Innovation And The Annual Report: Putting Your Money Where Your Mouth Is

Look at just about any company’s annual report, and I bet you’ll find talk of innovation peppered through the pages. Unfortunately, from my experience, few CEOs actually demonstrate the dedication to innovation they purport to have in their annual reports. That’s because innovation won’t become important because you declare it so, nor will it be the result of a happy accident. Nurturing innovation — and, subsequently, reporting accurately on your efforts — has to be deliberate. Here are a few things you can do to bolster your annual report and gain buy-in on future innovation efforts from investors, employees, and other stakeholders.

1. Allocate to innovate. R&D spending in the private sector is on the rise, and for good reason: Real innovation requires a real budget, complete with detailed spending plans. I challenge CEOs to plan their yearly innovation budgets with clear parameters in mind.

In most organizations, it’s a good idea to devote 75 percent of the allocated funds to core innovation, perhaps more accurately called “renovation.” Think Bud Light packaging changes or how Reese’s Peanut Butter Cups tend to come in various formats. It’s innovating by taking what you have and doing it a little bit differently. The remaining 25 percent is classified as “leap innovation” — and that involves investing in much more profound solutions. These are “blue ocean” innovations: You identify an existing problem and set out to solve it. Think Apple’s iPad.

2. Create a portfolio of innovation. One of the best ways to start your portfolio of innovation is to invest in a specific group or program that’s dedicated to driving change. Accelerators, for example, have long been at the forefront of promoting innovation, and their role in the corporate world is growing. In 2016, 52.3 percent of accelerators were at least somewhat funded by a corporation, with 66.7 percent hoping to generate revenue with corporate services in the future. By fostering an accelerator program, companies can benefit from the entrepreneurial mindset that accelerators and incubators encourage.

Remember that not all innovation initiatives will be successful. With this knowledge in mind, use the “crawl, walk, run” method. First, test the waters, developing a clear timeline, mission, and objectives. After this exploratory phase, it’s time to achieve leadership and team buy-in. Finally, develop an MVP or proof of concept and start testing. RELX Group follows this procedure for each customer segment: Its leaders start 10 to 15 experiments annually, each with a $200,000 budget, then pick only the best ideas to move forward with.

3. Use innovation metrics to set goal posts. The key performance indicators you use to measure success in other areas of your business won’t necessarily work in gauging the effectiveness of innovation efforts. Instead, consider creating new KPIs specifically designed for innovation. At first, these might include the percentage of employees submitting ideas for innovation experiments. Eventually, an innovation KPI might be the net sales resulting from ideas that reach a certain level of maturation — think sales from IBM’s Watson or Amazon’s revenue from Amazon Web Services.

As the CEO of your company, you’re in charge of crafting an annual report on your activities throughout the last year — and innovation efforts are a key component of this. But if your reporting on innovation efforts isn’t accurate or comprehensive, you simply won’t gain stakeholder support for future initiatives. Follow these key tips to ensure your annual reports show stakeholders how you’re driving company growth through innovation.

Related: Jeff Bezos On Innovation: Five Big Takeaways