Performance measurement in R&D

Here is quick reference from the Journal R&D Management: Performance measurement in R&D: exploring the interplay between measurement objectives, dimensions of performance and contextual factors. The overall learning is that industry and size and a big influencer on what metrics firms use. Furthermore, overall goal for performance management also guides what metrics are used.

The results indicate that firms measure R&D performance with different purposes, i.e. motivate researchers and engineers, monitor the progress of activities, evaluate the profitability of R&D projects, favour coordination and communication and stimulate organisational learning. These objectives are pursued in clusters, and the importance firms attach to each cluster is influenced by the context (type of R&D, industry belonging, size) in which measurement takes place. Furthermore, a firm’s choice to measure R&D performance along a particular perspective (i.e. financial, customer, business processes or innovation and learning) is influenced by the classes of objectives (diagnostic, motivational or interactive) that are given higher priority.

Too many metrics?

The article The Only KPIs Your Firm Will Ever Need in AccountingWEB.com discusses why too many metrics are not value adding:

Measurement for measurement sake’s is senseless, as quality pioneer Philip Crosby understood when he uttered, ‘Building a better scale doesn’t change your weight.’

They seem to contrast it from the McKinsey maxim:

“What you can measure you can manage.”

The example they have is of Continental turn around, where Mr. Bethune focused on just three high-level metrics:

On-time arrival
Lost luggage
Customer complaints

Clearly, these are important for an airline. However they are not the only metrics that need to be monitored in an operating airline. The article makes sense and it is important for Managers to have dashboards that have unique metrics – Key Predictive Indicators. However, in most cases, KPI need to be broken down into constituents that can be controlled to improve efficiencies. So it is not that KPI replace detailed metrics – they provide a way to consolidate many metrics into meaningful indicators and help managers easily detect and eliminate problems.

Data on contribution of “Innovation”

The article Strategic Decision Making and the CFO has some interesting data about contribution of innovation to the bottom line.

As chart 1 shows, this provocation (which isn’t our word by the way – see below) is important. The data comes from the well-known book “Blue Ocean Strategy” and shows that new ideas only account for 14% of new business launches but deliver 61% of the profits.

Chart 1: Revenues and profits from innovative versus incremental new business launches

Definition of what is innovation will change the results significantly The results would be easily explained if one defines innovation as new product line introductions (as opposed to incremental releases to an existing product line). A relevant question to ask is how much of the R&D investment is spent on what is defined as innovation…

Tatas learn to innovate

I really enjoyed this article in the Business Standard on innovation management in India –Tatas learn to innovate:

While this is aimed to lift the inhibitions that failure can cause, TGIF realised that several employees are afraid to question conventional wisdom. Thus in the works is a series of seminars called Courage to be Curious and Question. “The Tata Management Training Centre is working on it. This is to tell people how to ask questions without being intrusive and offensive. We will do the pilot in the next two or three months,” says Gopalakrishnan.

I guess this is an important problem in most corporate cultures – lack of questioning or open debate. But I found India to have a tendency towards top-down management cultures. I do believe that the culture is changing. I talked with the CEO of a large Indian conglomerate and was very impressed with his approach to make sure decisions are as much bottom-up as top down. It will be interesting to see how Tata achieves the change in culture…

Below was another impressive paragraph. Tata attempted to define Innovation and baseline initial level of innovation before proceeding with change.

Before any effort to boost innovation, it is essential to know the state of innovation in the company. The treatment will emanate from this. After much deliberation, TGIF has adopted the Innometer developed by Julian Birkinshaw of the London Business School. It measures the innovation process and culture on a scale of zero to five, and can be run on the whole company, a unit or even a small team. So far, about ten Tata Group companies have gone through it. The scores, of course, are confidential. “We are medium to upper-medium. We are not on top. It’s a 5-point scale, and I haven’t seen a 4.9 score. But I have seen scores between 3.6 and 4.3,” says Gopalakrishnan.

This was another impressive paragraph. I am not familiar with the Innometer, but I hope to check it out soon and post about it. Unfortunately, Prof. Birkinshaw’s website does not appear to have any material on it.The only page with information I find is from Tata itself.

Another barrier to innovation was that the various Tata companies wouldn’t talk to each other. There was always scope for collaboration, but seldom was it exploited. This was because large group companies like Tata Steel, Tata Chemicals and Indian Hotels Company were run like independent fiefdoms. Ratan Tata, when he became chairman in the early 1990s, eased out powerful chieftains like Rusi Modi, Ajit Kerkar and Darbari Seth. A cohesive group identity was forged, but collaboration still did not happen. So, TGIF decided to set up InnoClusters — groups of companies that could work together in different areas. There are four such clusters: Nanotechnology, plastics & composites, information technology and water. At the moment, the biggest cluster, of ten companies, is around nanotechnology.

Finally, TGIF has setup an innovation market place and they seem to have a good plan for staged implementation…

TGIF has come out with a web-based open innovation initiative called InnoVerse. Employees can post a problem on the intranet, to which anybody can provide a solution. People can bet on ideas with the 1,000 karma points they get. If the idea is accepted, your pile of points goes up. More than that, this will show which solutions are popular. A pilot is being run at the moment. Can all 300,000-odd Tata Group employees access it? “Not all, but most can,” says Tata Quality Management Services Vice-president Ravi Arora. “You must remember that a large chunk of these employees (almost 40 per cent) are from TCS, who are all net-savvy.

Rewarding Failure

The Kellogg Insights from Kellogg School of Business has an article justifying Bonuses Despite Billion Dollar Bailouts:

Eisfeldt and Rampini’s research suggests that their function is less about the past than the future. Bonuses provide managers with an incentive to be honest about their own performance and about the firm’s prospects earlier rather than later, when shifting capital to more productive managers and more productive uses can have the greatest impact.

Clearly, large bonuses in failing financial institutions is a touchy subject and I would like to stay away from it. However, there is definitely a case for rewarding failure in R&D. If all R&D efforts are successful, than the organization is not taking large enough risks and would likely not be able to compete long-term. Managers need to drive a healthy risk appetite, while managing overall exposure. Furthermore, if failures are not exposed early, more money is normally wasted in keeping wasteful projects alive. It also means that the R&D culture is not accepting of failure and that is a dangerous path.

One effective approach to encouraging/managing risk is to tie some fraction of executive compensation to “Wasted Development Effort.” The idea here is to recognize that some R&D should fail and that the executives should be encouraged to talk about it. If the term wasted development effort does not sound appropriate, consider Technology Path Elimination. My boss a few years ago came up with this term and it sounds much better: Encouraging R&D organizations to eliminate technology paths that will eventually lead to failure. Thoughts?

BCG Innovation Study

The management consulting firm BCG has a very informative annual Innovation survey. The results of the sixth survey were published recently. The study provides very informative results and may help with benchmarking your organization.

The fraction of executives being satisfied with the return on their R&D investment went up from 43% in 2008 to 52% in 2009. I wonder what has caused the change. May be because the budgets have been cut enough to drive the return or the executives are working harder to drive focus.

Another interesting result is that everyone believes that innovation should be measured rigorously and less than 50% of the organizations actually do so. I have found that measuring innovation requires defining what is innovation. Many of the companies I have worked with have no clear definition of what is innovation and how it is different from R&D in general.
What is your experience?

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Necessity is the mother of – Innovation

A couple of articles on driving innovation through Reverse Innovation. One is from Wharton School of Business and another from Forbes. The article suggests that historically innovation happened in the rich countries and moved to poor countries and now it needs to start in the emerging countries.

Vijay Govindarajan, professor of international business at the Tuck School of Business at Dartmouth College, who spent the last two years as a GE professor in residence and chief innovation consultant, calls the company’s strategy “reverse innovation”. “Historically, innovations have always happened in rich countries,” he points out, “But in the future, innovations will have to take place in countries like India and China, because this is where the bulk of the customers are. The needs are more pressing here and the sheer volumes will justify the investments that will be required for developing the appropriate products.”

The reality is that the emerging market is becoming more attractive and the need to drive down costs to meet the economical realities of that market is driving innovation at GE. The reduced costs then have a great positive impact on other markets as well. Similarly, there is a need for products of all sorts – such as cell phones – that need to fit the budgets of a whole new population.

One lesson I am learning from this is that R&D managers need to create situations where the technologists are challenged to generate new solutions. Innovation is not just about people sitting around and free thinking in a cool room filled with new toys. I am wondering if there is a structured way for managers to come up with challenges that get the same result without “Reverse Innovation.”

In any case, we can now safely modify Plato’s quote to say that “Necessity is the mother of Innovation.”

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Making Data Work For You

Here is an article from Forbes talking about how to make data work for you. The underlying presumption is that the data necessary to make management decisions is lying around in the company in different forms – the challenge is to mine it effectively and prepare the right kind of report.

The amount of data inside corporations is exploding. In fact, there has never been such a wealth of information available in the history of business, and there has never been the vast array of tools to dissect it.
CIOs are generating reports for business leaders that slice the data horizontally and vertically, project growth, calculate productivity and profitability, and compare all of this historically and competitively. They are even pulling out tidbits of data that may appear randomly and building models based upon recurrences that escaped notice by even the most astute teams of experts. But is all this stuff right?

The key challenge according to the article is to find the right kinds of skills that marry IT and business understanding to generate these reports. And that unfortunately, those skills are hard to come by.

You’re talking about creating a data model, but aren’t models inherently flawed? Look at what happened to Wall Street in 2007.
The problem with models is not so much that they’re difficult to create. It’s whether everyone involved agrees with the same semantics. If you want a revenue report or a profitability report, you need to figure out what should be included. Once you have clarity on that, the other steps are much easier.
Do these skills exist?
They’re not very common. We need a completely new skill set for the CIO and the IT department. They have to speak the language of requirements for the application as well as the business language of reports.

In my experience, getting hold of the right data to make effective R&D management decisions is a big challenge. The problem is not only that the data is fragmented across multiple tools and databases, but also the fact that the tools all use different jargon and structure. It is difficult, if not impossible to aggregate data across these fragments to generate meaningful reports.

For example, if one wants to generate project portfolio status reports automatically, one has to mine across project management, requirements management and financial management systems. Each one of these systems maintain their data at different, disconnected levels of abstraction. Even if it was possible to mine data from each one of them, effort needed to link them across each other would be cost prohibitive.

What do you think? Have you used automated data mining / report generation tools successfully? Are there any lessons learned that you can share?

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