Are Innovative Companies More Profitable?

Are Innovative Companies More Profitable?

By at least one measure, the answer is yes.

We recently researched this question across five years of data from 154 companies. Because these companies all used the same ideation management software, we were able to seek correlations between their commitment to innovation and their public financial results, such as growth and profit. (The data about individual participants at each company and about the companies themselves remains private; this study analyzed only public financial information and anonymized company metadata.)

The companies in this study all used a platform that enables employees to share ideas in response to challenges created by management, or comment or vote on ideas shared by others. As we demonstrated in our previous research, the key variable that predicts successful innovation across these companies is ideation rate: the number of winning ideas generated per 1,000 active users. In this context, winning ideas means employee-generated ideas that were finally selected by management for active development and implementation.

We examined the relationship between ideation rate and several publicly reported financial metrics (based on generally accepted accounting principles [GAAP]) for the 28 public companies in our data set for the time period between 2014 and 2016. We found a significant correlation between the ideation rate at these companies and growth in profit or net income: The more ideation, the faster they grew. (See “Profit Growth Is Correlated With More Accepted Ideas.”) While the correlation is far from perfect, this clearly is not a random effect; you’d expect to see a correlation this strong by random chance less than one time in 100.

Each data point here is a fascinating case study. For example, the enterprise with the highest ideation rate was a large health care company in which a highly active ideation program generated 500 winning ideas per 1,000 active users — and where the net profit grew 6% over the two years we studied. And the company in the sample with the fastest-growing profit, a semiconductor company, was generating a healthy 340 winning ideas per 1,000 active users.

The left side of the chart is illustrative, too. When we look at the ideation laggards — companies with ideation rates below 100 winning ideas per 1,000 active users — about half of them had no growth in profits at all.

Growing companies need ideas, and companies that generate lots of good ideas tend to have profitable growth. But it’s unlikely that simply goosing up the ideation rate is what made these companies grow profitably. A more likely explanation is that both healthy ideation and net income growth are a result of a third factor: a culture of innovation.

When a corporate culture is designed not just to encourage innovation but to systematically nurture employee ideas, the results are dramatic. Companies like this boost employee participation in innovation challenges created by management, generate more actionable ideas, and then implement those ideas in a way that generates profitable growth. As a result, you can actually assess the level of innovation at a company on a quarter-by-quarter basis by measuring its ideation rate.

When you visit one of these innovative companies, you can feel a palpable difference in the way the company welcomes ideas from employees.

Consider the case of a company that operates hundreds of medical clinics. Because of the decentralized nature of this business, the company empowers its field workers to solve problems. The mindset of employees is, “I have a voice; my opinion and ideas matter.” So it made sense to tap into that same problem-solving energy across the company to improve operations and efficiency.

For example, a local worker at one of the company’s clinics identified a common problem: helping patients who experience dry mouth during a time-consuming type of therapy but are on a restricted fluid intake. The solution they came up with was to create a spray bottle that was printed with reminders of the best ways that patients could manage their fluid intake — educating the patient with the actual device they were using to cure the dry mouth problem.

Problem-solving of this kind happens in every company. But with this company’s culture of innovation, the workers solving the problem naturally thought, “Who else could benefit?” As a result, they posted their solution on the company’s idea hub, and it eventually became a nationwide standard that improved the patient experience in all the company’s clinics.

Because of the company’s culture, the commitment to innovation spans from the mass of employees to the ranks of management. Ideation challenges put this commitment into practice. Managers show their commitment to the ideation program with internal marketing to drive engagement: They conduct “innovation road shows” locally and use March Madness-style brackets to surface the best ideas in each region. Local winners present their ideas to senior leadership with support from corporate. This way, a nurse in a facility anywhere in the country can get the opportunity to deliver a professional-quality presentation on his or her idea to people who can actually make it effective across all the company’s clinics.

These attitudes have led to a healthy ideation rate and an 11% growth in profit over the two years we studied. But what these numbers can’t measure is the attitude of the staff. At this company — and at all the successful companies we’ve monitored — the culture of innovation is woven throughout the workday. Managers know that ideas will come from the rank and file, while workers recognize that they have an important role to play in identifying problems and spreading solutions that may ultimately affect operations and products far beyond their day-to-day experience. Growth and profitability spring directly from this culture, which energizes employees. As one clinic administrator at the medical company told the people running the innovation challenges, “Thank you so much for what you are doing. I finally feel like we have a voice, and our ideas aren’t dropping into a black hole.”

Another company, EDF Energy PLC in the United Kingdom, had a similar experience. Consumer supply of energy in the U.K. is highly competitive; EDF, which delivers one-fifth of the U.K.’s electricity, has 45 competitors. Its management wanted to harness the ideas of as many of its workers as possible to improve its service to customers, so they launched an ideation challenge to more than 6,000 employees, including meter readers, call center staff, back-office workers, human resources staff, and IT employees.

Because they wanted to show rapid results, they framed the challenge with this question: “What ideas do you have for products and services that can be implemented in the next 12 months?”

The launch of the challenge, using the company’s idea management software, included a high degree of visibility from senior managers, many of whom made sure to comment on the ideas flowing from workers. Constant communication — both digitally and in physical locations — ensured that people remained aware of how they could contribute and how their contributions would be visible to management and colleagues. Over a four-week challenge, employees generated 151 ideas.

“The thing that was most surprising was the number of people who engaged in the process from our operations part of the organization,” said Shetal Edwards, EDF Energy’s head of innovation partnerships. She pointed out that 60% of the ideas came from the operations staff.

After participants had voted on the best ideas, the company selected 10 finalists and brought in professional coaches to help them perfect their presentations to top management, which then selected a winning idea.

The winning idea actually came from a call center worker. This staffer had noticed that a significant number of the company’s complaints came from customers seeking explanations for increases in their electric bills — increases that in many cases were due to new appliance purchases. She suggested creating an app that would enable customers to estimate the likely cost of electricity for new appliances they were considering purchasing.

After that audacious start, EDF has gone on to run many more challenges and has generated many more useful ideas from its employees. It eventually attained an ideation rate of 224 winning ideas per 1,000 active users, one of the highest levels of ideation of any of the companies we tracked.

Our research shows a similar pattern across energy companies, telecom companies, retailers, manufacturers, financial services providers, and health care companies. The companies that have the greatest level of participation have the best ideas. They also have the strongest profit growth. And it all stems from a culture that recognizes that effective innovations can come from a call center worker, a clinic staffer, or just about anyone else in the organization bright enough to identify where the right ideas could make a difference.

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