Yes, you can measure the value of innovation. Three years ago, the concept woke me out of a dead sleep. I sat bolt upright, ran downstairs for a pen and paper and scratched it out. And it has been the basis for demonstrating the value of what I do as a civic innovator ever since.
Yes, innovation can be a tricky thing to measure. But when you’re in the innovation business, you need to try. If you consider “efficiency value” (EV) to be a concept whereby a process or operation gets better at doing their activity, then Innovation Value (IV) is the sum of the efficiencies (EVx), plus actual cost savings (ACS). Actual Cost Savings is the one-time cost savings and the Net Present Value (NPV) of ongoing annual cost savings for a reasonable period.*
Now, I'm not Rain Man, nor do I have A Beautiful Mind, so the equation is as simple as I could make it and still capture the essence. With that said, I know I'll lose about half of you with this dry, butterless math toast.
Innovation Value (IV) = EV+ Actual Cost Savings (ACS)
ACS = (One-Time Cost Savings) + NPV(Annual Cost Savings/Avoidance)*
In essence, the value of innovation can be measured. Now I'll add in some math marmalade for your dry math toast in the form of an example on how to use it.
Imagine this conundrum: You have 20-year-old equipment in your fleet, and you've deferred replacement indefinitely because you lack the capital funds to replace it on the appropriate cycle. If the equipment is sold, all the proceeds go back to the general fund "black hole", who pays the operation and maintenance costs, so there is no incentive for the operations group to sell the equipment because it doesn't hit their budget and doesn't benefit them if they do.
However, the budget team that oversees the general fund doesn't know that the equipment isn't needed because they don't run operations. So in essence, the people who know what they need have no incentive to get rid of old equipment, and the ones who would benefit can't reduce it. Classic conundrum.
Then it hits--the eureka moment...the brilliant brainstorm that will solve all this oddness...the budget team offers to do a one-time sale of old equipment and agrees to use the funds and allow the operations team to purchase new "21st century" equipment that meets their modern operational needs. All proceeds from the sale will be reinvested in new equipment-one time only. This creates the urgency. Wow. Brilliant! But what's the true value to the organization?
In real life, the one-time sale netted 69 pieces of equipment, and the sale led to a one-time recovery of $585,000 in proceeds. It also led to a decrease of $150,000 in average annual cost savings by reducing ongoing fleet maintenance (the total annual average maintenance cost of the 69 "old" pieces of equipment). There are many other assumptions that you could use, but the goal of Innovation Value is to keep it simple and defensible.
Since the $585,000 will be reinvested in more “efficient” operations (EV), it is not a true cost savings. But it does have value. The $150,000 in annual ongoing savings is true cost savings/avoidance and since it is reasonable to assume that for at least 3 years the equipment will have a reduced maintenance need (via the warranty), the formula for “Innovation Value” would be:
Innovation Value (IV) = $585,000 + NPV($150,000+$150,000+$150,000)
So, in this case, the total Innovation Value (IV) is slightly over $1 million.
While this example demonstrates the "how", the true value of measuring innovation is in defining and quantifying that innovation does have value. That there is an inherent, tangible, and sometimes intangible, good in innovation and getting your organization to agree that it can be measured. We used this process of measuring Innovation Value to demonstrate that for every $1 invested in our team, we were able to return $1.70 in value to our citizens. And isn't that how we want our government to function? To measure and demonstrate value to our citizens? We used this formula to demonstrate that our value exceeded our cost--and pioneered the concept of innovation in a conservative community: government that "pays for itself"--and we used innovation value to get there.
In addition, Innovation Value demonstrates that innovation has a shelf-life and new projects need to be constantly added to keep the value coming. You can't innovate and then ride the gravy train to the finish line. There is value, but as time goes on, you need to keep a pipeline of new ideas coming.
So I ask you to consider the true value of measuring innovation for your organization and begin "buttering the dry toast" of your innovation efforts. And I've found that innovation value can be applied to almost any project. To learn more about applying innovation value to your organization, please contact me directly and good luck fellow innovators!