By Nick Kittle
Innovation is a common buzzword, frequently overused and often misunderstood. Innovation is creativity implemented, and it has value. But how much value?
How do you quantify innovation? How can you demonstrate its value to your organization?
As the former cofounder of the Colorado Springs, Colorado, Office of Innovation and Sustainability, my team spent a considerable amount of time learning about the practical side of implementing innovation, measuring its value, and quantifying its impact—a necessary task in a conservative community.
Team members realized early on that in order to have a chance at success, we needed to demonstrate that innovation can pay for itself. The question was how?
It is possible to do this by measuring “innovation value” using the following equation:
Innovation value (IV) = reasonable net present value (NPV) of actual cost savings + efficiency value (EV).
Shift the Paradigm
Here’s one example using this equation. In Colorado Springs, the streets division had a large fleet with a lot of outdated equipment because a replacement budget had not been available.
When the city sold equipment, however, the proceeds went back into the general fund “black hole,” meaning the streets division had no direct incentive to sell equipment. The budget department also knew very little about the operational needs for the equipment and relied on the streets division to advise its staff. Consequently, the fleet size grew over time.
Shift the paradigm. Working with both budget and streets departments, we struck an innovative deal where the streets team would get all the proceeds from the one-time sale of equipment to invest in new equipment.
The streets staff members now had an incentive to do everything they could to trim the fleet and make thoughtful choices about what equipment best suited the division’s 21st century needs. Changing the incentive changed the behavior.
The streets division benefitted from new equipment, and the budget department benefitted from reduced maintenance and fuel costs: a win-win situation.
As a result, the streets staff identified and eliminated 69 pieces of equipment, yielding $590,000 in one-time money that was reinvested in six pieces of critical equipment. It also reduced the maintenance costs to the general fund by $150,000 per year. So what is the innovation value of this project?
As stated earlier, innovation value is the sum of the net present value of actual cost savings plus efficiency value. EV comes from any funds that are reinvested into the organization—similar to the $590,000 reinvested in mission-critical equipment. Since these funds are not actually saved but reinvested, they need to be identified separately.
Demonstrate the Power of Creativity
In this example, the innovation value is the reasonable NPV of the reduced maintenance, plus the reinvested funds (the efficiency value). Since the maintenance requirement will be virtually nil for the first three years because of warranties, three years can be chosen as the reasonable NPV period.
As a result, the innovation value is: IV= 3 year NPV of $150,000 annually (~$410,000) + $590,000 = $1 million. The negative number is the three-year NPV of savings from reduced operations and maintenance for the vehicles and is the actual cost savings. The $590,000 is the efficiency value.
By tracking every innovation project in this way, you can create a portfolio of projects that collectively shows the power of creativity. In 2013, we partnered to create “innovation value” from a portfolio of projects equal to 175 percent of the total cost of operating the entire city office.
In fiscally conservative communities like Colorado Springs, it is critical to find a way to define and refine the value of innovation in a way that leadership and residents can understand.
Civic innovation is a growing trend across the country, and it is not a one-size-fits-all approach. Local governments understand and support the power of social and organizational innovation on its face value.
These organizations spearheading innovation and the residents they represent inherently understand that taking risks and trying out new concepts is an important part of running a better government. Sometimes they win. Sometimes they don’t. But trying to better serve residents requires taking risks and rethinking how departments and programs operate.
Here to Stay
For those communities that want to be more innovative but demand more financial scrutiny before funding creativity, this equation can help shed light on the true value of innovation. It can be used to measure almost any project, pilot, or plan.
It can be used to quantify social good or organizational efficiencies. It can be reformulated to meet an organization’s needs. But know this: Innovation isn’t going away. In the end, our team demonstrated that investing in dedicated innovation efforts more than paid for itself.