Of course, most professionals are familiar with Return on Investment. Yet, another more insightful key performance indicator is your Return on Innovation Investment (ROII). Most companies and organizations invest a percentage each year into innovations. However, what is your return on these investments? In this article, we will analyze ROII, what it is, and why every Six Sigma professional should be using it.
What is Return on Innovation Investment?
Return on Innovation Investment is a calculation that assesses how much revenue certain innovations make for an organization. On average, companies will invest 3.5% of their revenue into innovations each year. These categories include research and development, along with innovation activities. More specific industries, such as manufacturing and high-tech will invest greater percentages. Because organizations invest in these innovations, it’s important to measure how effective they are at generating revenue. That’s where ROII comes into play. This calculation provides insight into your innovation activities while comparing it with returns from other investments.
How to Calculate your ROII
While there are multiple ways to calculate your ROII, the most effective way is in retrospect. First, you calculate the difference between your net profits from new products/services and their respective innovation costs. With this figure, you then divide by the respective innovation costs. You can calculate your ROII for future estimations. However, this requires more time and resources and may not be highly accurate.
While calculating your ROII is important, how often you do can be more so. Most organizations will calculate their ROII every quarter, at the end of an innovation project, or after a year. When and how often you make this calculation can greatly affect your rate of return. However, when you do calculate your ROII, you will have a percentage of your return. This directly correlates to how long it will take to regain. For example, an ROII of 25% each year will require four years to payback for your investment.
Another key factor in calculating an accurate ROII is where you source your data. It’s important to extract the correct data from the innovative investments you want to assess. Typically, you can use accounting and project data that team members will organize.
Why You Should Calculate your ROII
While your organization may invest heavily into various departments, it’s important to understand your innovation investments first hand. First, innovations can either make or break efficiencies within your company. Because the Six Sigma philosophy focuses on improving efficiencies, you must calculate where these are being made. Likewise, your ROII is an ideal way to reflect on past projects and see where improvements can be made in the future. Although ROII can be used for future estimations, we do not advise this because of its high cost and inaccuracy. Furthermore, your return on innovation investment can help decide if your organization needs to devote more or less funding to it each year. If you see a negative trend for most innovations, you may not need as much funding as once predicted.