Business is about profits. I define business as, ‘creating wealth through profitable transactions’. Like it or not, that’s what business is about, right?
Indeed, it’s the first duty of a CEO and board to work to the best interests of shareholders and that usually involves providing a return on their investments. If you are running a business without shareholders (or if you are the only shareholder), you might be driven by different motivations. But, if shareholders are involved, this is one of the fundamental responsibilities of a board and, by and large, guides all company board decisions where shareholders are involved.
Do you measure it?
In many businesses, precise metrics are employed to ensure workers are providing an adequate return on their costs, wages and all the attendant overheads. In fact, these days it’s sometimes said that the total cost of many workers is 50% or more of their direct salaries.
In production, we measure process efficiency, defined as output per unit time divided by costs. We then work to maximise the process efficiency, by measuring it.
In accounting, law, consulting and even contracted medical professionals, earned income compared with cost is measured. If you are not paying your way and returning a profit then your time in your chosen profession will be short lived. This is how it is in business and this is the way it will remain.
There are some escapees
Strangely, senior managers, except perhaps the CEO, sometimes escape this direct measurement of performance (more will be said on this in future articles). In fact, some complete departments deemed as essential also sometimes escape measurement.
Accounts, payroll, and ITC may fall into this category, as essential overheads whose costs must be amortised across other profit centres.
In the case of innovation initiatives and, indeed, complete innovation departments, the rationale behind the establishment of these is that ‘it’s the done thing’.
It’s right to think that if the organisation is not being innovative it will not be able to retain its position and will soon be overtaken by smarter competitors.
But, unfortunately, the other side of this reality is that if the innovation initiative is not delivering quantifiable value then clearly it should not be funded and, therefore, should not exist.
How does your innovation initiative measure up?
In the past, many companies have embraced then later discarded their innovation initiatives after it became obvious that the costs associated with the initiative were not justifiable — being met by the outcomes.
The common defence for such departments when challenged is that ‘innovation takes time but we will get the big one and all will be well.’ Sure. But how many times have we heard that one from would-be innovators?
There is an old axiom in business and engineering: ‘If you can’t measure it, don’t do it’. This is so true. So, do you have innovation metrics in place? What is your planned innovation payback period and are the costs exceeding any expected returns.
Where to Start?
The starting point, too often overlooked, is embodied in the following four questions.
- What are you trying to achieve?
- Where are you now?
- How will you measure progress?
- What outcome defines success?
If you intend to either embrace or continue with an innovation initiative then answer each of these questions, ideally with a single sentence. If you cannot do that, you are not yet on the first rung of the innovation ladder.
Finally, my next article will look at the time scale for implementation, and you may be quite surprised at just how short that can be if the goal is to provide a positive ROI.
Roger La Salle is the creator of the Matrix Thinking™ technique and is widely sought after as an international speaker on Innovation, Opportunity and business development. He is the author of three books, Director and former CEO of the Innovation Centre of Victoria (INNOVIC), as well as a number of companies both in Australian and overseas. He has been responsible for a number of successful technology start-ups and, in 2004, was a regular panellist on the ABC New Inventors TV program. In 2005 he was appointed to the Chair of Innovation at The Queens University in Belfast. Matrix Thinking is now used in more than 26 countries.