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The Math Behind the Innovation Process

This is part of my reflections from the OpsInsight Forum in Boston.

One of my favorite presentations was done be Dr. John Evans, Vice President of Business Innovation, from Lockheed Martin.  The presentation wasn’t only about innovation but how to look at the innovation process and the math behind it.

Dr. Evans displayed the graph below.

The graph shows a high uncertainty of success means a larger hurdle rate to clear for the innovation to be profitable.  Companies should work towards removing uncertainty as much as possible to lower the hurdle rate for the innovation to be successful.  This does not mean that all uncertainty can be removed.  Companies need to be acutely aware of the uncertainty in new innovation in order to give the idea the best chance for success.

Dr. Evans discussed the typical stage gate process for innovation.

(click on image to enlarge)

What the graphic shows is a classic Marchov Chain.

As an idea moves through the stage gates it has an 80% chance of passing.  The costs are split evenly between the stages.  This means there is only a 51% chance the idea will pass all the stages and $10 million will have been sunk into the idea.

Dr. Evan’s point was the innovation process should be very light on cost on the front end but very hard to pass Stage Gate 1.  This allows companies to save resources on ideas they believe will actually deliver.  What innovation process tasks can be moved to the front so the cost is under $1 million (compared to the $3.3 million above) but only have 20% chance of passing the stage gate.

The best is front load the process with high risks, but low costs.  As the idea moves through the process, the gates are easier to pass.  This helps to prevent adding a lot of cost to ideas that don’t make it to the market place.  The idea has a higher chance of success in the market place and removes more uncertainty from the equation, moving the idea more to the left in the first graph.

The innovation stage gate process and how a company evaluates ideas adds value more than the idea itself.  The innovation stage gate process is critical to removing market place uncertainty from an idea.

I probably did not due Dr. Evans justice in his thoughts but I tried.  It was very interesting and provide a lot to think about.

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