Innovation: inputs, outputs, and the measurement problem

Ultimately, if I look at measurements, organizations measure outputs. They have large numbers of KPIs and spend millions and tens of millions of dollars on business intelligence and business information to give them lots of dashboards and spreadsheets to show them how well they're doing. But it doesn't always work. I spend a lot of my career in the consulting industry. In the consulting industry, the metrics that drive it are what is known as utilization, which is the percentage of time that the people I have working for me are billable to a client. It's a pretty sensible measure of utilization. It helps you know how successful you are. But ultimately, it drives in very strange behaviors, because if your target as an individual is to maintain a utilization rate of 80 percent, you are going to focus a large amount of effort to making that happen. That includes actually wasting time just getting job numbers that aren't even real. But also it means that you start thinking, focusing only on the day-to-day process of maintaining that measurement. I've worked with lots of consulting companies recently that are struggling now because ultimately, while they've been focusing on utilization, the market has shifted and they find themselves all of a sudden going off the cliff because they're not relevant to the market. Outputs and measurements often define organizational processes and make them very hard to innovate, because innovation is not something you can measure as an output. Because I can't put a KPI on innovation, I can say, okay, I have five projects and an innovation process. Not sure what that means precisely. The problem is you can't measure innovation or how well you're doing at it until such time the innovation generate something. But what you need to be able to focus on is the innovation itself and the "process" of innovating within an organization. Again, I use the word process in quotation marks. Let me give you an example. Some of you might have heard a company called Zappos, very, very successful. They sell shoes online. One year, they gave their largest bonus to their customer service people, to someone who spent seven hours and 52 minutes on one phone call with one customer. Now, I've worked in a lot of call centers and anybody who spends that amount of time on a call to one customer will be summarily dismissed without a shadow of a doubt. But they weren't, why? The reason is very simple. Because Zappos whole ethos was that it's the customer service element of what we do that makes us successful. If we measured the time spent on phones on a per customer basis, we start to kill the very psychology of our customer service representatives that makes them so successful with our customers. If someone wants to spend seven hours on the phone with one customer, that means we will never make a profit on that customer. But that ethos will drive us to make a lot of profit on a lot of customers, because we don't make money by selling shoes. We make money by having great customer service. If we measure a lot of the inputs, like time due calls, we will lose a whole ethos of what makes us successful as a business.