Are we measuring what matters?
February 28, 2018
Growth is back on the CFO agenda, with 89 percent of companies reporting growth in 2016 and 82 percent projecting growth in excess of 5 percent by 2020, according to recent Accenture Strategy research.1 So where is the growth coming from? The top 10 strategic growth drivers identified by business leaders (see figure 1) include the usual suspects: expanding products and services, attracting new customers, and growing geographically. But also high on the list are accelerating innovation, implementing disruptive technologies, transforming business models and connecting ecosystems.
Metrics such as revenue from new products and services, market share, or revenue per customer do a decent job of measuring traditional growth. But what are the key performance indicators (KPIs) that track innovation, use of disruptive technologies, business model transformation and ecosystem connectivity? Most companies can precisely say how much they spend on travel each year, but have no idea how much they plan to invest in innovation or disruption.
Figure 1: Top 10 strategic growth drivers
Replacing an accounting mindset with a decision-oriented mindset is a great starting point for defining relevant measures. Too often:
- Measures focus on inputs such as time, money and resources, rather than outcomes such as market growth and share. The latter are far more relevant when addressing areas like innovation and disruption.
- Simplistic measures have been used as surrogates. For example, R&D acts as a surrogate for innovation, and the IT budget as a surrogate for technology investment. With innovation moving out of the laboratory and technology embedded in every business activity, it is time to develop more relevant metrics.
- Measures are compared to internal budget items. However, innovation and disruption can only be measured against the things that are replaced or disrupted. In fact, the only measures of innovation and disruption that matter are those rooted in the market, the competition and the customer.
Today, the size of the strategic bets that companies are making in the areas of innovation and disruption demands a more rigorous measurement process. The first step involves understanding what outcomes innovation and disruption can deliver, and which measures can be used to inform strategy. We believe such measures exist at three levels:
- Market: If a new market emerges or an existing market starts growing at a level that exceeds historic norms, it can indicate increased demand due to innovative solutions that better meets customers’ needs. For example, the market for digital assistants (e.g. Siri, Alexa, Cortana) did not even exist seven years ago.
- Competition: Declines in market share of established players may occur as customers favor more innovative market entrants or disruptors. For instance, established retailers experienced declines in market share as consumers embraced online channels.
- Company: Customers change their buying preferences from traditional offerings to new, more innovative offerings. One entertainment company’s business model shift from video and DVD rental to streaming is one example.
These trends can be captured or reflected by external, market-focused measures.
| Strategic Growth Driver | Outcome Desired | Candidate Measures |
|---|---|---|
| Innovation | Create new, more profitable markets, products or services |
Growth rate as a multiple of the economy/market. Growth rate relative to that of alternative customer choices. |
| Disruptive technologies | Encourage customers to abandon traditional models and adopt new disruptive models | Market share of traditional models relative to new models. Margin expansion of traditional models relative to new models. |
Looking further into the research, companies are clear about their investment priorities. The top five are talent (38 percent), brand (33 percent), innovation (31 percent), trust and sustainability (31 percent) and automation (30 percent).2 Yet within each of these areas, how do CFOs measure both the investments being made and the return on those investments? Rarely is there a budget line item for “Talent Investment” or “Innovation Investment.” Similarly, scorecard KPIs for “Return on Talent” or “Return on Innovation” are hard to find.
Given the importance of such investments, there is a compelling need for companies to define and calculate more effective metrics. For example, Return on Talent may reflect improvements in productivity (revenue per labor hour and cost per labor hour). Talent retention strategies can be tracked through unplanned attrition of high performers.
Bottom line: Developing credible measures of innovation and disruption will allow organizations to more accurately and effectively evaluate the success of their growth strategies and increase competitive agility. Today, CFOs have access to unprecedented amounts of data. As they seek to capture growth, they have the opportunity to use that data in new ways to rethink everything—from how they set targets and create budgets to how they measure performance.
1 Accenture Strategy Revenue Growth research, 2017
2 Ibid
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