Wednesday, July 09, 2003

I sent this post to a KM e-mail group discussion as they talked about Innovation recently. As it was particularly well received I thought I'd duplicate it here:

Dear all,

Well, this has been a very interesting conversation so far. I find it particularly interesting because I'm constantly going to conferences on both KM and on Innovation as part of my work - and it seems like more and more, the two disciplines are starting to come together. KM seems to be looking for a new market in which to sell its mainly 'soft' concepts whilst I was bemused to hear at a conference on the Fuzzy Front End of Innovation the first mentions of "tacit knowledge" as a topic of discussion. Of course, coming from mainly R&D backgrounds, the Innovation people are more used to looking for hard results - mainly in the form of revenue generating products - and so their interest in tacit K had little/no dialogue about its measurement, its nature, or how to grow it and exchange it - but more to do with how to get around it by allowing people to use it to come up with new and interesting new product ideas. My company has been looking at this field for some 10 years now - and having originally come from the KM side of things - it's been a revelation to see the two sides converging as we thought they might eventually do several years ago.

As far as innovation measurement goes, I have to agree with the previous posters in that, (like in all things KM nowadays), much of it depends on the definition that you use to describe innovation. We've chosen to go with a very simple one - "Innovation is the act of doing new stuff" - as part of that statement there is an implication that you are actually innovating with a purpose in mind, that you are trying to achieve something, that there is action involved to implement as part of that process.

With that definition in mind, we have found that measurement of innovation, unlike knowledge, is a relatively easy and concrete thing. Part of the reason I have always thought that KM'ers would eventually embrace concepts such as idea and innovation management processes was due to their being Dynamic Knowledge Systems (see this White paper on Dynamic Knowledge Systems I wrote last year for background if you're interested) - and as such would be a move away from the need to stick with soft measurements and move into the more credible world of hard financial benefits that could be used to justify further, equally useful, soft work.

As the implication of action is brought into the equation, the old equation "for every action there is a reaction" comes into play. For every idea you collect, build up and implement, there is a problem that is solved, a need that is fulfilled, or a process that has been optimized. Whether the innovation results in a new product (yielding new revenue), a cost reduction (saving cash), or a process improvement (saving time/energy/etc) - there is a before and after state that can be measured over the long term which is reasonably easy to measure.

What is harder to measure - and is a big topic in the Innovation world right now - is the value of your innovation-in-progress - ie the stuff you haven't yet implemented! There are several methods being looked at right now to overcome this:

Sunk cost: Where the value of the idea/innovation-in-progress is assumed to be worth the money you have invested in it to get it to the stage you are at.

Next Stage Cost: This assumes that if an idea/innovation-in-progress is worthy of spending more money to develop further, then the value of that idea/innovation-in-progress is worth the sunk cost PLUS what you are about to spend on further development of that idea

Expected Return: Here, a simple Financial futures equation is used to predict the future expected return from your idea/innovation-in-progress

Options: The most complex and probably the most talked about measurement currently - it uses options theory - used currently in the financial services industry extensively - to calculate the overall value of an idea/innovation-in-progress by working out the probability of success, the potential return, and the potential cost of NOT innovating to come up with an overall value for that idea/innovation-in-progress. (phew - tires me out just thinking about it..:p )

Using methods such as these and others, many companies have put $$$ values to their innovation pipeline, and to their innovation processes - not to mention also to better direct their innovation processes to where they are most needed through the use of a "portfolio" approach to innovation. For example, Bristol Myers Squibb were able to measure that they gained an additional $200 million in revenue from employee ideas - including one innovation, the GlucoVan - a customised van that toured across the USA testing people and educating them on type II diabetes (got to love ideas that get you both advertising to your target audience AND increasing the size of your target audience too!) - which they calculated a revenue of $50 million from. Grace Performance Chemicals have launched entire new businesses from their innovation processes - one recent one is now a $45 million business!

Best Regards


Boris Pluskowski
Director of KM Research
Imaginatik Research
+1 - 617 - 275 7140

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