Though companies continue to pour more money into innovation, a majority of their senior executives are unhappy with the returns the investments are yielding and are unclear on how to do a better job turning ideas and innovations into profits. That’s according to the results of a new survey of senior executives representing 68 countries and all major industries by The Boston Consulting Group (BCG).

Innovation 2005, the report on BCG's second annual global survey of senior executives on innovation and the innovation-to-cash process, reveals that three-quarters, (74 percent) of the 940 participating executives said spending on innovation at their companies would increase in 2005, but fewer than half, (49 percent) say they were satisfied with the financial returns on their investments to date.

Despite the lack of satisfaction, the intention to spend on innovation has increased; only 64 percent of the executives in the survey last year said they intended to increase innovation spending.

"The unspoken truth seems to be that for a very large number of companies, innovation spending continues to rise, but it is generating neither enough profit nor enough competitive advantage," said Jim Andrew, a senior vice president at BCG and the leader of the firm's work on innovation and commercialization. "There may be a disconnect between the reality of companies' actual experience with innovation and what the marketplace believes is the reality."

The planned increase in spending in 2005 apparently stems from the near universal view among senior executives that strong organic growth is necessary for success, and that organic growth (the growth rate of a company excluding any growth from takeovers, mergers or acquisitions or growth from within) can be driven only by innovation:

• Eighty-seven percent of the executives this year agreed that organic growth through innovation has become essential to success in their industry.
• In some industries, there was even more agreement on the need for organic growth; 90 percent of the executives from the energy, consumer products, and healthcare sectors agreed, along with 96 percent of technology and IT executives, that organic growth is essential.

Still, not even half of the executives surveyed said they're satisfied with the financial returns on their companies' investments in innovation, and the disappointment runs even deeper in key industries.

• Sixty percent of the executives in the industrial goods sector-which represents four of the world's top five spenders on R&D, with just those four spending more than $26 billion on R&D in 2004 alone-were dissatisfied with their returns on innovation investments.
• In addition, 64 percent of energy executives were dissatisfied with their innovation ROI, as were 56 percent in health care, and 54 percent in financial services.

An aggregate of 52 percent of the executives surveyed believed either that their company was not as good as its competitors at turning ideas into profits (40 percent), or were unsure that it was (12 percent). Half (50 percent) of all executives rated their companies "weak" or "very weak" at quickly moving from the creation of an idea to initial sales of products or services based on the idea. And 51 percent gave their companies a "weak" rating at being able to draw on suppliers for new ideas.

Participants also expressed concern about how well they were managing their portfolio of innovation projects: 43 percent rated themselves "weak" at "balancing risks, time frames and returns across projects." Likewise, 43 percent rated their companies "weak" at "strictly enforcing project success hurdles."

Summarizing the frustration arising from the portfolio model, one executive said, "We are pursuing too many things simultaneously, and our organization cannot successfully build and commercialize them all. Yet, we don't want to miss the next 'big thing.”

A belief that incremental innovations aren't adequate in the current environment is potentially intensifying executives' concerns and doubts about their companies' innovation capabilities, according to the report:

• In the energy and healthcare sectors, four out of five (80 percent) respondents agreed with the statement: "true breakthrough innovations are required to win in my industry."
• Seventy-eight percent of technology/IT executives agreed about the importance of serious breakthroughs, as did 71 percent of executives from consumer products and retail and media and entertainment.

Even in financial services, the industry in which executives were least likely to see the need for breakthrough innovations, almost six out of ten (58 percent) agreed that major breakthroughs are necessary for a company to be a winner.

"What we've discovered is that even though executives are unhappy with their returns on innovation, and are concerned about how their companies stack up against the other guy, they're reluctant to slow down spending because they reason that their competitors are spending heavily too. They know they need to reexamine their investment-to-cash process, to see why it isn't yielding the results they want and whether it might be improved, but in the meantime they must pour money into their existing process," Andrew said. "Of course, this isn't exactly the picture that most companies paint for their shareholders, employees, analysts and customers. So our study has, we believe, revealed a fairly wide gap between the public perception of the success of innovation efforts in driving corporate growth, competitiveness, and profitability, and the actual views of company executives on how good-or bad-their companies are at turning ideas into profits. There is clearly a mismatch between what's said in annual reports and the reality-a somewhat troubling finding in this research," he added.

The report suggests that a lack of metrics to track innovation efforts could be undermining success and fueling frustration. Fewer than half (44 percent) of the executives said their companies carefully tracked the financial returns associated with each innovation. According to the report, companies lack the right tools to do so-and are settling for using broader measures, such as overall revenue growth and the percentage of sales derived from new products or services.

"The lack of good metrics may be one of the biggest problems companies have," Andrew noted. "Unlike measuring cost control, which is fairly easy to track, measuring the actual value of innovation means tracking revenues and costs associated with an innovation from start to finish-from the beginning of development to when the product or service is finally retired from the market. Most companies simply don't have the tools to do it."