Failure to measure innovation damages value, says ESRC

If innovation is not properly quantified, companies risk being undervalued, according to a report by the Economic and Social Research Council, published this week.

The report – entitled ‘Facilitating Innovation through the Measurement and Management of Intangibles’ – highlights ESRC-funded research carried out by Professors Chris Hendry and David Citron of the City University’s Cass Business School. It claims that the success of companies and the future of the UK economy is increasingly dependent on intangible assets such as intellectual property.

Using two sets of data supplied by the Confederation of British Industry, Hendry and his team analysed 437 manufacturing and 260 service organisations across a range of sectors, in a bid to identify key innovation processes.

The researchers also looked at current methods and practices used by companies to measure and report intangibles, and investigated potential alternatives.

From the research, two facets of innovation emerged – the development of new products and services, and changes to company structures that indirectly help bring about innovation.

According to the report’s findings, the manner in which the human, structural and relational capital of companies combine to create value ‘is especially important’ in communicating the true value of a company. In addition, the researchers noted that human capital in isolation has a ‘significantly negative impact’ on innovation. The report suggests that, unless human capital is channelled properly throughout a company, through teams and systems, then its value will be lost.

According to Hendry, who is director of the Centre for New Technologies, Innovation & Entrepreneurship at Cass Business School, the research has implications for what is important in innovation and what is worth measuring – beyond traditional criteria such as spending on research, development and patents.

Hendry feels that innovation cannot be rated solely by sales revenue or R&D spend.

‘Because of the long time it takes for new products or services to get to market, innovation cannot be regarded simply in terms of sales revenue. Variables like speed of development, target spending and incremental achievements ought to be factored in,’ he says. ‘Rolls-Royce, for example, takes a rigorous approach to evaluating each step of its innovation process. It’s about checking if innovation [and new product development] are on the right track.’

According to Hendry, whether designers are working on ideas for prototypes or developing services, this sort of systematic and structured approach to evaluating incremental development is key to communicating creative value.

Hendry also points out that, while most companies communicate their value to the financial community through annual reports, operating reviews and financial reviews are, he says, failing to capture the full value of innovation activities.

‘It’s about developing alternative business performance indicators that can influence investors, getting them to appreciate the true value of innovation and using this as leverage for future innovation,’ Hendry says.

Human – the resources employees can take with them such as ideas, experience, skills, training and personal education
Relational – the ‘network’ capital of a company that includes suppliers, research and development partners, and possibly customer loyalty and company reputation
Structural – databases, operational processes, routines and corporate cultures

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