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Payback: Reaping the Rewards of Innovation

December 01, 2006 by Jim Andrew and Harold L. Sirkin
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In This Article
  • To realize a profit from new products and services, innovation must be managed as an entire process, rather than as a short-lived event.

  • To manage for cash, it’s necessary to have a disciplined and consistent way to analyze, understand, and make decisions about the innovation process.

  • The organizational key to successful innovation is alignment. Are the various units, disciplines, activities, and processes aligned around creating payback?

 
Overview

For almost every company, the greatest challenge of innovation is not a lack of ideas but rather, successfully managing innovation so that it delivers the required return on the company’s investment of money, time, and people. Most attempts at innovation fail to deliver this return—they do not generate enough payback.

Payback means one thing—cash. Cash that is realized within the planned time frame. When a company makes an investment in innovation and creates something new that produces a cash return swiftly and directly, it has created a winning situation, particularly when the return is larger than expected. The company has a “hit” on its hands. And this is true regardless of whether the new thing is a product, service, process change, business model, customer experience, or anything else that is new.

But it is the nature of innovation, of all types, that cash is not always produced from it, and rarely is it produced immediately. There can be a lag between the time of investment in innovation and the cash return. This lag can make companies and leaders nervous. Perhaps the cash payback will never come at all? With other types of investments (particularly in tangible assets like factories, machines, or new trucks), companies can often calculate their cash return with much more certainty. But, as with advertising and certain other expenditures, the return on an investment in innovation cannot be so easily predicted or measured.

To complicate matters, the innovation process sometimes generates a cash payback, but indirectly—not through the specific product or service being developed but through a benefit that only later impacts the company’s ability to generate cash. These indirect benefits are real, although difficult to capture. There are four of them:

  • Knowledge. The innovation process always produces knowledge, some of which can usually be put to work in more than one way to produce cash.

  • Brand. Innovation can enhance a brand, thereby attracting more customers and enabling companies to charge a premium, which can mean greater cash returns.

  • Ecosystem. Innovators can create exceptionally strong ecosystems of partners and associated organizations, enabling them to leverage their position in multiple ways, for the benefit of their payback.

  • Organization. People want to work for and contribute to innovative companies, and being innovative allows companies to attract and retain more of the best people, or at least more of the most innovative ones. Having better people, with less cost to keep them, results in more cash.

For managers, the fundamental challenge of innovation is to achieve the required cash payback, by managing the overall innovation process with the understanding that payback can come quite directly and quickly, but also that it may take longer, be much less certain, or come back to the company only indirectly, via other products and services.

Reprinted by permission of Harvard Business Press. Excerpted from  Payback: Reaping the Rewards of Innovation by James P. Andrew and Harold L. Sirkin.Copyright © 2006, The Boston Consulting Group. All rights reserved.