Switzerland is the world champion of innovation. So what? In terms of the metrics in use, the system is optimized. Try to learn from it and you may improve the business just a tiny bit. But look at it closer and you soon realize that excellent scores themselves may hide critical issues: fundamentally, we are forgetting how to be makers.
Why are we misguided? The indicators are limited to strictly economic capitals. This is insufficient to account for the sustainability of the effort required to produce new meaningful value. Thus, we propose to measure the innovation activity of an organization by considering the impacts of innovation on the economic, social and environmental capitals all together.
Why should you care? This shift may renovate the design of the seed investing system and the startup support in general. In the same way, it should positively impact big and small companies with a constructive dynamic enabling new business dimensions.
Switzerland is the world champion of innovation, according to international innovation indicators.
The indicators measure what is done to support innovation and what is the outcome of this activity. Governments and enterprises put into action the analysis of the scores by taking decisions aimed at increasing their innovation effort. For instance, an analysis of the indicators used by the European Union innovation scoreboard shows how these metrics can be used by the governments to deduce a few actions to improve in the area of seed investment, or by entrepreneurs to create new flavors of services. These decisions can only result in strengthening the very values measured by the indicators, like the number of filed patents, the number of scientific publications, the (academic) education level, the R&D expenditures inside SMEs, the intensity of venture capital investments, the number of new high-tech products.
But innovation is not an end in itself. If we content ourselves with good scores, we will just fuel a system for its own sake, feeding the ecosystem of advisors, managers, and government officers. So, taking decisions on top of these scores creates economic value only provided that indicators have a strong link with, or are a measure of, conditions that really benefit to enterprises. But do they? These conditions evolve while the indicators do not.
Indeed, a deeper analysis shows that the use of these indicators hide a number of issues. There are examples in which even excellent scores are misguiding: when enlightened by other results, we understand that attempts in trying to increase a score just a bit could lead to dead-ends and a waste of resources. Basically, we find that there is a disconnection between the capacity to innovate according to these indicators and the actual capability to generate meaningful novelty in a sustainable way. We forget how to be makers, and the indicators do reinforce this issue.
It is all about defining what is valuable at the end of the day. We claim that the detected chasm is the consequence of a shift in the core values of the society, the markets, and the economy. The indicators are mostly measuring inputs and outputs of the innovation system in terms that come back to financial assets. Whereas in the emerging “maker space”, the world of many startups, co-working spaces, sharing economy, collaborative organizations, communities of creators and innovators, alternative economy and public movements, the fablabs, the hacker labs, etc. value is naturally measured in terms of multiple capitals: economic, environmental and human. Measuring the capacity of an organization to innovate must fulfill the goal of measuring the sustainability of the very effort to innovate and produce value; else the organization’s future is compromised. Thus, the innovation inputs and outputs should be measured also along these three vital capitals.
We show a number of consequences of the use of the current indicators, when designing elements of the seed investing system and the startup support effort in general. In parallel, we suggest what the use of new indicators could positively change in these fields. We do the same with enterprises and government decisions. We indicate how they may suffer from the standpoint on innovation that looms from the current indicators. At the opposite we discuss how a constructive dynamic could emerge from new indicators and support the evolution of organizations.
We propose to undertake the definition and adoption of new supplementary indicators that would be in charge of accounting for the impacts of the innovation effort on these three capitals all together. Finally, we invite people to join the discussion about the definition and the right usage of indicators. We believe that the best usage should be not just to measure what has been done, but to be able to simulate the impact of possible actions.
Importance of international indicators
Decision-makers, prior to anything else, need metrics to assess the health of the innovation system. What do these metrics reveal about the current system? And what type of decisions can they lead to? We hope that the criticism of these metrics will lead to their completion or replacement, which would in turn result in a change in the decisions they drive. So let’s have a closer look at them.
We can find examples of the type of metrics in use in some international reports that try to rank the innovation systems of different countries and help decision-makers improving or reorienting their system.
In 2015, we have looked at two reports: the Global Innovation Index and the European Union Innovation Scoreboard, two international reports that can be influential. These reports use a variety of measurable indicators, and then compute scores of all countries in order to rank and compare them.
Figure 1 : Switzerland scores in EU Innovation scoreboards 2015
Looking at “bad” scores and checking how to improve
How can an organization use innovation indicators to improve? As an illustration, we analyzed the few indicators defined by the European Union where Switzerland’s scores are not that good – which actually means they are just below the European average.
For instance an indicator shows us we do not export well knowledge-based services. This draws the attention on a weakness, which is to have a tendency for secrecy. This is good for some businesses, like banking and data protection, but in a global world this may lead to confinement. Thus a bad score here drives organizations toward a slightly more opening. This also suggests to entrepreneurs something very concrete: there are opportunities to launch new businesses around the exportation of the expertise we have in innovation fostering and management themselves.
Another indicator shows us that there is not much collaboration between SMEs. This points to an important “not invented here” syndrome in Switzerland. Not necessarily a question of pride, it is rather relative to a “secrecy” culture again but also shyness in asking for help. Thus, we see that a change in culture here would have disruptive effects. Companies that collaborate may reach new markets. Even more, companies that dare to try coopetition may develop in a more sustainable way.
The bad score in community design applications indicates a low level of activity in product design. This can be seen as a side topic, just one component of innovative products. But if we understand that an innovation is not just an invention, if we sense that successful innovation depends on meeting a market needs and expectations, the design of product becomes crucial. Design is the aspect of the product that talks to human beings. Not focusing on design is a way to say that humans are not at the center of innovation.
Thus, this bad score is a premise of our discussion below about false positives: we will see that Switzerland is good in technological innovation and academic research, to the detriment of the ability to touch markets and people.
Looking at disappointing scores
We can draw some conclusions on how to improve things out of “bad” scores. But there are not many bad scores for Switzerland… So, now, let’s have also a look at those scores close to the European average, say, “neutral” scores.
For instance there is an indicator measuring Venture Capital investments. We claim that Switzerland’s neutral score is alarming given its wealth. Today, as a result of a bad score here, we see successful startups either moving to UK or US (for instance) or finishing with too early exits, lower than the possible value, because they cannot reach the financing of the next rounds. We can conclude that VC has to be rethought; incentives must be found, as well as bravery.
This seems important for the future of startups, which are a source of innovation and economic wealth. But this matters so much only as long as VC is seen as the essential tool to retain the value produced by startups, which is questionable. Indeed, if we rely on alternatives to Venture Capital, like crowd funding or crowd lending, or also have a system supporting “startups” that just aim at becoming solid SMEs with no wondrous exits, the VC indicator is less useful.
This is where we are getting at: indicators are useful only if we take for granted a given system that they are used to feed back. And this tautology is even more sensible when looking at excellent scores.
Switzerland is doing well, so what?
Figure 2 : Switzerland at the top of the EU score board 2015
So, let’s look to excellent scores too. Actually, both reports I mentioned place Switzerland at the top as the most innovative country in the world since several years. Champagne!
Indeed, in the European scoreboard, Switzerland’s has excellent scores along most of the various indicators. For instance in a group of indicators that measure all sort of investments in innovation, and a group measuring the number of scientific publications. Excellent scores along these indicators show a remarkable aptitude to feed the economy with new technologies and advanced discoveries. It means Switzerland has the ability to keep the system up. But is this what we want?
All the positive scores demonstrate a very mature system. The same landscape prevails for all countries in the top of the classification (Denmark, Finland, Germany, Sweden). This also explains we observe some stagnation, because only fine-tuning is now possible. This is a well-known problem of optimization: at the beginning, changes bring huge differences; while you go forward, you need bigger efforts to get slightly visible improvements. This is shown on figure 3: optimization in innovation leading countries can only expand the scores a bit, whereas modest innovators have clear areas to focus on.
It may signify Switzerland is close to the best maximum. In a complex system however, the landscape designed by a function measuring performances is most often made of a lot of local optima. So it is much likely we are trapped onto a local optimum. This point of view is alarming, because it questions us on the quality of this optimum and how to go further, to go out of this optimum in order to find a better one.
This is why we asked myself: Switzerland is doing well, so what? Indicators are so good that our motivation to change anything is certainly not high.
The excellent scores that Switzerland gets are supposed to measure the quality of the system that supports innovation. But Switzerland has also neutral scores in a group of indicators measuring the outcome of innovation. For instance, we see in figure 1 disappointing results regarding the introduction of actual product or process innovations, the employment in fast growing firms, and the ability to commercialize high-tech products. These neutral scores mean that the well-scored activity does not necessarily convert into so much value as expected, into actual economic wealth.
In other words, there is a waste. As a consequence, we certainly fail at innovating in a sustainable way, in setting up a system that is able to sustain the innovation effort, and make the outcome of innovation sustainable.
Do we even have the capacity to survive to crises? How could we do something wrong with all these high scores? We need to look closer to indicators where Switzerland gets very high scores to understand this.
Figure 3 : Best innovators are good everywhere – EU scoreboard 2015
False positive hiding issues
For instance, Switzerland gets an indecently huge score in the number of scientific publications. It means we have a high activity in research. For the people who created the indicators and those who use it, it certainly means we innovate. This is true only if the results of research can be converted into innovations, which means into products satisfying some needs, do fit a market, and bring wealth to the country. Which is not what the previously cited neutral scores are showing…
Indeed, from another standpoint, high research activity alone is a sign that too much focus is put on technology transfer once we try to relate scientific research with marketable products: the universities provide technological inventions and it seems incontestable that these inventions must find applications. This one-directional flow can be interpreted as a countrywide technology push.
Other indicators support this stance. For example, we have seen that he market and the Venture Capital cannot absorb the inventions and research outcomes at the right pace. Maybe the pace is to fast. Hence, part of our effort and resources should be put on developing the inventions so to meet people needs, rather than accelerating research in order to improve yet the score. Or maybe, the market does not need at all the innovation we try to build on top of the academic inventions.
We also get an outstanding score in the number of Patent Applications. This is again about papers! And again, let’s look at the result in the light of another indicator, the one that shows that many of these applications result in license revenues from abroad. This means that companies in other countries become the maker of the innovative products built on top of “Swiss ideas”: the intellectual property does not result in employment and wealth in Switzerland.
Moreover, we enter a vicious circle: by not learning from production and market launches, we miss opportunities of experimenting and understanding the needs. It is just another case of the Descartes’ error. The mind is embodied and it learns through the body. It learns by trying and making, by improving deeds, by reiterating actions, and by restating its influence on matter, a truth that current indicators totally fail to capture.
Hence these high scores paradoxically explain why we have issues in converting our innovation effort into adopted new product and services: we produce papers but we forget how to produce goods. We are forgetting how to be makers.
Call for a renovation
The indicators globally show us we are doing well, while we aren’t. This shows that we have two problems together: we do something wrong, and the indicators are misleading. Hence, in order to do better, we need complementary indicators.
Why is this important? The indicators are used to make decisions at different levels that rule people’s life. The indicators can be used by enterprises. Good results give the signal that enterprises are doing well, so that nothing fundamental should be changed, increasing the gap between a feeling of comfort and the actual well-being of stakeholders, from the employee to the country, through the users and shareholders. Whereas, as we have seen, an effort to further improve the scores along the same indicators would lead to waste and will have no definite impact on wealth. Decisions are also taken at the government level on which depends not only a part of the financing of innovation but also the definition of structures in which we work and of goods and benefits that are easily available to people.
Moreover, with the classical indicators, we are in a process of optimization, which is meticulous, technical, and time consuming. Eventually the current system transforms the improvement of innovation into a business that concerns only an elite and deprives people of creating value. While with new indicators, we could get out of the local optimum where we are trapped: the landscape would be quite new, everything has to be done.
Thus, our lives and the control on our lives are really and directly impacted by inaccurate metrics. That is why we are now coming to what could be changed. We’d like to suggest how to look at new indicators that would truly empower decision-makers, and innovators.
Systems of values at work
There is no value per-se in having indicators and getting good scores, as there is no value per-se in innovation. Indicators are useful only if they help organizations and people in taking better decisions. Now, it is still to be defined what kind of decisions should be influenced by indicators, in which area, and for which purpose. This will help designing the right indicators for the right aim.
In order to understand this, it is critical to understand the underlying system of values behind the indicators, because the decisions we can take on their basis can only carry and maintain these values. Indeed, the indicators in use are just the reflection of the mindset prevailing in the governance of innovation and organizations producing economic wealth. They are the reflection of what wealth means, dominantly. If we want to propose other indicators, we must finally rely on other mindsets and refer to other values, and probably to a different definition of wealth.
So, what are he current values? We have seen they are about paper (publications, patents), finance (expenditure, investments), or control (intellectual property, risk management).
We realize here that many indicators constitute what we call “vanity metrics” in the Lean Startup approach. Vanity metrics measure high figures that impress an audience but do not correlate with real benefits for the innovation project and users. What decisions can we make on such metrics? Vain decisions!
More deeply, what is the common feature of current indicators? They mostly measure financial capitals, not he economic wealth in a broader sense. Indeed, most indicators are explicitly about financial values, like support funding, internal investment of firms, and venture capital. Many other come back to the production of paper, like scientific publications and patents: intellectual property is a company’s internal financial capital in multi-capitalism theory. Most outcomes of innovation are also explicitly measured in terms of economic effects, read “financial”, through revenue. Just a few indicators measure different bottom lines, like education and collaboration.
In comparison, what are the values emerging in the world of entrepreneurship today? We see the importance of creating sense aligned with a new way to consume goods, and the correlated demand for new types of services, with worries for sustainability and ethical values, or with the expectation for participative creative processes in the search of significance for our life. The innovation in enterprises that support these values put forward intangible assets that are human-centric and context-dependent.
This happens at both the employee and the consumer levels. We see this for instance in the enterprise processes gaining ground today, like the concept of learning in the lean startup methodology, the empathy in the design thinking approach, or the focus on sustainability in responsible businesses. It does not only impact the produced goods and services: as we have seen it changes people lives because organizations modify their structure accordingly, with co-working spaces, transverse roles, role-based teams, relational management, and distributed ownership. As a consequence, we hear today about holacracy, the importance of self-consciousness, meditation at work, being close to one’s value, authentic leadership, etc.
These are non-financial values that support a truly innovating activity and especially provide the ground to make this activity sustainable, because they are explicitly about sustainability, they aim at maintaining both the environment and the human alive, they are connected to the real needs of people, they create wealth at different levels. Hence, these values should be taken into account when trying to measure the validity of the innovation system, and appropriate indicators should measure the quality and intensity of the effort that develop the related flows, or capitals. We will call them ”multi-capital indicators”.
Now, measuring innovation in terms of other-than-economic capitals, especially in terms of sustainability, impact on environment, on people, on well-being, on consciousness… may seem to go a bit in a mystic direction. It can also seem difficult to transform such assessments in numbers for ranking and comparisons.
First, let us show that the difference in decision making when relying on the current indicators or when trying to take into account other-than-economic capitals is quite concrete.
Some consequence of the value gap for governments
Figure 4: Best innovators are good everywhere – EU scoreboard 2015
1) A decision that can be taken on the basis of the current indicators is to create a Swiss Silicon Valley or concreting more Innovation Parks close to universities. The incentive would be to improve the already excellent score in scientific publication and private-public joint research in a desperate optimization attempt. Another incentive would be to try to draw investors in those tailored premises, and give them a positive sign that the startup ecosystem is well backed up. This is all about technology push, again, and it is contradictory with the search for new intangible assets. Indeed, the values at work now lead entrepreneurs and innovators to look for proximity with the users and the places where life happens. Thus, it is certainly preferable to absorb the entrepreneurs in the population, in the popular places, in order to let them keep in touch with reality. And it is not only about the entrepreneur, but also the whole team of talents that should not be limited to university geeks. If startup offices are spread in the city or countryside, or in artisan and industry zones for the case of more B2B businesses, it does not prevent them to communicate and share. Sharing must be reinvented. There is of course the Internet support. But also, some common spaces may be set elsewhere. Moving from the office to the sharing space would allow dedicating time to this, providing a privileged moment for thinking out of the box.
2) Concerning collaboration inside the innovating community, there could be co-working spaces in innovation parks – well. But the founding principles of co-working, which is both a place and a mindset, are to re-invent the way we communicate and inspire each others, to explore new management styles, to enrich our lives; it is also a quest for changing oneself in order to be closer to ones own values, with the help of others. Else, the co-working space just becomes a cubicle workplace: resources are wasted and the effort is not sustainable. When building such a campus, aiming at good outcomes in financial terms will not help carving these values in the space between the walls. In order to measure if a true and vivid collaboration has been enabled, other metrics are required.
3) The bad score with Venture Capital investment is sadly an incentive to roll out the red carpet for MassChallenge in Switzerland, an US-based startup accelerator. Described as a not-for-profit organization, it is certainly as not-for-profit as the FIFA. If there is no profit, it is because the profit goes in other pockets. On this basis, it could be feared that one of the MassChallenge goal is to drive promising startups and their positive outcomes out of EU. Moreover, with its increasing worldwide power, it amplifies the bias in favor of startups rather than new SME creation. It would be preferable to invent a new way to support young companies, tailored for them according to a deep understanding of their needs and flaws. This understanding should be obviously based on different indicators in order to guide to different actions.
Some consequences for investors
Just for investors, we think to several examples showing what kind of decision can be taken when focusing on multi-capital indicators. Here is a non-exhaustive list to start with.
1) Generally, get inspired by the social trends at least as much as by the technology novelties and financial events. It can help finding differentiated companies. It can result in finding the gem.
2) Focus on lean execution and ask for human-centric design and human-centric management. Use human capital indicators because personal development, thriving, blossoming at work does generate creativity and sense in a sustainable way. So, look at startups that will not become sclerotic with rigid management and infrastructure. It is a condition for health and wealth, for sustainable effort, for avoiding exhaustion. Stop asking who is the CEO and who is the COO.
3) Love the startups that do not limit themselves to the official ecosystem and concrete offices in innovation parks. Follow the movement of nomad entrepreneurs and co-working spaces installed in the cities.
4) Look for environmental sustainability even when the startup business is not about ecology. For instance avoid “green wash” because the stakeholders, being the consumers, shareholders, employees, will be sooner or later disgusted by such misleading approaches. Not caring is also a source for failing to hire new talents, the future of the company at strategic moments.
5) Contribute to change the risk culture. In their due diligence process and team appraisal, investors must positively interpret “failures”. Current indicators do definitively not capture the value of failure: it is just a human-centered appraisal.
6) Try to lower the gap in the treatment between the “future SME” type of new enterprises versus the startup type. This is also the responsibility of investors today because the startup definition is a financial one related to the investing process and investor expectations. Investors should try to innovate themselves in order to find ways to support future SMEs in a sustainable way, benefiting both parties.
Eventually, taking multiple impacts into account is just a way to enable deeper and more effective risk assessment. It allows the investor to get a more complete and documented feeling of where the startup is going.
Some consequence for enterprises
1) Like investors, enterprises should be inspired by the social trends. They can introduce human-centered innovation (through processes as well as through design), participative organizations, collaborative management, co-working spaces, empathy, and search for intangible assets as a source of new services and business, and a source of company wealth.
2) Ranking high with current indicators, many companies may decide to increase their patenting activity. The typical process for this is to create a dedicated team that think hard about engineering, read a lot and try to be smart in their office. Again, this is completely disconnected from the reality of the users and this team has no chance to understand new needs and to go for human-centered design. On the contrary, they could build barriers to innovation by bringing into life new patent trolls.
3) Companies may feel legitimate to relocate their manufacturing activities because no innovation indicator is measuring the possible negative impact of such a decision: the intellectual assets would remain in Switzerland, papers can be published with a Swiss label, new products are still seen as Swiss inventions, and the financial capital is mostly kept in Swiss shareholders’ pockets. Or seem to be, because the manufacturing countries do actually earn money, with knowledge in the process. Indeed, we have heard speakers at conferences and companies that affirm there is a valid strategy to solve current strong currency issues that consists in keeping the intellectual activity in Switzerland while relocating production. This is arrogant, since it presumes that producing is an activity totally devoid of imagination and necessitating no brain activity. The truth is that when you make something, you have to solve problems and you learn, a lot. In other words, the indicators support the “Descartes error” and companies measuring their progress with these indicators will be motivated to repeat this error.
4) An amendment to the EU directive 2013/34 demands that enterprises of more than 500 employees include non-financial information to their management reporting. This just goes in the right direction. According to the EU commission, a company can become socially responsible by integrating social, environmental, ethical, consumer, and human rights concerns into their business strategy and operations. Corporate Social Responsibility (CSR) benefits to companies through improved risk management and cost savings (when taking the full life cycle into account for instance), access to capital (check the SMI sustainability index for instance), or more significant customer relationships and HR management (by integrating stakeholders in decision or even in design processes). This means it benefits their ability to innovate. Hence, CSR is a source of innovation, a source of benefits and of wealth sustainability.
Now, enterprises have the choice to integrate CSR data into their yearly report just because the law forces them to do so. They can just delegate this task to some isolated guys. But their only way to take this out of a cost center is by finding how to capitalize on it. For this, they need tools, like accurate indicators taking several capitals into account. This would help them measure their progress and the effect of their operations so to actually start innovating in a sustainable way.
Some consequences for SMEs
Consequences and recommendation for investors or other enterprises can be repeated here: change the risk culture, look for environmental sustainability, focus on lean execution of innovative projects, get inspired by the social trends in the product design and management style, beware of relocation, do not confine oneself into intellectual activity, measure impacts on all capitals in order to discover innovation sources.
They can do all of this more easily than big enterprises. SMEs can capitalize on their size. For instance, they can more easily organize as startups, change their approach of management with immediate effects or organize the whole company as a co-working space, and plan their innovative projects like a startup would do with product iterations and user integration. They can get out of the building easily: they are less screened from reality.
Hence, whereas big companies have more pressure from the EU directives for instance, and are the target of a public that become more and more aware, it is easier for SME to turn CSR and multi-capital impact measurement into competitive advantage. So we believe they should be the early adopters of new indicators.
The sketch of new indicators
Now that we understand it is not a mystic quest to refer to other-than-financial values, we have still to show that actual multi-capital indicators can be designed to asses the sustainability, quality and outcome of the innovation efforts. Let us just sketch the basis for the design of new indicators.
We must be careful not to create indicators that measure particular properties of specific objects and topics of innovation. For instance, there is no current indicator such as counting the number of new watch models or the increase in the speed of cars. It would obviously introduce a serious bias. Innovation topics vary between countries and change with time. We need to define indicators out of the areas of innovation in order to qualify innovation activity in absolute. Hence, new indicators cannot count the number of social innovations or the increase in intangible assets delivered to the public. New indicators must be able to qualify the ability of the innovation effort to support other capitals than the strictly economic ones.
This stance makes it natural to include measures of social and environmental impacts of innovation rather than seeing social and environmental innovation as just one topic of innovation among many others.
In order to create these new indicators, we can be inspired by existing works. We can mention the United Nations agenda to reach what they defined as the Sustainable Development Goals (SDG), which include for instance to “build resilient infrastructures, promote inclusive and sustainable industrialization and foster innovation”. There are also a bunch of well-advanced standards like the Global Reporting Initiative (GRI) to help organizations understand and communicate the impact of business on critical sustainability issues and that include multi-capital reporting. Or the Integrated Reporting framework of the International Integrated Reporting Council (IIRC) that “helps businesses to think holistically about their strategy and plans, make informed decisions and manage key risks to build investor and stakeholder confidence and improve future performance”.
It is not the purpose of this paper to derive and propose actual new indicators. We wanted to make clear there is an issue with current indicators, that there is a gap with new values at work, that we lack the metrics that are now needed to construct a sustainable innovation system, and that new indicators should be based on multi-capital measurement.
We can just sketch some quick ideas that may serve as examples. For instance, to come back on Venture Capital investment, we could measure investments in term of non-financial participation. We could measure the companies’ capability to learn along their innovation process, so to stay connected with their customers. We could measure the proximity of the innovation sources with the public place. Eventually, when measuring the outcome of innovation, we should envisage a measure of the happiness generated by innovation.
To go beyond these simple ideas we will now conclude by inviting people to go on board, join the movement and think with us.
Conclusion and invitation
In an era of societal, political, social, environmental, technological changes, we cannot afford to simply replicate and amplify what has been done until now. Instead of optimizing a complex system of metrics in order to increase a tiny bit a pointless value, we have to think about creating a new system of indicators that are inspirational. If we look at new values at work in our society, the innovation field is opened to everyone. With new indicators, we can come back to a more fundamental and fresher view on innovation: an activity that empowers people not only through its outcomes but also by its nature; a journey bringing control on our life.
We call for action: that communities work together to propose and enforce new and meaningful innovation indicators to their governance. It remains to create these indicators. We propose to work on the basis of existing standards, initiatives and practices in sustainable economy, human-centered innovation, and multi-capital reporting.