Valuing your innovation pipeline

How do you assess the potential value of your innovation pipeline in order to give management and employees alike an idea of what is coming next (and when) and its revenue-generating expectations? This is a question that has been to the fore of many IMSs since the inception of the process. Failure to put a value on what has been and is being worked on may result in the loss of support for the process from key influencers in your business.

Innovation Value = Predicted revenues X Chance of it working - Investment remaining

where:

• IV = Innovation Value
• Predicted revenues = This is the potential prize of the initiative in terms of revenues generated or costs avoided
• Chance of it working = This is the average of the commercial and technical likelihood of success, expressed as a decimal
• Investment remaining = This is the cost (less grants or tax credits) of bringing the innovation to the market which cannot be recovered from the initiative once it starts to spin out cash. That is the sunk costs associated with the initial project spend.

Record possible future project revenues associated with the successful completion of the identified innovation initiatives and their calculated IVs.

In business, financial metrics remain the most commonly-used measurement of the success or otherwise of an innovation or NPD programme. Measurements such as return on investment (ROI), return on capital employed (ROCE) or internal rate of return (IRR) are used to value the outputs of innovation activities. These are usually calculated net of grant funding (front end) or tax credits (back end) supports.

However, I think that it is too restrictive to attempt to measure and value the effectiveness of a business’s innovation activities based on financial metrics alone. Therefore, I have given a great deal of attention over the years to the non-financial means by which you can put a value on your endeavours.

In some ways, it is easier to value an innovation output once it has been developed. It is infinitely more difficult to put a value on what has not been completed yet or is in the pipeline. The way we have done this is by measuring the number of potentially successful ideas we collect and making an educated or informed estimate on the sales potential of a typical initiative. 

Extracted from EVERYDAY INNOVATION: A Practical Guide to Establishing and Operating an Innovation Management System in Your Business by Hugh Henry.