Measuring the effectiveness of a company’s R&D and innovation processes can be as difficult as quantum mechanics, writes Calum MacRae.
The only element companies often consider is that they are maintaining adequate provision for R&D, which can be anything between 3 and 10% of revenues depending on the company ethos or the market in which it competes.
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What makes measuring R&D effectiveness so difficult is that R&D centres have no tangible commercial revenues or markets from which can be derived traditional key performance indicators (KPIs) such as return on investment or profitability measures. This often leads to “softer” KPIs being instituted such as people or process measurement.
Now, Johnson Controls (JCI), some two years after instituting a new innovation process at its interior systems business (accounting for about 20% of its US$21.7 billion automotive business) is reporting very positive innovation results. JCI has happened upon three R&D KPIs that it tracks on a quarterly basis in a robust two-way process. Every KPI has to be signed off by the chief financial officer, while likewise every customer business unit has to agree on the figures and sign them off.
The first KPI is based upon targeted business results. “At the beginning of each fiscal year we target to win a set number of programmes – it might be US$1 billion of business – but we say that at least 25% of the business that we win should contain a recent innovation,” explains Han Hendriks, vice president of new product development and sales at JCI’s automotive interiors. The simple rationale for this approach is that if the company is producing innovations but they’re not making any money from them they can’t be very useful. Additionally JCI finds that including innovations in a programme helps the company create advantage in their programmes and usually leads to increased margins. But why stop at 25% of a new business win has to contain an innovation, why not 100%? “We don’t want it to be 100% because we also want to sell our existing products and technologies that have been fully or partially amortised,” says Hendriks.
JCI’s second KPI for improved efficacy of the innovation process is more forward-looking and looks at the pipeline objectively. Like many companies, JCI manages innovation as a pipeline – some projects are at a very early stage of development and others are ready to exit the pipeline and enter the market. What JCI does with the pipeline however is subtly different according to Hendriks. “These projects are directly tied to targeted programmes that we intend to win. So for example, innovation A might be targeted at five programmes and we’ll say what is the total sales value of those programmes per year. Thus, the KPI asks of the projects exiting the pipeline in a fiscal year what is the value of the sales and EBIT that the innovation will help generate.”
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By GlobalDataThe upshot of using this KPI is that the company has quadrupled the output from its pipeline in just two years – trebling output in the first year alone – but without adding a single person or dollar to the division’s R&D budget. Importantly, the business processes in place prevent the loading of the pipeline with duplicate projects just to maintain the numbers. Indeed, when JCI embarked on the new process it inherited a pipeline of about 70 projects at various stages of maturity and in the first two quarters, the company axed 50% of those projects because of duplication, lack of alignment with business goals and hobby projects.
The third and final KPI that JCI’s interior business monitors is its speed to market – how long each innovation remains in the pipeline. Speed to market for any business is of utmost importance – it helps maintain competitive advantage, improves margin and reduces cost. By continually monitoring the speed to market of its innovations JCI has found that it’s been able to increase its speed markedly and without quality issues manifesting themselves.
Hendriks again: “As a business we cannot compromise on the robustness of our pipeline exits. Due to the new processes, we have found that our new organisation differs from the organisation two years ago. Then we had different groups doing their own thing with no accountability.
“For example, formerly a regional engineering manager with a piece of the innovation budget and also responsible for managing customer programmes might have found at the end of the month he was US$200,000 short. Then, he might have done one of two things: let go of a contract engineer working on a customer programme or removed US$200k from his innovations budget and nobody finds out for six months.”
Therefore, it would seem that JCI has happened not only upon a method that measures the unmeasurable but also on a process that is having a positive affect on company culture. In the words of Hendriks, “measuring the return on investment of innovation is the holy grail of innovation; if you’re looking for KPIs everybody will have a different answer”.
Results thus far at JCI would indicate that the interiors business unit has addressed the riddle better than most.
