5 key questions to build KPIs for innovation reporting

This second article in our series of three on corporate innovation focuses on the Key Performance Indicators (KPIs) innovation leaders use to report and communicate their progress. These metrics assess the success and effectiveness of innovation efforts, provide information about achieving the desired goals, help detect problems and encourage behaviors consistent with the company’s drivers. Interviews with 15 innovation leaders from 5 different countries helped define 5 key questions to develop strong innovation KPIs.

1. How do the KPIs fit into the innovation and company strategy?

The innovation leaders stressed the importance of developing KPIs in line with the overall business strategy and innovation goals, rather than seeing them as an independent tool. Embedding them in these structures ensures that innovation efforts are purposeful, strategic and contribute directly to the company's success, resulting in various advantages:

• Easier and more structured decision-making
• Heightened employee engagement and support from higher management
• Innovation efforts with a high potential for value creation are prioritized
• Clear definition of the return on investment for all stakeholders

Despite the benefits, many innovation leaders don’t install clear KPIs in time. Some even state that while KPIs need to be developed in line with business strategy, that does not necessarily mean they need to be connected to a company’s core business. Whether or not innovation KPIs should relate to the company’s core business, strongly depends on the type of collaboration with startups. Each type of corporate venturing or innovation activity can have different ambitions (cfr. Innovation Horizons) that are closer or further removed from the core business. This will be further explained in the final report.

2. How mature is the company in innovation?

Innovation is a learning process. As companies mature in their innovation practices, the KPIs need to evolve along with the changing priorities and challenges of this journey. Innovative newcomers generally tend to measure different KPIs than mature companies.

For example, young corporate venturing units measure the following:

• KPIs related to the number of ideas generated or experiments conducted.
• Qualitative insights on what works, what does not and what the company has learned.
• KPIs related to fostering an innovative culture, employee engagement in innovation initiatives and the frequency of cross-functional collaboration.

In contrast, mature corporate venturing units track KPIs like these:

• Revenue generated from new products, market share gained from innovative initiatives, or the return on investment (ROI) from innovation projects.
• KPIs related to employee satisfaction and retention of innovative talent.
• The alignment of innovation efforts with overall business strategy.

Depending on the maturity of a corporate venturing unit, dissimilar KPIs will be used since success is measured differently. Less mature corporate venturing units often focus on learning from failures and adapting their innovation strategies when necessary, while more mature corporate venturing units draw conclusions from both failures and successes and tend to have well-established processes for continuous improvement.

3. Go broad or go deep?

Recent studies identified more than 730 innovation KPIs mentioned in academic studies since 1983 (Nappi and Kelly, 2022), but in reality there are even more. The interviews showed that leaders typically prioritize the KPIs with hard, quantitative outcomes, like the revenue from new products and customer traction. However, some prefer a broader view and also add softer, qualitative KPIs, like the number of ideas generated and implemented and the contribution to sustainability goals.

This wide scope of possible KPIs raises whether innovation leaders should aim for a broad measurement or an in-depth understanding of their innovation efforts. Both methods have their pros and cons.

The choice to go deep or broad is highly dependent on the maturity of the company, the level of automation of the KPIs, the relationship with the higher levels and the strategy of the firm. Some interviewees noted that while the mix of KPI-types is important, so is the way they are processed and used to make decisions. “With a broad measuring system, you need a telescope to look at all the stars. With an in-depth measuring system, you need a microscope”, explained one interviewee, “But when people use the microscope to look at the sky, all they see is red dots. You need to be able to see the big picture.”

4. To what extent can the process be automated?

Companies often struggle to control the reporting load, aiming to keep it simple and resource efficient, while still giving an open, comprehensive and complete view of the innovation progress (see blog 1 ‘5 challenges in measuring the return on innovation’). Some innovation leaders tackle this tension by optimizing their meeting culture. Others go even further by automating (parts of) the KPI reporting, via Salesforce implementation, communication tools and other forms of data collection. According to our interviewees, (partial) automation of KPI reporting has many advantages.

• Efficiency: Automation reduces the manual effort and time required to collect, process, and analyze data related to innovation KPIs.
• Accuracy: It eliminates the risk of human errors and ensures accurate reported metrics.
• Real-time insights: Tools like dashboards enable continuous, real-time monitoring of innovation KPIs, allowing decision-makers to identify trends, opportunities and issues.
• Faster decision-making: Automated reporting and analysis enables executives and managers to make data-driven decisions more quickly. This agility is essential in the fast-paced and competitive world of innovation.
• Scalability: Automation enables the organization to handle a larger volume of data without increasing the administrative burden. That explains why especially the leaders of bigger corporations talked about the benefits of automated KPIs.
• Integration and data centralization: Automation tools can be integrated with various data sources to centralize information from different departments or systems. This integration provides a holistic view of innovation performance, fostering cross-functional collaboration and better-informed decision-making.
• Predictive analytics: Some advanced automation systems offer predictive analytics, which enable companies to anticipate challenges and proactively address potential issues.
• Compliance and audit trail: Automation ensures consistent and traceable data reporting. This audit trail serves as a control for compliance with internal policies and external regulations on innovation management.

5. How will these KPIs feed or eat our innovation culture?

The way innovation KPIs are designed, communicated and used within the organization plays a crucial role in shaping the innovation culture - with two possible outcomes.

The KPIs can feed the company’s innovation culture, by nurturing and strengthening it, resulting in the following.

• Recognition and rewards: Innovation KPIs tied to recognition and rewards can motivate employees to actively participate in innovation initiatives and foster an appreciative innovation culture.
• Empowerment and autonomy: Relevant and well-aligned KPIs can empower employees to take ownership of their innovation projects, which encourages essential creativity and risk-taking.
• Continuous improvement: Innovation KPIs that track both successes and failures as learning opportunities promote a culture of continuous improvement, in which there is room for experimentation.
• Collaboration and cross-functional engagement: Innovation KPIs with this focus promote open communication, knowledge-sharing and teamwork.
• Learning and development: Aligning innovation KPIs with employees' learning and development goals can foster a culture of skill development and knowledge enhancement, and a generally more innovative workforce.

However, innovation KPIs can also eat the company’s innovation culture, by undermining it, resulting in the following.

• Misaligned objectives: If innovation KPIs are not aligned with the organization’s overall strategy or incentivize short-term gains at the expense of long-term innovation, teams may focus on meeting KPIs without considering the broader impact on innovation quality.
• Fear of failure: If innovation KPIs overly penalize failure, it can create an experimentation and risk-averse culture, which stifles creativity and hinders innovation.
• Competitive environment: Excessive competition among employees based on KPIs can discourage collaboration and knowledge-sharing, while an innovation culture thrives on cooperation and a shared sense of purpose.
• Quantity over quality: If innovation KPIs emphasize the number of ideas generated or projects initiated rather than their quality and impact, it may lead to a superficial innovation culture, lacking adequate idea evaluation or implementation.
• Bureaucratic processes: If the measurement and reporting of innovation KPIs become overly bureaucratic and time-consuming, it can divert employees' attention from necessary creative work.

To ensure that innovation KPIs positively impact the innovation culture, leaders should clearly communicate their purpose and significance to employees. Regularly reviewing and refining the innovation KPIs fosters a culture where innovation is embraced, encouraged, and valued. In the next article, the innovation leaders will zoom in on how measuring innovation progress poses a challenge to develop a strong relationship with C-level executives.

Subscribe to our Strategy & Innovation newsletter and be the first to receive the final report.

Connect with PwC Belgium via Enya Steenssens or Elise Carton