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The Current State of Innovation ROI: A Lesson from Frugal Innovation

Frugal innovation is being touted by some industry gurus as the next generation of disruptive innovation. Through this concept, organizations strive to do more with less. Nokia, for example, designed a “bare bones” basic phone, which, apart from a flash light, had little features apart from voice and text. Two hundred million units sold within four years, making it one of the best selling phones of all time. Another example is the solar light bulb crafted from one litre soda bottles filled with bleach and water, which provides inexpensive lighting in poorer areas of the Philippines.

Navi Radjou and Jaideep Prabhu wrote a book called Frugal Innovation: How to Do More with Less, which was released earlier this year. The book explores this estimated trillion-dollar global market and how businesses can use fewer resources and spend less time on projects all the while driving more social and business value. We found the book to be incredibly insightful and wanted to share a few key takeaways, with the first being calculating the ROI of innovation:frugal-0

This concept is fairly straightforward and is practised regularly. After all, in order to be successful, organizations should be finding ways to decrease the denominator while increasing their numerator.

The Current State of Innovation ROI

Ironically, the current state of innovation does not foster innovation. As noted in Frugal Innovation: How to Do More with Less, “It takes fifteen years to create a new drug, five years for a new airplane, and three years to create a new concept for a car.”

Let’s take a look at the pharmaceutical industry, for example. Companies within this industry pour their funds into R&D functions to develop new drugs. On average it costs around $4 billion to develop a new drug. The return on the drug, however, is only maybe a quarter of their costs before the patent runs out and generic brands begin producing molecularly identical drugs.

In other words, these companies put in a huge financial investment for slim to no returns.frugal-01B

Why Companies Are Built for Low Innovation ROI

In a word: metrics. Rather than measuring the “value” as customer value and “investment” as insight from employees, most companies measure their ROI by calculating the amount of money coming in and the amount of money going out.

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To make matters worse, cross functional collaboration is, at best, a challenge for most companies. As departments struggle to work with one another, project timelines are extended. Then, the longer the extension, the more resources that are required to complete the project.

We are continuing to see products that are more complex and can do more things. But users do not need or even necessarily always want complex (i.e. the Nokia phone example above). More importantly, complex products take longer to build, feeding into the problem of extended development times.

What Organizations Can Do to Create a More Agile R&D Infrastructure

Companies need to change the way they see Innovation ROI.

Instead of:

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It should be:

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The first step: Make use of employee insight. Tap into their ideas so that you can create products that are simpler, more market relevant, and most importantly, useful.

Below are seven steps you can take to change your Innovation ROI:

  1. Align Innovation Goals with Corporate Strategy
    Having innovation goals aligned with corporate strategy is key to ensuring that your products are returning the value that you want to see from your program.
  2. Opt for Smaller Projects Rather than Expensive Endeavours
    Use your funds where they will make the greatest impact by either:
  • Targeting smaller projects that will have a bigger cumulative impact; or
  • Break up larger projects into bite-sized incremental projects
  1. Change the Attitude
    ROI is not just about numbers—it is about the people. Encourage collaboration between different functional units and keep bureaucracy at bay in order to create an innovation-friendly environment.
  2. Recognize and Reward
    Employees not only want to be heard, but also, they want something to happen with their ideas. The best form of incentive is to recognize your employees for their ideas and for the work that goes into implementing these ideas.
  3. Set the Rules of Engagement
    Without engaged employees, creating a positive and constructive environment for ideas to flourish is extremely difficult. Setting the rules of engagement ensures that employees are all on the same page about what ideas you want and which you are not looking for.
  4. Extend your Global Reach
    Ideas should not be restricted to the square footage of your office. Connect with counterparts across the globe to obtain new insights and to reduce redundancies.
  5. Be Inspired by Startups
    Lastly, startups have the benefit of being very tight-knit where collaboration is not an option, but rather, it is a necessity.

This is just the beginning of what we enjoyed when reading the book Frugal Innovation – How To Do More with Less. Pick up your own copy and let us know what you think!

We also have a post on the using the Service Profit Chain to measure employee engagement ROI.

Harness the power of employee ideas.

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