CEOs Say Investing In Innovation Is Not Paying Off

'Moving the needle' is one of those omnipresent business cliches that are used so frequently we tend to tune them out.

In the work context it means making an investment or taking an action that changes an enterprises' fortunes. By which, those who use it usually mean raising the stock price, improving earnings, creating strategic advantage and, just in case we weren't clear about most executives' priorities these days, raising the stock price.

So when a consulting firm like Accenture - which makes its quite substantial living from pleasing the CEOs of many large corporations - reports that said CEOs are concerned about the low impact of innovation investments, we should pay attention. We should also ask a lot of questions.

The first question is what they mean by 'not paying off.' CEOs and the companies they manage are evaluated on a range of metrics. Some of them fairly reflect the KPIs - key performance indicators - that it takes to really run that business. But some of them, again, to be fair, are designed to assure that senior executives are compensated in the manner to which they have become accustomed.

What this means is that investments in anything - an acquisition, opening a foreign market, new product development - are evaluated with an eye to the long term prospects, but more importantly, whether they will 'move the needle' in the short term. And we do mean short. So if said investment, as in innovation, is not producing returns consistent with hurdle rates meant to emphasize near over far, or bonus calculations tied to this year's payout versus that in five years, it is appropriate to wonder whether the measures being used are reasonable or whether they reflect a bias designed to support a certain outcome.

Now one might also ask why, if all those smart, well-compensated people are investing in innovations that aren't paying off, what assumptions did they make that led them to make the choices they did. And what, by the way, do they mean by innovation? Is it shiny new devices that cause the business press to ooh and ahh. Or is it the less glamorous but potentially more profitable investments in processes, procedures and systems?

When my colleagues and I did a survey of attitudes about corporate innovation, our results showed that most CEOs thought that innovation was one of the terms that defined their enterprise in the eyes of customers and investors. But a concurrent survey of said customers and investors reported that innovation often didnt make it onto their priority list of considerations for purchasing from that company. If it did, it sometimes ranked lower than attributes like 'low cost producer,' or 'convenient.'

The point is that innovation has become so popular a concept that everyone thinks they have to be 'innovative' even when the market does not reward that activity with any sort of premium. Because the market often takes innovation for granted. So when CEOs say they are disappointed in the returns on innovation investment, it may well be because they are investing in the wrong innovation at the wrong time and for the wrong reasons. JL

Bernhard Warner reports in BusinessWeek:

Fewer than one in five chief executives believes his strategic investments in innovation are paying off, and that this poor track record is starting to discourage companies from taking risks.
By now it is almost gospel that investing in innovative new products and services helps a company’s long-term success. That doesn’t mean it’s easy.

For the study “Why ‘Low Risk’ Innovation Is Costly,” , Accenture (ACN) surveyed 519 companies across more than 12 industry sectors in France, Britain, and the U.S. Half (51 percent) of survey respondents reported they had recently increased funding for innovation at their companies. Almost all (93 percent) said the long-term success of their organization’s business strategy depends on their ability to innovate.
Despite the importance they assign to this innovate-or-die business rationale, just 18 percent of CEOs say they’re seeing their investments in innovation pay off. At the same time, 46 percent of the executives surveyed said their company had become more risk averse when considering new breakthrough ideas, the study found.
There may be a classic negative feedback loop at work here. If frustrated CEOs are not seeing their more risky R&D investments produce needle-moving results fast enough, they may turn to incremental improvements rather than big killer ideas. To wit, nearly two out of three of respondents said they were investing in product-line extensions. And 33 percent said that when it comes to innovation, “their primary goal was the expansion of the product suites that support their basic offerings.” That’s fine, but it’s the kind of innovation that begets the donut burger, not the risk-taking that can really change a company’s future.