Product Marty Cagan

Measuring Innovation

Measuring innovation is a popular topic lately.  Many product teams use Product Scorecards to keep their focus on outcomes rather than output.   Eric Ries introduced the term “Innovation Accounting” for this purpose as well.

However, as much as I like and advocate for these techniques of measuring true improvement to your products rather than just adding features, if this is all you look at, over time you run the very real risk of falling into The Innovator’s Dilemma.

I am perhaps overly attracted to the concept of building enduring companies.  I attribute this to having spent the first ten years of my career as a developer for Hewlett Packard, which back then was a company that prided itself on continuous innovation.  But they had a tougher measure of innovation than many companies today.  We were taught to measure the percentage of revenue that was coming from products and services introduced in the past few years.

My mentor during those years advocated that at least 50% of your revenue should be coming from products introduced in the past 3 years.  He argued that even the best products have a natural cycle, and with good continuous improvement on those products you can stretch that cycle out, but still, every product has its day, and eventually competition and shifts in consumer behavior will take its toll, and sales and use will diminish.

Many large companies today use the “grow revenues through acquisition” strategy to building new sources of revenue.  Certainly that’s one route, and occasionally the acquisition is one that is truly synergistic and could legitimately be viewed as a form of innovation.

But when people ask me for my favorite examples of truly strong product organizations, I cite the product teams that have proven their ability to not only improve their existing products, but even more importantly, to repeatedly deliver entirely new major streams of revenue for their companies.  Examples include Apple, Amazon, Netflix and Zynga (in the case of the latter two examples, please don’t confuse recent questionable business decisions by the leadership with any fault of the product teams).

When I meet a company that is still getting nearly all of its revenue off of products introduced more than 3-5 years ago, I feel a real sense of urgency to help them get serious about innovation.

If you’re in one of these companies that has gone many years without new sources of revenue, and are harvesting the innovations of the founders, and you’re wondering if it’s possible for your company to learn these skills, one of my favorite examples today is the team at Barnes and Noble.  They are now consistently producing highly rated new products and services, even while competing against two of the best product companies of our age.  Their product team is giving their company a fighting chance to avoid the fate of the rest of their industry.

I hope more teams will track this additional measure of innovation.  Interestingly, when I find companies that are very aware of this measure, they are much more open to the possibility of a pivot.  Pivots are often the best source of these new major streams of revenue.  Yet when you only are looking at innovation within your specific product, pivots are all too often viewed as a distraction rather than an opportunity.