R&D; investment is not a good indicator of innovation, but a company’s Vitality Index (VI) is. VI is the ratio of revenue generated from new breakthrough innovations (breakthrough) over the last 12 months as compared with all other existing revenue (sustaining). This is a revenue view of innovation verses a spend view. Most software companies think 10-15% of revenue spent on R&D; is healthy from an innovation standpoint, but an R&D; x-ray will reveal only 1-5% is actually focused on breakthrough innovation. Healthy organizations should strive for a VI of 10-20%, which compounded over time, will result in a 100% turnover in revenue from new products every 5 years.
The Vitality Index measures how innovations contribute to organizational growth which is distinctly different from the traditional indirect and implied measurements of R&D; spending and headcount. Counting spend tells only the cost but not the gain. The measure of innovation must include consideration of the demand side and the diffusion of new solutions into the ecosystem. This is the real determinant of the success of an investment.
By using the Vitality Index as a direct measure of innovation, companies can foresee the revenue implications of unfocused R&D; years earlier than with traditional measures. To foresee is to be forewarned, a metaphor realized through the Vitality Index.