Enterprises understand more than ever that innovation is integral to their success. Which means that innovation budgets are growing and there is increasing pressure to show financial returns from that investment (i.e., Innovation ROI). Unfortunately when it comes to valuing the solutions that innovation teams deliver, things often get a bit fuzzy. The more established innovation teams we work with utilize Needs Briefs to help them accelerate fulfillment of internal demands and capture the financial impact of the solutions they’re delivering.
(For more on capturing needs, check out my previous blog post. It goes hand-in-hand with this one.)
We’re often asked how innovation teams define a need’s value, so we wanted to share what we’ve learned so far. We believe it is one of the most important issues to address at the outset of any innovation initiative, as it helps prioritize your efforts and feeds into tracking and reporting on the value delivered.
The three most common methods to determine the value of a need that we see from our customers are: 1) Projected Profit; 2) R&D Offset; and 3) Operational Cost Savings. In each of these methods, you will need to subtract the projected cost of acquiring the external innovation to properly account for the net value created. In addition, the value created is typically being realized over a multi-year period — so you may need to apply some form of discounted cash flow to determine the present value.
1. Projected Profit reflects how much the fulfillment of a need is expected to generate in additional profit from a new product or service or an improvement to an existing one. If the required solution is going to be incorporated into a larger project or initiative, only a percentage of projected future profit should be applied. As an example, say your enterprise is going to launch a new software application and needs a security technology to ensure the highest level of encryption. If the new application is projected to bring in $100 million in profit and the security solution is estimated to contribute 10% of the total value of the application, the value of the need would be $10 million.
Some questions to ask when using the Projected Profit approach:
2. R&D Offset often comes into play when organizations are making “build vs. buy” decisions. This method allows you to value the need based on how much your business will save by avoiding the cost of build the solution in-house.
Let’s say your enterprise has a need for a deep-learning speech recognition technology that will automate processes across call centers to increase efficiency levels and impact customer satisfaction. It is expected to cost $5 million (and two years) to develop the capability internally. At the same time, you may find an existing solution in the market that meets your requirements which will cost $2 million, including vendor costs, implementation, training, etc.. So the value of your need – based on R&D Offset – will be at least $3M. If you’re able to implement the external solution in less than two years you’ll create additional value from reducing costs and increasing customer satisfaction more quickly.
Some questions to ask when using the R&D Offset approach:
3. Operational Cost Savings captures how much is gained by automation, process improvement, digitization or other types of improved efficiencies. It involves determining the savings realized by solving a need that is not necessarily a result of product innovation, but in how you conduct business. A way to quantify Operational Cost Savings is to calculate how much you save from implementing a solution that eliminates or reduces any inefficiencies.
For example, if you spend $100M annually on fulfillment and automation would lead to a 30% reduction in these cost (after netting out the cost of the external solution), the value of your need would be $30M annually.
Some questions to ask when using the Operational Cost Savings approach:
As you know, the ultimate goal of enterprise innovation is to contribute to your company’s bottom line. By placing a specific value on the needs you’re fulfilling, you can better understand and communicate your contribution and gain continued support for your work.
Do you use other methods for determining the value of innovation needs? If so, we’d love to hear them.