Companies are increasingly focusing on quantifying the return on investment (ROI) of their innovation initiatives.

In an environment where results and returns are closely scrutinized, as innovation teams we must navigate the delicate balance between pursuing long-term, transformative initiatives and delivering short-term wins that affirm their contribution to the organization's goals

During a recent Innov8rs Learning Lab, Megan Kennedy, Head of Learning at Kromatic had a conversation with Lisette Koppelman from ABN AMRO and Ben Williams from the Wisconsin Primary Health Care Association, exploring how innovation departments can demonstrate their value.

Click to play the full session recording

The Evolving Role of Innovation Departments

Innovation departments maintain a company's competitive edge through continuous reinvention and adaptation. Our role extends beyond the mere generation of new products or services; it involves cultivating a culture of innovation that permeates every facet of the organization, encouraging creativity, experimentation, and a forward-thinking mindset among all employees.

Most of us now engage in activities ranging from internal process optimization to the development of new business models and revenue streams. This expansive scope underscores the increasing recognition of innovation as a comprehensive, company-wide endeavor rather than a siloed function.

A critical challenge confronting innovation departments is demonstrating our value within the corporate. Moreover, it requires the ability to articulate and measure our impact in terms that resonate with stakeholders across the organization. How to do that?

How To Measure Innovation ROI (And Illustrate Tangible Benefits)

Lisette emphasizes the critical role of both quantitative and qualitative metrics in assessing the success of innovation initiatives. Financial metrics, such as fee income or interest income in the case of the bank she’s working for, stand as the traditional barometers for innovation's contribution to their organization's growth.

However, Lisette also points to the importance of qualitative metrics, which might include new customer acquisition or churn reduction, highlighting the multifaceted nature of value creation through innovation. This dual approach reflects a strategic alignment with the broader business objectives, ensuring that innovation efforts are not only measurable but also meaningful to the organization's overall success.

To accommodate uncertainties inherent in innovation projects, it’s best to use ranges instead of fixed numbers. This nuanced approach facilitates a more adaptable and less intimidating engagement with financial modeling, encouraging stakeholders to participate actively in the estimation and planning processes. Creating scenarios within financial models serves as a bridge between innovation initiatives and stakeholder expectations, enabling a dialogue that aligns with organizational objectives and risk tolerance.

Ben shares insights from the nonprofit sector, where innovation ROI extends beyond financial gains to include enhancements in service provision and operational efficiency. His approach involves a multi-year perspective, focusing on revenue generation, time savings, and increased service capacity as critical metrics. Ben underscores the complexity of measuring innovation in contexts where financial returns may not fully capture the value created, such as health care services that prioritize patient care over profit.

Quantifying innovation ROI requires not just a deep understanding of numbers but also an appreciation for the human element in innovation.

Both Lisette and Ben have embraced the concept of innovation accounting, a framework to quantify innovation ROI, emphasizing the need for financial modeling that can appear intimidating but is essential for making informed decisions.

At ABN AMRO, they use “guesstimation exercises” to break the ice around financial modeling, making teams more comfortable with making estimations. Lizette also runs workshops to bridge the gap between innovation journeys and financial modeling, highlighting the importance of making realistic yet ambitious scenarios.

Ben highlights the challenge of conveying complex financial analyses, such as the Monte Carlo simulation, to a diverse audience. To bridge this gap, he advocated for simplifying financial presentations by focusing on key assumptions and outcomes in a more digestible format. This strategy ensures that stakeholders with varying degrees of financial literacy can grasp the potential value and risks associated with innovation projects.

As example, when the innovation team at ABM AMRO introduced "Pay Day," an instant payout system for flex workers developed, they demonstrated the financial and operational benefits early on, which was key to securing buy-in from various stakeholders. Ben shares that by mapping out the current and proposed states of the insurance credentialing process, they demonstrated how innovation can lead to significant efficiencies, cost savings, and improved services.

They demonstrate that while the objectives and metrics may vary across industries, the underlying principles of innovation accounting remain constant: the need for a strategic approach to measurement, the importance of aligning innovation with organizational goals, and the power of practical applications to illustrate the tangible benefits of innovative projects.

Building Stakeholder Confidence: Quantitative Rigor + Qualitative Insight

Of course, the current economic climate (as well as the pandemic two years ago) have influenced innovation strategies and the metrics used to measure against delivering upon those. Lisette has noted a shift towards working closer to the core business, aiming to diversify income streams and respond to emerging market threats, including new entrants and disruptive technologies. Aligning to these strategic shifts is crucial for innovation teams to remain relevant and contribute to the company's resilience and growth.

Ben points out the increased pressure but also the risk aversion seen in the nonprofit sector, emphasizing the importance of framing innovation discussions in terms of risk management. By highlighting the potential risks of inaction and the benefits of innovation, Williams illustrated how to garner support for innovative projects even in challenging economic times.

Both Lisette and Ben emphasize the importance of clear, concise communication tailored to the needs and interests of different stakeholders. Misalignment between innovation objectives and what leadership values can pose a significant challenge. Always start by developing mutual understanding and agreements upfront with stakeholders, ensuring that everyone is on the same page regarding key definitions and expectations.

Whether it's speaking the financial language of a CFO or addressing the interests of a venture capital arm, tailoring the story to the audience's priorities can significantly impact the reception and support of innovation projects.

Additionally, showcasing the entire portfolio, including projects at different stages of development, helps stakeholders appreciate the breadth and depth of the innovation department's efforts, demonstrating the tangible benefits of innovation, even when some projects do not progress as expected.

In conclusion, proving the value of innovation involves not just the mathematical discipline of financial modeling but also the strategic narrative that contextualizes innovation efforts within an organization's broader mission.

Combining quantitative rigor with qualitative insight enables innovation leaders to craft compelling stories around their projects, ensuring that the value of innovation is recognized, appreciated, and supported across all levels of the organization.