The importance and role of metrics in delivering SEI is still a matter of debate. While there is a huge variety of approaches that companies take and a huge number of potential measurements that can be tracked, innovation remains notoriously difficult to measure.
Some organizations feel that aligning a strong set of KPIs with finance is essential; others believe a smaller set of pointed metrics are most effective; others entirely eschewed the idea of monitoring innovation targets at all in favour of story-telling and trust. Generally speaking, the more mature an organization is in terms of SEI, the more likely that this latter approach is used.
However, metrics are best thought of in three categories:
- First, internal procurement metrics, which are used to monitor the direct action of buyers.
- Second, more commercial metrics, which relate to the organization’s market position.
- Third, external metrics which are directly applied to suppliers and other third parties.
As mentioned above, there is an evolution of the type of metrics deployed. The ease of which procurement-specific KPIs can be applied are an attractive entry for companies starting out on their SEI journey – KPIs such as innovation clauses in contracts and number of innovation events can be a quick way to communicate a message that work is being done.
However, the energy expended on monitoring these metrics can be costly and the benefits from encouraging these specific activities may not deliver a significant return on investment. Rather, as functions evolve, their focus seems to shift to a higher level, with a broader range of commercial metrics.
This emphasises, in the mind of stakeholders just as much as buyers, the overall importance of the business outcome, which is delivered by innovation. As such, we can better consider innovation as a means to an end, as opposed to an end in itself.
In reality, few procurement functions have any innovation metrics to speak of, leaving a position of potential uncertainty within organizations as to which KPIs should be applied to the procurement function and an unclear case for continued investment.
However, one CPO from the manufacturing sector was particularly unimpressed with the concept of measuring and reporting success in SEI at all. “Why do we need to measure everything? Innovation is an entrepreneurial process which cannot be tracked,” he said.
It isn’t an uncommon belief, but our Innovation Compass study did find that the more metrics that are in place (and, specifically, procurement-focused KPIs) the higher the company’s output of innovation. Where a company can actively monitor its staff’s attempts at innovation, it is more likely that these activities can be quantified and resources targeted accordingly.
The metrics journey and maturity
Ultimately, there are stand-out factors that concern innovation metrics.
- First, many less-mature organizations are searching to find the ‘right’ metrics. These companies invest significant time and energy to find a set of targets that can align and incentivize the activities of buyers and suppliers.
- Second, many advanced companies have a similar journey when it comes to KPIs. Starting out, they obviously have few, as innovation is bundled into general procurement activity. As the notion of innovation takes hold in leadership teams, metrics proliferate, as managers seek to encourage any activity which provides novel solutions.
- Finally, as functions mature they often abandon the large number of legacy metrics and settle on just a few. These tend to be general in nature, or incorporate innovation into standard buying activities.
Having said all of this, there is one stand-out innovation metric, which has an eye on the bottom-line, and that is the number of projects which come from the innovation process. This allows managers to measure the tangible output of SEI in terms of key business indicators, as well as demonstrate the value of a robust, well-funded program.