Best Practice Guidebook Innovation Metrics Selection and Implementation Process growth team membership 1 Parker Hannifin INDUSTRY Diversified Manufacturing REVENUE (2012) $13 billion USD Challenge Seeking greater insight into its innovation performance across divisions, Parker s corporate innovation team compiles metrics tracked by innovation teams companywide. However, the volume of information clouds companywide visibility into innovation effectiveness. Solution The corporate innovation team selects a core set of four metrics based on applicability and usefulness that is standardized across divisions. The resulting clarity enhances decision making and improves innovation portfolio performance. Applicability to Executive Functions Solution Components R&D/ Innovation R&D/ Innovation Reduce Total Number of Metrics» Standardize Metrics across All Divisions» Measure Innovation Performance» Reevaluate Portfolio Decisions» Corporate Strategy Sales Leadership Marketing CEO Corporate Development Parker s Key Lessons Learned Investors/ Finance Competitive Intelligence Market Research Fewer metrics produce greater insight Shared metrics and tools enable transparency and collaboration Simplified dashboard informs key decisions about the portfolio mix Incremental Portfolio Value helps track growth from new products year over year READ MORE»
2 Contents Parker Hannifin Organization Structure........... 3 Overview Page........ 4 Reduce Total Number of Metrics.......... 5 HEADQUARTERS Cleveland, Ohio, United States GEOGRAPHIC FOOTPRINT Global OWNERSHIP Public EMPLOYEES (2012) 60,000 Standardize Metrics across All Divisions..... 7 Measure Innovation Performance......... 9 Reevaluate Portfolio Decisions.......... 12 Business Results...... 13 Key Lessons Learned.... 14 Supporting Tools & Resources........ 15 Parker Hannifin Organization Structure......... 15 Business Results In 2010, Parker was tracking more than 2,400 active projects in its innovation pipeline. In 2013, Parker is tracking 1,136 a 45% decrease. Portfolio value has increased by 20%. Parker can take on higher-risk. (breakthrough) efforts because it has confidence in its risk management capabilities. Parker is seeing an increase in sales from breakthrough products. Resources Required Multiple executives at the corporate and division levels* commit time to this initiative: 50% time commitment from the Vice President; Chief Technology & Innovation Officer 100% commitment from the corporate process owner (Director of Winovation Systems) 50% commitment from each Vice President for Technology & Innovation 25% commitment from division General Managers 140 full-time division process owners (usually Facilitators) Contact the Growth Team Membership (GTM) GTMresearch@frost.com www.gtm.frost.com twitter.com/frost_gtm * For more information on Parker Hannifin s organization structure, please see page 3.
3 Parker Hannifin s corporate innovation team is responsible for finding and developing organic growth opportunities across the company s 8 groups and 140 divisions Parker Hannifin Organization Structure (Partial) Chairman & CEO Vice President; Chief Technology & Innovation Officer Strategic Marketing Corporate Process Owner (Director of Winovation Systems) Executive Vice President of Operations Executive Vice President of Operations Group President Group President Group President Group President Group Staff Group Staff Group Staff Group Staff Vice President of Technology & Innovation Vice President of Technology & Innovation Vice President of Technology & Innovation Vice President of Technology & Innovation The Corporate Innovation Team The team is comprised of the Vice President; Chief Technology & Innovation Officer, the corporate process owner, the eight Group Presidents, and the Vice Presidents of Technology & Innovation. These individuals collaborate sometimes formally, sometimes informally on all decisions relating to Parker s long term strategy for growth through innovation.
4 Parker s corporate innovation team launches a metrics-simplification initiative that delivers greater insight into project value and enables principled adjustments to the portfolio Innovation Metrics Selection and Implementation Process Reduce Total Number of Metrics Standardize Metrics across All Divisions Measure Innovation Performance Reevaluate Portfolio Decisions Objective Objective Objective Objective Enable greater visibility into innovation performance Ensure companywide adoption and prioritization of selected metrics Draw relationships between innovation performance and growth Prioritize projects with the greatest potential for long-term growth Key Activities Key Activities Key Activities Key Activities Simplify the data senior executives review Gain buy-in among the corporate innovation team for the simplified set of metrics Conduct a speedy roll-out of the simplified metrics to all divisions Empower division-level teams to gather and share accurate data Prioritize Incremental Portfolio Value () above other metrics Translate corporate-level insight into division-level action items Identify projects with the highest score (i.e., those with the greatest contribution to growth) Shuffle the portfolio mix to include more high-value projects
Reduce Total Number of Metrics 5 key takeaway: Measure what really matters in innovation performance Parker s corporate innovation team stops closely monitoring all metrics, focusing instead on four critical measures Cutting through the Complexity Identify Barriers to Innovation Led Growth Focus on the Right Metrics Build a Centralized View of Performance Key Barriers Filter From 50 Metrics to 4 Decentralized structure: Each division tracks data differently, making it difficult for the corporate innovation team to understand companywide performance. Too much data: The corporate innovation team tracks more than 50 metrics; this information overload prevents insight generation and project prioritization. Lack of a shared language: Metrics are defined inconsistently, making it difficult for divisions to speak to each other or collaborate on projects. Uneven prioritization: Divisions select and monitor performance measures in a vacuum, seldom considering their context within or applicability to the larger organization. Global or Companywide Relevance Automatic Calculation Capability Relevance to the Corporate Team Metric 1. Timeline for Launch 2. Revenue Projection 3. Risk Assessment 4. Incremental Portfolio Value () The Big Four Critical Measures of Performance Definition Removed: Any that are meaningful only for a specific division, or small sub-set of divisions (e.g.,manufacturing cost, gate criteria) Removed: Any measures that are open to interpretation (e.g., post-launch reviews, satisfaction scores) Removed: Tactical, stage-gate-based metrics that can easily distract the team from strategic discussions (e.g., performance to schedule, performance to budget) How long the project will take to develop and when it is estimated to enter the market Ability for a potential project to hit specific targets or contribute to a specific target Comparison of the potential loss (or gain) a potential product could deliver, weighted against the likelihood of that outcome occurring The amount of new revenue (growth) that a project helps contribute, year-over-year Project Management Tool The Big Four metrics are central to a project management tool that captures data for every innovation project. It operationalizes the metrics at the division level. Dashboard This dashboard focuses on one of the Big Four, Incremental Portfolio Value (). Based on inputs from the project management tool, it rolls up project and division data for a companywide view of innovation performance.
Reduce Total Number of Metrics 6 key takeaway: Generate corporate-level buy-in for the simplified view of performance Supporting data for every measure convince the group presidents and vice presidents of technology & innovation to trust the Big Four Securing Corporate-Level Buy-In Introduce the Big Four Invite Skepticism Zoom In Zoom Out Purpose Purpose Purpose Purpose Orchestrate a coordinated roll out of the new metrics Build corporate-wide awareness of the new metrics and how they will be operationalized Demonstrate that simplified performance measurement does not hamper visibility or transparency The Iceberg Principle Convince leadership of each measure s accuracy, building more trust in the metrics with every investigation Further Investigation Inspire the corporate innovation team to push the Big Four down throughout the divisions Metrics Reinforcement Action Notify the eight group presidents of the finalized set of metrics (final selection resides with the VP; Chief Technology & Innovation Officer and the corporate process owner) Prepare the group presidents to share the information with their VPs of technology & innovation Set a plan for communicating the information to division-level stakeholders 1/8 above: Anytime a highlevel measure is questioned The Big Four All other metrics 7/8 beneath: supporting information can be immediately accessed. Action Encourage all members of the executive team to question the accuracy of the Big Four Project Data Division Data Group Data Timeline for Launch: Supporting Data High-level metrics are monitored at every level from groups to divisions to individual projects. Action Search for supporting information on lower-level, tactically-based performance databases Group A Div. A Center Group B Div. B Group C Div. C Other stakeholders appreciate the level of attention these metrics receive, which helps connect all divisions to corporate priorities. Action Embed the Big Four into divisionlevel tools that communicate innovation performance Note Note Note Note All stakeholders provide input, but once the decision is finalized, they are encouraged to accept the result. Although the team prioritizes the Big Four measures, the other metrics are still monitored and available on supporting dashboards. Each time the team locates accurate supporting data, the Big Four s reliability is reinforced; over time, the team feels less need to double-check the numbers. Once the divisions understand corporate expectations, they can produce information that is valuable in managing the business.
Standardize Metrics across All Divisions 7 key takeaway: Take a test-and-learn approach to rolling out the metrics to the divisions Ongoing collaboration and information-sharing between the corporate and division teams help improve data quality and adoption over time Metrics Introduction and Data Refinement Process Start Gather the Data Scrutinize the Data Action: Notify divisions of the simplified metrics and data quality requirements Outcome: Re-set expectations for division-corporate alignment and visibility Communication: Message from VP; Chief Technology & Innovation Officer; reinforced by Group Presidents Data Dress-up Action: Require divisions to enter and/ or review their project data in the corporate tool within six weeks Outcome: An unvarnished look at how divisions are monitoring the metrics Communication: Division Facilitators and Team Leaders, under the supervision of the General Managers, enter the data into the corporate tool Data Inaccuracy Action: Scrutinize all divisions data as it is submitted; reinforce compliance Outcome: Identified inaccuracies or discrepancies that require further attention Communication: Corporate process owner notifies each VP of technology & innovation of opportunities to improve data quality Divisions don t have time to make the project portfolio look healthier than it really is. Ever-better data translates into a dashboard with increasing credibility and usefulness. Division teams must learn why data quality is poor, and take steps to improve it. Data Inaccuracy Finish Refine Data Calculations Investigate Data Problems Action: Ensure the dashboard is widely used and trusted Action: Review newly submitted data; adjust overall projections accordingly Action: Collaborate with each division on identifying the root causes behind poor data (e.g., user training, lack of process discipline) Outcome: A shared language that is spoken companywide Dashboard Rejection Outcome: Improved corporate dashboard Data Inaccuracy Outcome: Clearly defined action items for delivering improved data to corporate Communication: Ongoing, fluid dialogue between the divisions and corporate Communication: Corporate process owner confirms divisions new data or sends it back to the group or division for further review as necessary Communication: Division reports to the corporate process owner its plans for addressing the root-cause problems (timeline for fixing problems is dependent upon the complexity of problem)
Standardize Metrics across All Divisions 8 key takeaway: Hold divisions accountable for total data accuracy People, processes, and tools work in concert to embed the metrics within the divisions and to create accountability for data quality Framework for Institutionalizing the Metrics Tools Purpose: Enable all divisions to share projects performance according to the Big Four in a standard, utilitarian format. What happens: An automated project management tool requires standardized inputs from all divisions. The software is programmed so that no division or team can modify the inputs. Project Management Tool Accountability Impact: The corporate, division-wide view of innovation performance is based on thousands of projects. The project management tool is an essential ingredient in managing this complexity and enabling apples-to-apples comparisons across all projects. Process Purpose: Enable the divisions to deliver the data that the corporate innovation team requires. What happens: All project teams must update the Big Four metrics for every project in the portfolio. Noncompliant projects are removed from the calculations and do not count toward a division s total pipeline. Data from compliant projects roll up into the Corporate dashboard (see page 10) for a high-level view of performance. Accountability Impact: Nobody wants their projects disqualified. This encourages self-governance among divisions and a respect for the process as a whole. People Purpose: Designate individuals responsible for ensuring data are trustworthy, up-to-date, and compliant with corporate standards. What happens: Project teams update the Big Four metrics for every project. Division-Level Organization Structure* Position Innovation Responsibilities Metrics Use Facilitator Team Leader Project Team Create projects and assign team leaders to projects; set up the stage gates Develop the project plan; maintain project discipline, perform financial analysis, update the project management tool Focus on project execution; update the project management tool; inform leadership on project progress Weekly check-ins on affiliated project teams Daily tracking of project performance Real-time updating of metrics Accountability Impact: A clear organization structure institutionalizes accountability for providing data inputs. While others in the reporting chain have a responsibility for updating or analyzing Big Four, the bulk of the responsibility lies with the project teams. * See the Tools & Resources section for Parker s full division-level organization chart.
Measure Innovation Performance 9 key takeaway: Emphasize one essential measure of innovation performance and contribution to growth Of the Big Four, Parker Hannifin highlights Incremental Portfolio Value a measure of contribution to new revenue year over year What is? How does it work? isolates the incremental revenue that can be attributed to innovation activity carried out by each of the divisions. Why focus on one key metric? is Parker s North Star. It orients everyone on growth above all other measures, enabling greater visibility, alignment, and clarity in decision-making. How do you calculate it? Predict a project s sales over a multi year period. is the difference between each year s projected sales. New Growth Year-over-Year Project-Level Data-Gathering Division-Level Roll-Up Corporate Dashboard Owner Team Leader Contributors Project teams Output Estimation of each project s growth over a six-year period Example Incremental Portfolio Value: Project level Estimation Owner Group VP for Technology & Innovation, Division General Manager Contributors Facilitators, Team leaders, Project teams Output A Group score that shows each division s long-term contribution to new revenue Example Incremental Portfolio Value: Estimation of all projects in Division B Owner Director, Corporate Winovation Systems Contributors VP for Technology & Innovation Output Collection of all groups scores; helps Parker pinpoint all new sources of revenue companywide Example Illustrative Illustrative Illustrative Revenue (hundreds of s) $30 $20 $10 $0 FY13 FY14 Fiscal Year FY15 New revenue is the most important measure of long-term potential. Project 2013 2014 2015 A All revenue is new, since the project contributed $0 before it launched. $10 $17 $7 $10 in revenue is a increase above the preceding year. Project 2013 2014 2015 A B C $10 $8 $3 $12 $7 $17 $7 $12 $4 $12 $0 The corporate chart (which is also used by divisions and groups) shows each division s innovation performance and compares actual and estimated sales. If a project s revenue is static year-to-year, the score is 0.
Measure Innovation Performance key takeaway: Use to build a macro-level view of innovation performance 10 The corporate dashboard helps determine how much innovation-based growth Parker is on track to deliver, and how many projects are involved Corporate Dashboard Macro to Micro Examination is possible as the dashboard can provide companywide information, or drill down to a specific group, division, or project. Managing the Portfolio by highlighting the Target for Incremental Growth (the amount of new revenue that is expected year-over-year) and the for new products which emphasizes the key role of breakthrough projects in attaining targets. Benchmarking the Portfolio by tracking Actual Sales & Estimates how Parker has performed over the past few years, relative to its goals. % Alignment illustrates how close Parker is to hitting its target. Monitoring the Portfolio by tracking performance against % Alignment how close Parker is to hitting its target, and color coding the progress: Red: 0 to 60% alignment toward goal Amber: 61% to 80% alignment toward goal Green: 81% or more alignment toward goal Comparison to Industrial Production contextualizes sales using industry-wide performance. For example, Parker s performance in 2011 eclipsed competitors, indicating that Parker gained market share. Focusing on the Long Term by providing six years of projections so project teams prioritize long-term expectations over shortterm revenue performance. who does what? Facilitators and Team Leaders are responsible for updating project data. This data then roll up to the corporate-level dashboard, which is closely monitored by the corporate process owner, Group Presidents, and Vice Presidents for Technology & Innovation; the CEO also reviews it formally on a biannual basis and informally as needed.
Measure Innovation Performance key takeaway: Monitor shifts in scores to detect signs of future dips in performance High-level, -based insights trigger group-, division-, and project-specific action items 11 There and Back Again: A Case in Point Monitoring the group for the period FY13 18, the corporate innovation team detects a change in value and rectifying the reduction in corporate that raised concerns initially. High Level which closer scrutiny reveals is due to a large drop-off in Division B improving Division B s score Going Deep because Division B has put a project on hold allowing it to continue contributing to Division B s pipeline value due to resource constraints limiting the number of projects that receive funding. thereby clearing the resource constraint issue and enabling the project to be taken off hold Taking Action The group staff, now aware of the division level resource constraint, allocates a group resource or coordinates with a sister division to loan a resource Dashboard People
Reevaluate Portfolio Decisions key takeaway: Use to demonstrate the value of breakthrough innovation forces division-level teams to rethink their portfolio mix and shift resources to projects with the greatest potential contribution to new revenue Evaluating the Portfolio Mix 12 Identify Performance Gaps A Division General Manager s decision to change the portfolio mix begins with the realization that current innovation activities are failing to attain the target. Each division is assigned an target and is responsible for managing its portfolio to achieve the target. Rebalancing the Portfolio Understand the Portfolio Problem Portfolio analysis reveals too many low-risk, low-reward projects with a low contribution to. Project Portfolio Risk/Reward Matrix High White Elephants Costly, never-ending Oysters Promising projects that Risk projects that sap resources could become Pearls Bread and Butter Pearls Low Not substantively contributing to growth Projects that will be key to future growth Low Reward High Reorganize the Project Teams The emphasis on breakthrough innovation projects results in staff being reassigned from incremental projects to higher risk, higher reward projects. Change the Focus The division must create a more balanced portfolio mix. The project management tool helps the Division General Manager identify and prioritize projects with a stronger contribution to. Incremental Team Breakthrough Team Bread-and-butter projects can be compared against one another, clarifying which should be abandoned and their resources redirected to Oysters or Pearls.
13 Business Results Simplified metrics and a commitment to growth deliver efficiency gains and improved portfolio value Number of Projects in the Innovation Pipeline Portfolio Value (Indexed) 2,400 45% decrease 20% increase 1,136 2011 Year 2013 2011 Year 2013 Changing Portfolio Mix Bang for the Buck 15,000 Sales 10,000 5,000 0 4% 6% 8% FY08 FY09 FY10 FY11 FY12 Fiscal Year 13% 19% Total Sales Sales from Breakthrough Projects Each year, breakthrough projects comprise a larger percentage of Parker s total innovation portfolio. In essence, we re executing lean on our innovation program just like we were executing lean on our manufacturing program. We want the leanest innovation program we can have. We don t want to spend a lot of money on projects that aren t going to yield any results. CEO Don Washkewicz, Parker Hannifin
14 Profiled Company Perspective Key Lessons Learned Fewer metrics produce greater insight: The more metrics you track at the corporate level, the more tempting it becomes for senior leadership to shift focus from the strategic to the tactical. Of course, determining which metrics to trim and which to keep is critical to establishing and maintaining visibility, so make sure you screen for the right things (such as strategic value, objectivity, and relevance). Importantly, this is not a battle you fight, and win, once. Unless you continually reinforce the importance and effectiveness of simplicity, metrics that had been removed will slowly find their way back onto the corporate dashboard, and complexity will return with them. Shared metrics and tools enable transparency and facilitate collaboration: Because all divisions now track and prioritize the same measures, they can speak to each other far more readily and clearly than they could before. They find it easier to collaborate on projects, share resources, and together drive increased performance. Furthermore, objectivity and transparency have created a much firmer sense for what the corporate innovation team expects at every level of the organization, and employees can be sure that the corporate team is treating all divisions and groups equally and fairly. Know thyself: By taking a very frank assessment of its own culture and challenges in achieving profitable organic growth, Parker determined that innovation and its associated processes were too often relegated to engineering, when in fact they should be approached as business challenges, involving the full spectrum of functions and leadership. To get that broader perspective, Parker subjected its innovation activities to the same standards for visibility and accountability to which all other aspects of the business are held. Success begets success: Simplified metrics have made key senior leaders aware of Parker s issues around innovation and organic growth, and have inspired them to address these issues with appropriate focus and urgency. In doing so, they compel a more robust cross-functional participation, significantly improving the overall likelihood of success and giving Parker s innovation teams improved skills by which to tackle even more exciting opportunities over time.
Supporting Tools & Resources Parker Hannifin Organization Structure 15 Role Innovation Responsibilities Metrics Use Vice President; Chief Technology & Innovation Officer Vice President for Technology & Innovation Division General Manager Forge a connection between marketing insights and engineering efforts; oversee collaboration between groups Maintain visibility over all projects; be a champion for the new product commercialization process; foster cross division and division-corporate collaboration Balance corporate goals and division activities Biannual assessments of all groups project teams Biannual assessments of all divisions project teams Monthly monitoring of project teams within his/ her division Facilitator Create projects and assign team leaders to projects; set up the stage gates Weekly check-ins on affiliated project teams Team Leader Project Team Develop the project plan; maintain project discipline, perform financial analysis, submit project business cases Focus on project execution; update the stage gate system; inform leadership on project progress Daily tracking of project performance Real-time updating of metrics