When people focus on metrics and lose sight of the intended goal, the end result might be unintended behaviors and failed strategies meant to drive innovation. Metrics are intended to represent strategy and not become the strategy.
— By Daniel Perez
Metrics are one of the most misunderstood measurements of business performance. Meant to represent strategy and measure progress towards goals, they frequently become the focus at the sake of strategy. Innovation leaders are particularly at risk of falling into this trap because innovation is sometimes nebulous and difficult to measure. Instead of developing a strategy, the organization develops metrics that become the focal point. It is easy to concentrate on numbers because they project a sense of control and objectivity. When the measure of a strategy replaces the strategy, it is called surrogation, and it is likely the metrics are working against the organization. A focus on the metrics can lead to lost opportunities for innovation because the numbers begin to drive behavior, rather than behavior driving the numbers. Aligning the metrics with organizational culture, strategy and goals and adding accountability is the solution for surrogation. Metrics do have a role to play in driving the right behaviors, but it is up to leadership to ensure the metrics do not become the incentive.
Driving Deliberate Innovation
In a frequently referenced article in Harvard Business Review, authors Michael Harris and Bill Taylor address the dangers of metrics when not properly used. The risk is a company can lose sight of its strategy and focus only on the metrics meant to give strategy form. The example presented is Wells Fargo. The banking company developed a cross-selling strategy to increase the number of deposit and credit card accounts. Instead, employees focused on metrics to prove performance. Millions of accounts were opened and millions of unauthorized mortgage modifications were made without customer approvals, in addition to unethical auto loan practices. The company was severely punished by the U.S. government in numerous ways. Upon evaluation, it was not a poor innovative strategy that failed. It was that Wells Fargo did not have a customer cross-selling strategy. It has a cross-selling metric, and that was what employees focused on.
So should a company measure innovation? Yes, metrics are important to deliberate innovating and creativity when they measure strategic results. Peter F. Drucker said, “Most innovations, especially the successful ones, result from a conscious, purposeful search for innovation opportunities.” Capturing innovative ideas and opportunities whenever they arise is important to organizational success, but the most successful companies develop a culture of innovation as a strategic approach. Managers should measure innovation output but within context of the strategic plan.
Metrics should not be the incentive for behaviors. They should be guides for processes and initiatives that produce innovation.
When Metrics Drive Strategy
Key Performance Indicators (KPIs) can have an enormous impact on behavior. For example, a manager is expected to launch a certain number of new products. It is intended to encourage innovation. However, a KPI that drives the launching of 15 mediocre products just so the manager can say he/she met or exceeded the KPI is not a good metric. The metric is driving strategy when the strategy should be to launch high quality products that bring good returns. Another common issue around measuring innovation is that early stage innovations are often not as high performing when compared to existing products and services. The metrics indicate the innovation is not valuable, yet it could be a disruptive innovation with the potential for higher profits once it reaches mainstream markets or customers.
All of this points to the fact that company leaders are making decisions based on metrics rather than strategy for the production of innovation. The innovation metrics can drive the right behaviors and should evaluate the results of initiatives. However, the metrics need to incorporate non-traditional measures. For example, 3M and Google have innovation metrics meant to ensure employees spend 10 percent of their time in experimentation. This measure would have no place among the traditional measures, like profit margin. There is also the issue of companies having too many metrics. A business leader who is confronted with too many metrics gets driven in different directions.
Getting the Metrics Right
Since innovation is a recognized requirement for business success in every industry, organizations need to develop metrics that recognize the value of strategic initiatives and address the leadership behaviors that support a culture of innovation and support growth initiatives. There is also a need for organizational capability metrics that focus on the process of innovation with the goal of creating a continuous sustainable approach to invention. Consulting firm InnovationPoint recommends the development of input and output metrics in each of the three metric categories. For example, input metrics for leadership are percent of executives’ time spent on strategic innovation versus day-to-day operations, percent of managers with training in the concepts and tools of innovation, and percent of strategic innovation projects with assigned executive sponsors. Output metrics measure the number of managers that become leaders of new category businesses. Input measures for organizational capability include identifying the processes supporting innovation, number of new competencies, and percent of employees who have received training and tools for innovation. Output metrics are the number of innovations significantly advancing the existing business and number of new-to-company opportunities in new markets.
Working For Innovation and Not Against
Making the metrics work for innovation instead of against it is a matter of balance. People will tend to pursue the manipulation of results to meet goals when those goals are not directly connected to a strategy and there is little or no accountability. Metrics should equate to accountability. Including people in strategy formulation is one way to create metrics with meaning. Collaborating with employees to design valuable KPIs can also add meaning to the metrics. Avoiding a tight connection between incentives and performance metrics is a way to guard against surrogation. Develop a set of metrics, and not just one or two, because it broadens perspective.
Metrics should not be the incentive for behaviors. They should be guides for processes and initiatives that produce innovation. KPI compliance is not enough. Metrics needs to be innovative too, and that is where companies struggle. They are stuck with a perspective that conventional metrics are the only right metrics, such as the number of new customer accounts. Business leaders need metrics that measure the conditions for innovation as well as the relationship of metrics to organizational strategy.