Getting the most ROI from new ideas

All this week, innovation author and strategy guru Rowan Gibson answers pressing questions about the best ways to approach innovation. He will provide case studies of some of the world’s top brands, and he’ll share some tips that you can apply to your business immediately to bring measurable value to your innovation efforts. Follow along through the week, and weigh in with your comments at the bottom of each post.

Why is innovation ROI hard to measure, and how may it be done better?

I’m not sure if innovation ROI is really so hard to measure. I mean, we have lots of ways to evaluate the potential business impact an idea or a business strategy will have.

We can use a whole set of criteria to assess whether it’s worth investing in  — for example, we can ask whether it is likely to deliver above-average profits, or create a sustainable competitive advantage, or satisfy customers in new ways. And once it has been commercialized, we can measure if our ROI projections were correct.

The problem, as I see it, is that questions like “What’s the expected ROI?” or “How profitable is this opportunity?” can often end up killing great ideas prematurely. Of course, asking detailed questions about profitability is not wrong, but many companies tend to ask these questions way too early — at a stage where they are sometimes impossible to answer.

Take eBay. Go back to December 1995, when eBay was only a few months old. Who would have thought that this fledgling online auctioneer would one day have a market value of $40 or $50 billion? Demanding a lot of financial precision about a nascent idea — particularly during the embryonic stages of experimentation — is very counterproductive. It’s almost like looking at a human baby when it is only a couple of months old and saying, “Well, it can’t walk. It can’t talk. What kind of value is there in this?”

Without the exploration of the idea of eBay, this multi-billion dollar enterprise

could have experienced an early demise (Image courtesy of valleywag)

In my experience, the first things a company should ask when evaluating a new opportunity are:

  • How radical is the idea?
  • How big — or how important — could it be?
  • What kind of impact could it have on customers, on the competition, on the whole industry?
  • How big is the potential market?
  • Would customers actually want it?
  • How much would they care about it?

In other words, the evaluation criteria should initially be focused on assessing the upside — how interested the company should be in an idea, how hard it should work to push the idea forward, and how committed it should be.

Sequentially, the next questions to consider are:

  • How feasible is this?
  • How mature is the technology?
  • Do we have the resources, the competencies, the capabilities to make this happen, or can we get them somewhere else — that is, through partnerships?
  • Do we have the distribution channels to bring this to the market?

As these questions of feasibility get resolved, the final questions to start asking are those that concern business model economics:

  • Can we actually make it profitable?
  • What sort of revenue might this idea generate?
  • What are the costs involved?
  • What sort of margin can we put on this?

This sequence — asking first about the size of the idea, then about the feasibility, and only then about the profitability — is one that many venture capitalists understand, but many companies don’t. Large organizations are often so afraid of overinvesting in a lousy idea that they fail to appreciate the concomitant risk of prematurely killing a great, but immature idea. By asking the profitability questions first instead of last, they make it almost impossible for the innovator to present a compelling case to those responsible for budgeting.

As a result, the project either gets flatly rejected at its embryonic stage — as a “bad” or “uncertain” idea — or, alternatively, the innovator is forced to create some false certainty about the project that can later blow up in people’s faces.

Asking the right questions in exactly the right sequence helps companies avoid the premature culling of promising opportunities, and it also helps identify the ideas that — if they worked — would be most likely to give the company’s revenues a dramatic boost.

Rowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation. He is also one of the world’s most in-demand public speakers. Rowan’s books have been translated into over 20 languages. His latest book, Innovation to the Core, is published by Harvard Business School Press. He may be contacted at rg@rowangibson.com.

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