is taking on their behalf. Good innovation management processes may not guarantee the best possible outcome, but they can maybe minimize the risk of the worst possible outcome. You can narrow the range of probability of disaster a bit.... but risk analysis must go beyond the financials Its not just the financial return, its also the technology risk, the marketing risk. There are companies that partition innovation risks, so they split up risk into market risk, or execution risk, or knowledge risk, and then assign people to assess and manage those risks. For example, the people that execute are most capable of talking about and quantifying execution risk. My company uses project-specific risk analysis to evaluate each technology innovation investment opportunity Percent of Responses Less than half of surveyed companies agreed that they used project-specific risk analysis to evaluate investment opportunities... To me, if you look across the American economy, there are only two segments of the economy that probably are truly good at managing riskthe insurance industry and the financial and banking industry. Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

21 Page 20 Companies seem to be focused on processes to ensure that they are fully compensated for their investments in technology innovation My company has operational and legal processes in place that ensure we are fully compensated for our technology innovation investments Percent of Responses Licensing is an important revenue stream … One way to manage non-core innovation is to say, It would cost too much to incubate, so lets license out this technology to anybody, even competitors, who might have an interest. … and the choice of business model is critical … The linkage between innovation and technology is the business model. We need different business models to take on different markets. … to capture the most value from innovation We have a comprehensive set of techniques to try to create value out of the whole portfolio. We are able to translate innovation into bottom-line results, and this, for me as a CFO, is the key target. Effective operational and assurance processes are needed to ensure that companies are not leaving money on the table Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

22 Page 21 Leading edge Analytical tools and techniques to make better decisions are not used to manage innovation My company uses leading analytical tools to help make and track technology innovation investment decisions Percent of Responses Most companies track the money they spend, and some track the time they spend, but few are tracking the risk they incur. Leading companies deploy analytical tools and control processes that address all three. Henry Chesbrough Companies see the need to enhance gut feel decision- making... In the end, somebody needs to sign on the dotted line, and it comes down to a gut feel whether to move forward or not. But you are enriching your gut feel by exposing it to various scenarios and various analytical techniques. You are looking at the picture in a multi- faceted way, and hopefully you make a better choice.... and look to Finance for help You need the fundamental toolstransparent numbersso that somebody can sit down and assess the risk equation. 47% Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152); Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business School Publishing Corp., 2003

23 Page 22 Companies that utilize leading analytical tools are also likely to have good processes to monitor their investment results The use of leading analytical tools is highly correlated with a companys ability to effectively monitor investment performance, as survey respondents answered these two questions similarly When you depend on individual visionaries for innovation decision- making, you have the chance of hitting it big. But even a simple process like collecting the best opinions of the people in the various fields and making a rational, analytical kind of assessment would helpbut we do not practice that. Thirty years in Finance has taught me to halve the projected return and double the projected cost to estimate the return of a project. My companys technology innovation investment results are monitored closely against the original decision analysis, and any variances are understood My company uses leading analytical tools to help make and track technology innovation investment decisions Financial discipline does not have to stifle innovation. Done well, it will drive it. Henry Chesbrough Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses); Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business School Publishing Corp., 2003

24 Page 23 Many companies do identify underperforming investments and taking action quickly My company is able to identify and reduce funding quickly for underperforming innovation investments Percent of Responses Innovation portfolio reviews are critical to success... The sifting process, the narrowing of the competing technologies, has to occur more quickly.... but organizational inertia can prevent tough calls... Its very challenging to cut projects because there are competing groupssales wants what customers want, engineers are focused on technology, and the CEO and marketing are in between.... so fact-based decision processes are key Sometimes you have to be the enforcer and encourage people to put an end to something that isnt working by saying, Look, Im not going to invest any more moneyits going down a black hole. It doesnt matter how enthusiastic you are, you dont have a business case. Theres a real focus on what milestones are going to be accomplished on what amount of moneyand the penalty for failure is terminal. There should be a healthy yin and yang between the CEO and the CFO, where the CFO can close the office door and say, Weve got to have a talk about this because this particular piece of the business isnt going to work. Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

25 Page 24 Importance of Innovation: Executives confirm innovation remains critical Managing Innovation: Companies struggle to manage investments Role of the CFO in encouraging Innovation : CFOs can bring new rigor to the process Performance Measurement and Innovation Metrics : Helps focus on drivers of success Research Agenda The CFO needs to be a business partner, not just a financial person. EY Study: Balance Point Bringing Discipline to Investment in Innovation Source: Ernst & Young analysis and executive interviews

26 Page 25 The CFO and Finance organization are becoming increasingly involved in the technology innovation investment process Over the past two years, the CFO and Finance organization have become more involved in the technology innovation investment process Percent of Responses The roles of the CFO and Finance organization in technology innovation investment decisions are clearly defined Percent of Responses Survey respondents clearly indicate the growing involvement of Finance in investment decisions however, the role of Finance in these decisions is less clear Finance should educate us technical people better about what finance does. Most engineers will think its just adding up numbers, and if you want to correct that simplistic view, then educate them. Otherwise, its just the finance guy saying, We cut the plan this quarter because were not going to make as much money, so you cant spend what you were planning. 53% 74% Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005 (n=152; graphs may not total 100 percent due to rounding and exclusion of not applicable responses)

27 Page 26 The CFO often adds value to the innovation investment process, but there is room for improvement Technology personnel are looking for a broader level of involvement from Finance... A lot of the time companies are flying by the seat of their pants. The CFO is cutting checks, but its not clear that theyre adding the kind of value they could. The only thing Finance tells us is, We can negotiate costs down, and thats a good thing, but that doesnt make the decision any better. It could still be a terrible loss, or it could be brilliant. Before, Finance was more like bean countersbut now that has changed completely.... and for Finance to play the key intermediary role In the future, the role of the Finance organization is to fit between the product, the support, and the field organization, and aggregate the three points-of-view into a company point-of-viewmore financial modeling and advice than financial control. The finance person should be the one who really facilitates, monitors, and coaches the management team. Finance is a good sounding board because theyre totally neutral on technologytheyre not grinding an axe one way or another. The CFO and Finance organization add significant value to the management of innovation investments Percent of Responses CTOs rate Finances contribution lower than CFOs do Source: Ernst & Young analysis and executive interviews; Ernst & Youngs Global Innovation Investment Survey, 2005

28 Page 27 CFOs can bring specific analytical tools to bear on the task of managing innovation The CFOs participation should be about bringing the right tools to the table. ANALYTICAL TOOLS FOR MANAGING INNOVATION Game theory Enterprise planning models Simulation models Sensitivity analysis Risk portfolio analysis To test how competitors, customers, suppliers, and other stakeholders might respond to an innovation, and the corresponding impacts to the innovator To provide an integrated view across all dimensions of the company (product, geography, business unit) that can test the impacts of innovation investments successes and failures on the financial performance and valuation of the innovator To test the probable outcomes of innovation investments To test the potential upsides and downsides of innovation investments, and help develop an innovation portfolio with relatively greater upside potential and reduced risk To apply portfolio theory to the balancing of the risks and returns of innovation investments To utilize consistent evaluation criteria and to track investment performance against planned results and gates Business case evaluation templates and performance tracking

29 Page 28 Finding the Balance Point across multiple innovation investment processes is the key challenge for technology executives Opportunity Innovation Creativity It's not a Lets see what happens bet, its a Lets bet the farm bet. You need the fundamental toolstransparent numbersso that somebody can sit down and assess the risk equation. You want to be in control of your own destiny as much as possible. Its not just the financial return, its also the technology risk, the marketing risk. Engineers are really focused on delivering the next degree of functionality just for the beauty of delivering it. I think that the CFOs participation should be about bringing the right tools to the table to assess the financial aspects of innovation investment. You need to make milestone reviews as objective and as measurable as you can. The hardest thing to do is figure out return on R&D investment. Short-term Return They want their money tomorrow. I can do whatever you want next quarter, but you wont like the answer a year from now. We have an environment these days where innovation is almost being replaced by hectic last-minute improvements. An innovation might be a little revenue in three years, but the revenue tail could grow exponentially, not linearly. Long-term Investmentand Riskand Financial Discipline and Source: Ernst & Young analysis and executive interviews

30 Page 29 Importance of Innovation: Executives confirm innovation remains critical Managing Innovation: Companies struggle to manage investments Role of the CFO in encouraging Innovation : CFOs can bring new rigor to the process Performance Measurement and Innovation Metrics : Helps focus on drivers of success Research agenda Practioners Perspective Source: Ernst & Young analysis and executive interviews Provides a tactical understanding of organizations value drivers

31 Page 30 Measurement of Innovation remains a challenge for Organizations The kinds of innovation companies take up are diverse. Yet no matter what form of innovation they pursue, far fewer companies measure it than pursue it. Sources:McKinsey Global Survey Results – Assessing innovation metrics

32 Page 31 Value of Metrics within Business Performance Management Re-Align Locks measures into strategy and value Helps define management dialogue upwards and management focus. Forms the basis for performance evaluation Helps to set expectations for reporting and planning level of detail Incent the desired behavior

33 Page 32 Within the organization, metrics are both used to focus the dialogue upward and provide management oversight downward 1.Management Dialogue – Metrics serve to focus discussion of business results with upper management / the investment community The Street Corporate BUs Geographies Dual Metric Roles Functions Management focus Management dialogue Management focus Management dialogue Management focus Management dialogue 2.Management Focus - Metrics should focus on critical measures needed to manage your business Cascaded / linked metrics ILLUSTRATIVE Metrics should therefore be cascaded to enhance the dialogue and scorecards are the key performance tracking format for metrics Metrics Fundamentals

34 Page 33 E&Ys 4 step process of creating and sustaining measurable organizational value through metrics Review Mission, Vision, Corporate strategy and operating model Review Companys industry and review key metrics used by external observers Review Strategic Objectives Value Decompostion Develop Outcome Metric Develop Input Metrics Collect Metric Data - Prioritize rankings and review with group – A. Ranking Methodology – B. Quantitative Methodology Cascading the metrics across the organization Link to Processes Link to Reporting Link to Incentives Understand & Articulate Strategy Develop Outcome/Input Metrics Prioritize and Select Metrics Cascade and Embed Metrics 1234

35 Page 34 What is Company Xs vision of the future? What are Company Xs differentiating activities and strategic objectives? Why does Company X exists? What are Company Xs guiding principles? What must be done well in order to implement strategy? What are the key drivers of success? Mission Steps / building blocks required to determine metrics Core Values Business Driver Metrics The internal and external factors that directly influence business outcomes Outcome Metrics The "few" measures of success for the company's mission and strategies Strategy & Objectives Vision How can Company X quantify its strategic objectives? Sources:1) Company X Vision: X.com/About/who-we-are/; 2) Company X Strategies: X.com/About/strategies/; 3) Corporate Scorecard Mockup Questions ILLUSTRATIVE Metrics Derivation Flow Metrics should be derived from Corporate strategic objectives (Step 1) Step 1 Step 2

36 Page 35 Measurement of Innovation: Innovation Outcome Metrics Outcome Metrics : Pros Better aligns with ultimate strategic objecdtives such as Revenue, Earnings and Shareholder Value Cons : Difficult to measure require some subjectivity Sources:McKinsey Global Survey Results – Assessing innovation metrics Examples: Number of new products or services launched Revenue growth due to new products or services Percentage of sales from new products/services in given time period Profit growth due to new products or services Potential of entire new product/service portfolio to meet growth targets Changes in market share resulting from new products/services Net present value (NPV) of entire new product/service portfolio

37 Page 36 Examples of Companies using Output Innovation Metrics Pepsi: Number of new products with revenue over $100M launched in the last two years Kelloggs 17% of sales in 2007 were from products launched in the last 3 years. 3M: 25% of revenue from products introduced in the last 5 years. Increased to 30% and shortened the period to 4 years. (Because this metric was so much a part of the culture of 3Ms innovation teams it took them only 2 years to exceed the new goal.) HP utilizes BET (break-even time) for each new product development project as their innovation metric.

38 Page 37 Measurement of Innovation: Innovation Input Metrics Examples: R&D spending as a percentage of sales Number of ideas or concepts in the pipeline Number of R&D projects Number of approved R&D projects as a percentage of ideas in the pipeline Number of people actively devoted to innovation Percentage of workforce time dedicated to innovation projects Number of innovation tools and methodologies available to employees Number of ideas submitted by employees Input Metrics: Pros : Easy to measure and track Helps manage R&D spend Cons : Might relate poorly with ultimate strategic objective Sources:McKinsey Global Survey Results – Assessing innovation metrics

39 Page 38 Innovation Metrics Usage Sources:McKinsey Global Survey Results – Assessing innovation metrics

40 Page 39 There are two broad techniques for prioritizing metrics (Step 3) Metric Ranking Methodologies Ranking MethodologyQuantitative Methodology ILLUSTRATIVE BU and Categories should preferably use a quantitative ranking methodology for selecting metrics Guiding Principles... Structured Process Metrics Qualification Ranking Composite Evaluation CriteriaOp. IncomeOp. Contribution Simple Specific Measurable Meaningful4.50 Actionable Assignable Relevant Reasonable Timely Average Score Score Timeframe Outcome Metric Sensitivity Analysis Percentage Change in Outcome Metric Return on Invested Capital Capital Expenditures Discretionary Cash Flow Operating Income Margin (%) Gross Margin (%) Operating Income Growth Organic Net Revenue Growth Organic Volume Growth Market Share -15% -10% -5% 0 +5% +10% +15%

41 Page 40 Corporate Metric Set BU Metric Set BU and Function metrics should include relevant cascaded Corporate metrics (Step 4) Illustrative Metric Cascade ILLUSTRATIVE Metric originally defined at the Corporate level Function Metric Set Guiding Principles... Cascaded Corporate Driver Metric 1 Corporate Driver Metric 2 Corporate Driver Metric 3 Corporate Driver Metric 4 Corporate Outcome Metric 1 Corporate Outcome Metric 2 Corporate Outcome Metric x Corporate Driver Metric 5 Corporate Driver Metric y Corporate Driver Metric 2 BU Driver Metric a Corporate Driver Metric 4 Corporate Outcome Metric 2 Corporate Outcome Metric x BU Driver Metric b Corporate Driver Metric y BU Outcome Metric x BU Driver Metric c Corporate Driver Metric 2 Corporate Driver Metric 3 Corporate Outcome Metric 2 Function Driver Metric a Function Outcome Metric x Function Driver Metric b Function Outcome Metric x Function Driver Metric c Function Driver Metric d Function Driver Metric e

42 Page 41 Selected metrics should be embedded in the planning processes and performance reporting (Step 4) Strategic Planning – Selected metrics will be used in the strategic planning process to form the basis for evaluating strategic options Annual Planning – The annual planning process set targets against a larger subset of metrics due to the shorter time horizon Forecasting – The forecasting process will update throughout the year targets for a subset of the metrics used in annual planning Performance Reporting – All metrics will be included in the performance reporting (scorecards and drill- downs) to show actual performance against targets and last year Compensation – Metrics will also play a role in establishing personal targets and compensation Guiding Principles... Structured Process

43 Page 42 Importance of Innovation: Executives confirm innovation remains critical Managing Innovation: Companies struggle to manage investments Role of the CFO in encouraging Innovation : CFOs can bring new rigor to the process Performance Measurement and Innovation Metrics : Helps focus on drivers of success Research Agenda Research agenda Source: Ernst & Young analysis and executive interviews

44 Page 43 Some Suggestions for Research Agenda 1. What type of innovation should companies pursue? What kind of innovation is most valuable for a company or industry ? 2. What should be the balance between ST and LT innovation; between opportunity and risk; between in sourced and outsourced innovation 3. What should the Role of the CFO/ Finance be in innovation 4. What innovation measures best relate with share holder value – could be industry specific. Is this a case for some standards similar to financial metrics 5. Compensation for innovation ? How do you compensate for less market facing research

45 Page 44 Thank You Contact information Presenter : Dr. Ashish Garg Telephone : (212) Links to the material Ersnt & Young - Balance Point Survey Study - _Balance_Point_Discipline_Investment_- _Almassy_Video_Transcript _Balance_Point_Discipline_Investment_- _Almassy_Video_Transcript


Download ppt "Innovation and Performance measurement Dr. Ashish Garg 9 January, 2009."

Similar presentations


Ads by Google