Innovation is a key driver of growth and competitiveness in today’s rapidly changing business climate. But how do we actually measure the results of innovation? Traditionally, many organizations have focused on Return on Investment (ROI) to assess the profitability of various investments.
But innovation differs from traditional investments in its uncertainty, long-term nature and potential to create entirely new markets. This is where the concept of Return on Innovation (ROI2) comes in as a more adapted way of assessing the value of innovation work.
The difference between Return on Investment and Return on Innovation
Return on Investment (ROI) is a financial key figure that is calculated by comparing the profit from an investment with the investment cost. The formula looks like this:
ROI = Net Result / Investment Cost
multiply the result by 100 to get a percentage
This model works well for short-term, clearly defined investments, but it is often insufficient for innovation. Innovation initiatives often involve exploring new areas, developing new technology or creating new business models – processes that can take several years to start yielding returns.
Return on Innovation (ROI2) focuses instead on how an innovation initiative contributes to the business’s future ability to generate value. This can include factors such as:
- New revenue streams – innovation can lead to new products, services or markets.
- Efficiency gains – innovation can improve processes and reduce costs.
- Brand value – innovative companies can gain a stronger brand and attract more customers.
- Knowledge building – innovation projects can lead to new skills and enhanced ability to deal with future challenges.
How to measure Return on Innovation
To be able to use ROI2 in practice, organizations need to develop relevant metrics that reflect the true value of innovation. Some examples include:
- Time savings: How much faster can we produce or deliver a product/service thanks to the innovation?
- Customer growth: How many new customers have we attracted through the innovation?
- Market share: Has the innovation led to increased market share?
- Patenting and IP: Has the innovation led to new patents or intangible assets?
- Employee engagement: Has the innovation work made the organization more attractive to talent?
Calculation example
Let’s say a company invests 10 million SEK in an innovation project to develop a new product. After three years, the innovation starts generating revenue and has led to:
- 30 million SEK in new revenue.
- A cost saving of 5 million SEK through more efficient production.
- An increased brand value that has led to a 15% increase in customer loyalty.
If we use a modified ROI2 formula:
ROI2 = (New Revenue + Cost Savings + Brand Impact) / Innovation Cost
ROI2 = (30M + 5M) / 10M = 3.5 (or 350%)
This shows that the innovation has generated 3.5 times its original cost, even though the benefits only came after several years.
Why use Return on Innovation?
1. Directs Innovation to Strategic Areas
By using ROI2, companies can focus on the areas of innovation that have the greatest strategic potential and not just those with the fastest financial return.
2. Motivates Long-Term Investments
Traditional ROI requirements can lead to innovative ventures being rejected because they do not provide immediate returns. With ROI2, management can make better decisions about investments in future growth.
3. Creates an Innovative Culture
Measuring and communicating the value of innovation helps build a culture where employees see innovation work as an important part of the organization’s development.
Return on Innovation is a more dynamic and adaptable measure for assessing the value of innovation efforts than traditional ROI.
By focusing on new revenues, cost savings, brand value and long-term competitiveness, companies can make more informed decisions about their innovation strategy.
By implementing ROI2 as a central control instrument, organizations can direct their innovation work towards areas with the highest strategic potential while creating a stronger innovation culture.
