Return on innovation investment (ROI2)

Historical cross-industry reporting placed average research, development and innovation spending at 3.5% of revenue, rising to roughly 7% in manufacturing and around 15% in some technology or pharmaceutical businesses. Accounting treatment and economic intent differ: some R&D is expensed, but managers fund it to create future products, capabilities and cash flows. Return on innovation investment (ROI2) asks whether that commitment creates value.

When to use it

• Answer the key performance question: “To what extent are our investments in innovation generating a return?”
• Include the KPI in the operational processes and supply-chain perspective.
• Compare innovation initiatives at decision gates and after launch.
• Examine portfolio value alongside learning, option value and strategic capability.

Origins

ROI2 adapts the long-established return-on-investment concept to innovation portfolios. Consulting and innovation-management practice popularised the label as companies sought a comparable financial view of R&D and new-product investment. It has no single standard-setting origin, and definitions vary materially.

What it is

Perspective: Operational processes and supply chain perspective.

Key performance question: To what extent are our investments in innovation generating a return?

ROI2 compares attributable benefits from new products, services or processes with the costs required to develop and commercialise them. A Boston Consulting Group report from 2010 stated that 50% of surveyed managers were dissatisfied with their innovation return. The finding is historical, but the management problem remains: large activity pipelines do not necessarily produce valuable outcomes.

Alexander Kandybin of Booz & Company argued that the method can compare innovation with other investments and contrast small initiatives with large ones. That comparability is useful only when boundaries, timing, risk and attribution are consistent. Early research, platform capabilities and failed experiments may create learning or options not captured in a project’s immediate profit.

How to use it

Measurement

Define the innovation unit, baseline, time horizon and counterfactual. Include research, development, testing, launch, capital, change and support costs as appropriate. Estimate incremental—not total—profit, and state how shared platforms, cannibalisation and benefits after the measurement window are treated.

Data collection method