I’m often asked about how to measure the effectiveness of an innovation operation. While there are many models, the one proposed below follows the world of startups: The “AAARRR” or “Pirate” model suggests that innovation activity will progress through a lifecycle, and hence measures of success will equally shift as the business or idea matures:
- Awareness: identifying the need and business imperative
- Acquisition: generating a range of ideas and strategic options
- Activation: putting the ideas into action
- Retention: actually launching these ideas to market
- Referral: ensuring there is a sustainable engine for future businesses and ideas
- Revenue: eventually any innovation effort should generate financial returns
When corporates are able to adopt simple behaviour changes like this from the startup world, and combine them with the capabilities link and disproportionate advantage of being an incumbent, great things can happen.
Read more from Innov8rs below.
The What, Why & How Of An Effective Innovation Ecosystem
Originally posted by Innov8rs: https://innov8rs.co/news/effective-innovation-ecosystem/
When you open a LEGO set, the sheer amount of pieces and parts can be overwhelming.
Even though you know the end result you’re aiming for, you have no idea how all these little blocks fit together to get there.
According to Dan Toma, an innovation ecosystem is a lot like LEGO. There are a ton of moving parts, and your job is to figure out how they all fit together. But with LEGO, you get instructions; as corporate innovators, we’re not so lucky.
When do you know you need to do a lab? When do you know you don’t need to do a lab? What about a hackathon, or an executive training – do we need them? When? Why?
Dan Toma helps governments and blue-chip organizations develop and implement innovation ecosystems that maximize innovation flow and enable everyone to collaborate and create value within focused teams – just like startups.
At #Innov8rs Tel Aviv, Dan walked us through the what, why, and how of effective innovation ecosystems; specifically, how to measure your ecosystem and identify exactly what you need, and why.
First, do no harm
“When I go to the doctor, I don’t want to walk into his office and have him just hand me a bunch of pills,” says Dan. “The first thing I want him to do is ask me some questions. What are my symptoms? And then prescribe me medicine that makes sense for those symptoms.”
Lean startup. Accelerators. Incubators. According to Dan, these are innovation ‘medicines’ that, too often, we just go ahead and take without first identifying our symptoms – or even understanding how all the different parts of our ecosystem work together.
How do we do that? We need to measure our ecosystem. “Measurements impact your actions, and your actions obviously have consequences. If you’re thinking about training your entire organization in design thinking, there’s a price tag. If you don’t get a good return on that, all that money is gone for good. So before you act, you need to know: is your ecosystem ready for that training? Does your ecosystem even need that particular training?”
Think like a ‘pirate’
When Dan measures an organization’s ecosystem, he views it as a funnel – specifically a Pirate funnel. Long used by startups, the Pirate funnel is a customer-lifecycle framework that categorizes metrics into Awareness, Acquisition, Activation, Revenue, Retention, and Referral – AAARRR, like a pirate – and helps you determine where you need to optimize and improve.
Dan has tweaked the framework so it functions as a measure of innovation, and can help identify where issues and potential optimization opportunities exist in an ecosystem. Each stage of the funnel identifies a specific ecosystem symptom, and prescribes the most appropriate ‘medicine’.
At the top of the funnel is acquisition. Here, you ask: How many ideas are being generated by the ecosystem, or are being brought in to the ecosystem? Measuring this before you take any action will help you identify whether or not you have an ideation problem.
If you identify an ideation problem, that’s when you may want to hold hackathons and idea challenges, implement ideation and design thinking training, or consider collaborations with startups or universities. But you may also need to look a little deeper.
“Our research revealed that only 1 in 3 companies have a clear ideation process. Most just let anybody come up with ideas and it’s chaotic, ad hoc. This is a problem,” says Dan. “Also, if you are doing hackathons but still don’t have enough ideas coming in, are your criteria for selecting ideas transparent? People may not be engaged in the process if your criteria isn’t clear.”
Next is activation: how many of these ideas are actually being worked on? You measure this by the number of teams that have been formed around ideas, and the number of ideas that have received financing.
Dan’s research in this area shocked him. “Ideas are being generated but not invested in, not taken to the next level. The cycle is, you convert money into ideas, and then ideas convert back into money. If you’re just stuck in the first part, you have a problem.”
If you find you have an activation problem, you’ll want to help people help others work on their idea. Management training and Train The Trainer programs work well at this phase of the funnel. But Dan cautions that your acquisition phase better be in good shape first.
“Lean startup is not a silver bullet. A lot of people think that because it’s an iterative process, it doesn’t matter what ideas we put forward because we’re going to iterate on them and everything’s going to be fine. No. It’s trash in, trash out. If you have a poor ideation process at the beginning, you’re going to have poor ideas coming out the other end.”
You’ve generated ideas. Those ideas are being worked on. But how many of these ideas actually make it to market? That’s what you’re measuring in the Retention phase. Some indicators include: how many experiments have been done; what percentage of ideas have been adopted by business units; and, what percentage of ideas actually launched in the marketplace.
If retention is low, implementing an innovation lab, accelerator program or venture capital arm can help. Again, Dan has a caveat. “Relying solely on your lab for innovation solutions is not going to work for you. Research on all venture capital companies in the US shows that 65% of all ideas return between 0 and 1x the initial investment. So in a best case scenario they’re just going to break even. That’s why just having that lab isn’t enough – innovation needs to happen at scale.”
If you’ve got a good percentage of ideas making it to market, isn’t that a sign of success? Yes, but it’s not enough. In the referral phase of the funnel, you need to ask: is your innovation ecosystem evergreen? Are you generating perpetual ideas? How many new ideas have grown from existing ideas?
Dan illustrates what an evergreen innovation system looks like. “Your product teams go ahead and build one idea and, as they are building, they stumble upon some interesting learnings and start creating a new growth avenue from that. Maybe a new team needs to be formed because they’ve uncovered something really interesting.“
If this is a problem area, it’s time to get people talking. “Run internal conferences. If you’re running a company on multiple time zones maybe it’s a good idea to have everyone meet once a year, have people cross-pollinate. Enter competitions. Send your teams to startup weekends, conferences and such to get them inspired and talking to other like minded people.”
Finally, you definitely want to measure revenue: how much money does your ecosystem generate?
While there are several KPIs to look at here, Dan’s favorite is this: how much money have you generated in the past 3 years from ideas you launched 3 years ago?
“Some companies have this particular KPI as a performance indicator for managers or VPs,” he says. “You might be really strong at measuring your financial expectations for the core business, but if you’re not meeting your financial expectations for this particular KPI it means you are not addressing the innovation problem. You are not growing your company.”
Joint ventures and collaborations with other companies can help address issues in the revenue phase. Mergers and acquisitions can also help, as long as you do your due diligence. “Acquiring a company is not enough. You need to make sure it makes sense. Can you grow it? Is it sustainable within your ecosystem? Validate before you acquire.”
Taking a holistic view
Just like a doctor needs to look at a variety of factors before making a diagnosis, you too have to take a holistic view of your entire innovation ecosystem before you decide on a course of action. Dan reminds us:
“Just looking at what we could do next – that next Train The Trainer, that next lab, that next management training, that next executive challenge – it’s not enough. You need to understand it in the context of your entire ecosystem. Does it make sense? Is it something we’ll actually benefit from as a company?
And most importantly, does it fit with all the other parts? Think of the LEGO. Does this brick fit with all the other bricks that are already laid down?
Does it contribute to the end result we’re going for? If not, don’t do it.”