ROI. Return on investment. What I get versus what I paid. These three letters kill more innovation projects and programs than any other innovation killer. ROI is more powerful than corporate culture, more insidious than risk aversion, more financially powerful than an allocated budget. ROI killed good ideas today, and will keep killing them until we determine how and when to use ROI effectively.
Is ROI the wrong evaluation metric to use for innovation? Yes, if it’s the only one you use, and yes, if you use it too early in the evolution of ideas. For many organizations, the one tool in the toolchest to evaluate any project is ROI, so everything is evaluated using ROI all the time. What we need are more practical, more reasonable and more timely evaluation criteria until the time where an innovation has matured enough, and we know enough about the ideas, to screen with ROI.
The reason ROI is so difficult and so dangerous for innovation is in the nominator. ROI is just a ratio – return on the top and investment on the bottom. Most companies have been in business long enough to provide a quick rough estimate of any development activity to some reasonable degree of certainty. However, new ideas often have wildly different “return” models that are hard to quantify or predict. So, while the “investment” side is easier to estimate with greater certainty, the “return” side is not, and that difference often leads to the elimination of many ideas before their time.
Evaluating ideas as they “ripen”
Early on in an innovation activity, ideas are simply too nascent, too unformed to use ROI. In these phases, the ideas should be evaluated based on the scope of the project, trends and future scenarios you’ve developed, customer needs you’ve uncovered and corporate capabilities. As you learn more about the idea, its viability and its market impact, you can begin to make much better assessments about its potential return. Trying to ascertain return too quickly will lead you to eliminate many viable ideas before you’ve had a chance to obtain the necessary research.
Not that ROI isn’t necessarily “wrong”, just often used at the wrong time where innovation is concerned. Every idea that leads to a new product or service must be evaluated on some return mechanism, we believe that it makes sense to wait until more of the facts are known before using the unsubtle sledgehammer of return on investment.