You might have heard plenty of times how important innovation is for your company to survive. Now, you are beginning to capture some of the most innovative ideas in your organization to implement in the future.
However, as you go along your way, you realize that investing in it comes with a lot of risks. What can you do to make sure that every penny is worth it? How can you optimize every single cent?
In this article, you will learn more about one of the most basic things that you have to understand before going all out with investing in your organization’s innovation process — the return on innovation investment.
What is a return on innovation investment?
A return on innovation investment is a measure of performance that organizations use to assess their investments’ value, efficacy, and benefits upon creating new products and services.
It is a number that business entities calculate by putting profits and expenditures side by side to determine how well they have turned these investments into profits.
Generally, when a company allocates its resources effectively and correctly estimates its demand for new offerings, they get a better return on innovation investment.
However, no one can weigh the value of an innovation investment based on the uniqueness of an idea alone or even with the net sales that it may generate in the future.
Most of the time, when an entrepreneur invests in innovation activities, he is likely to expect financial gains as he should.
But sometimes, innovation is more than just the financial returns. Its implementation process may meet hurdles and mistakes along the way. Still, the enterprise obtains the knowledge and experience that may lead to a more significant ROI later.
Hence, organizations need to think about the areas and processes they want to include in their innovation efforts. Authorized parties and stakeholders should be aware of all the risks and ambition levels involved to examine future hazards.
Innovation and risk management have to work together to prevent damage and establish measures to successfully pursue, assess, and launch innovative projects to the market.
Business leaders may also take appropriate, tiny steps that need less upfront investment to examine the project closely and improve their confidence in it.
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Why is determining the return on innovation investment difficult?
Although calculating ROI is simple, aligning it at an enterprise level is often difficult to do. As organizations allocate resources for innovation, they look forward to gaining ROI through revenue increase and cost savings.
Revenue increase can come from venturing into new and relevant markets, acquiring new customers, and creating a new or extended line of products and services. The terms of the sales utilized to introduce revenue are up-selling, cross-selling, and recent sales.
On the other hand, cost savings result from two things:
- Cutting back expenses on existing processes
- Through activities like sales, marketing, administration, product manufacturing, customer service, supply chain, employee productivity, and logistics operations
The costs of innovation may be more on people, like the innovation director, the innovation team, and all other personnel who are doing the innovation projects.
But some costs are fixed despite not being linked to any innovation projects. There are also variable costs necessary to bring the innovation to life.
Moreover, cost savings and revenue increase are connected to innovation projects and are calculated as the enterprise benefits centrally.
For instance, if a business creates a new product and generates more revenue than most of the time, then the first three to ten years of the proceeds can be attributed to the implemented project. As a result, the business case of innovation becomes more valid.
Other benefits also include employee satisfaction, external marketing, employee branding, and many others. Its details may be strenuous to measure, but it is possible.
Getting the correct costs and optimizing processes can help achieve the organization’s long-term objectives, despite being in a saturated market. When the costs are clear, the company can reposition itself in the competitive landscape.
Why is it essential to manage the innovation ROI of the enterprise?
There are plenty of reasons why companies need to oversee the ROI of innovation. Some of them are:
- Create a business case for new innovation investments
- Illustrate the value of the company to potential partners and shareholders
- Increase the worth of the innovation portfolio
- Apprise business strategy and technology development
Establishing accountability in making decisions regarding the company’s innovation portfolio is challenging.
However, without anyone to account for it, undesirable consequences may follow such as:
- The possibility to withhold long-term, inflated risk or returns, and breakthrough innovation projects
- Inflicted restraints on innovation resources that can negatively impact strategically crucial capabilities
- Poorly enhanced innovation project portfolio
- Weak management decisions on prime innovation investments
As these effects take place, the organization’s innovation pipeline may suffer substantial pitfalls.
What factors should you consider in achieving a higher return on innovation investment?
Addressing these challenges involves:
1. Determining Objectives
First and foremost, innovation teams must understand two things — why the return on innovation investment is being managed, and what benefits can this action contribute to the company.
You can do this by realizing ambitions and optimizing value.
Realizing Ambitions Involves Setting Innovation Deliverables
Innovation comes in many forms. Understanding what you want to achieve by implementing specific innovation projects can help you determine the nature of returns that you like the organization to obtain.
This binds the innovation investment and the objectives of the business together.
On the other hand, optimizing value includes identifying intricate business issues and establishing benchmarks.
Before incorporating tools and processes on innovation, relevant matters must first be determined, and standards must be established for measuring progress.
However, they must not, in any way, limit your innovation team from effectively managing your innovation portfolio without leaving product development behind. Viable ideas should be prioritized, and decisions must be made with facts and thorough plans.
Significant departments must collaborate to rigorously discuss all the possible risks, challenges, details, and approaches involved in the innovation process.
2. Specifying Roles and Accountabilities
Determining objectives should include taking appropriate management actions, like designating roles and accountabilities.
Establish this by:
- Making cross-functional bodies with enough authority to decide on innovation essentials like prioritization, resourcing, and go-or-no-go for projects in the innovation portfolio.
- Encouraging collaboration and integration of outputs between concerned departments in innovation project governance.
- Ensuring that every person in the team understands their tasks and responsibilities, particularly those involved in substantial activities like data gathering, analysis, and reporting.
- Following the innovation roadmap in addressing all unmet needs in specific markets.
- Relating progress and other relevant milestones in all related competencies.
3. Managing the Risks of Innovation
Aside from identifying every innovation risk and understanding what it entails, developing the necessary measures to manage it is also vital.
Here are the steps that you can take to accomplish this:
- Utilize commonly shared information regarding crucial and recurring parameters, particularly market growth rates.
- Apply clear and systematic methods, assumptions, and calculation models.
- Increase collaboration between departments and make sure they understand every aspect of the innovation process.
- Cultivate feedback and learning. Use these insights to enhance future return on innovation investment estimations.
- Choose the best valuation approaches for different parts of the innovation portfolio and its specific risks and reward profiles.
How to improve your return on innovation investment
Below are ten ways of refining your return on innovation investment:
- Keep your innovation and business strategies aligned. Make sure that your organization is focused and motivated in obtaining long-term success.
- Combine real-time methods and relevant business information in weighing innovation investments against the organization’s long-term strategic plan. Be objective.
- Apply strategic road mapping.
- Use an innovation portfolio management software to see interdependencies between innovation projects and double-check whether the required resources and market adjustments are met.
- Provide your innovation team with all the tools and resources that they need to perform and improve the innovation process well.
- Centralize relevant information, especially when making crucial decisions about investments and alterations of products and services.
- Again, set metrics to measure the performance of a specific innovation project. Ensure that every project constantly meets all the designated standards of the company.
- Study your innovation projects well and identify all the possible issues from start to end.
- Remember that innovation and new product development are long-term processes. Take this into consideration so upon making measurable and achievable goals, along with the organization’s innovation strategies.
In the end, improving the return on innovation investments of the business is about getting an overview of your overall costs and benefits and trying all the methods that you can to find a good balance between them.
A great innovation strategy, combined with an excellent execution process and a perfect set of performance metrics, can make you reap more benefits from innovation. Let’s talk more about it in our regular webinar sessions.