In my initial article, I discussed Smartsourcing, or the need to take outsourcing to the “next level” where overall business value, rather than cost savings, is the key objective. As outlined in that piece, there are six steps to achieving this goal.
In my first two pieces, I addressed Step One, Strategizing Innovation, and Step Two, Creating Metrics, in more detail. Step Three, Assessing a Partner’s Innovative Capabilities, discussed the key elements that are necessary in order to identify a vendor’s ability to consistently provide innovation. Step Four articulated the Key Elements of Contractual Agreements to ensure consistent innovation. Step Five covered the often-neglected area of Building Relationships with outsourcing partners.
This article will discuss specific ways to measure innovation to ensure that the partner and service provider prosper on a continuous basis.
There is no doubt that measuring innovation is a complicated endeavor. Part of the problem is that there isn’t a clear consensus on what characterizes an innovative organization. Some measurements make a concerted effort to accomplish this objective, however.
Return on Innovation
Since the primary purpose of smartsourcing innovation is to enhance financial performance, return on innovation is a fair and reasonable measurement tool for innovation. You can calculate this number by taking the profits or cash flow generated by innovation and dividing that figure by the total investment required to create those returns. This ratio can look backward (measuring the results of historical investments) or forward (measuring the expected value of current investments in innovation).
While return on innovation should be of significant value to BPO service providers and clients, it doesn’t precisely measure how a company achieved a particular result.
A superior way to approach this issue is to sub-divide return on innovation as follows:
- Innovation magnitude (overall financial contribution divided by successful concepts)
- Innovation success rate (successful concepts divided by total ideas explored)
- Investment efficiency (total ideas explored divided by total investment)
Companies that play it relatively safe routinely have a high success rate, low magnitude and high efficiency. An organization can achieve the same returns by compensating lower success rates with higher efficiency or magnitude.
These types of measurement tools would be valuable for organizations that want to immediately assess their incremental and dynamic innovation capacity. This approach may also uncover some unknown strategies that are more or less appropriate for different companies.
One of the most significant challenges facing BPO service providers and clients is that few organizations have considered, developed, implemented or used these metrics. The lack of common definition and readily available data makes benchmarking difficult, if not impossible.
Given how critical innovation is for a company’s long-term success and survival, I believe that it is time to mandate that public BPO service providers report on their innovation pipelines and the key drivers of their innovation performance.
Until they do, I strongly recommend that executives remain skeptical of news reports discussing the financial ramifications of an organization’s innovative concepts. These press releases and news announcements need to be supported by strong quantifiable data.
For example, Apple announced in July 2013 that it sold 31.2 million iPhones in the last quarter. By using proprietary Apple data and the metrics cited above, you can easily see the financial impact this had on the organization and the overall industry.
Marc Kauffmann is the president of The Kauffmann Group, LLC, a management consultancy featured in New York Times best-selling author Seth Godin’s book, “Bull Market: Companies That Make Things Happen.” He has 25-plus years of expertise in the evolution of innovative business practices, market approaches, product/service offerings and information technology. You can follow him on Twitter @Marc81753262 or find him on LinkedIn.