SUMMARY

• Deciding to focus on the cost of failure instead of the rate of failure will have many positive consequences in your company innovation system
• Tracking the cost of failure will encourage a mindset gravitating around (cost effective) experimenting and prototyping while, an emphasis on rate of failure will prompt leaders to do the impossible and pick winners from the start of the innovation journey 
• Tracking the cost of failure will ensure that decisions are taken fast. A high cost of failure can mean an innovation process where ideas are allowed to mature way too long before the plug is pulled.
• Tracking the cost of failure will tell you a lot about the culture of your company. A high cost of failure might mean that the work environment is not really allowing for honesty. 
• Tracking the cost of failure will give you an idea of how many initiatives you can kick off in a year given the budget you have.

Without a doubt, many businesses today consider innovation a cornerstone for growth and sustainability. As companies strive to foster innovation-led growth, prioritizing wise investment in innovation becomes essential. Consequently, there is significant emphasis on the success rate of innovation investments, measured through metrics such as the number of pilots implemented from those started, the number of ideas reaching maturity, and the number of products launched from initiated ideas, all variations of what is typically termed the ‘rate of failure’.

However, as important as this metric may seem, another metric, the ‘cost of failure’, carries even broader implications for a company’s innovation system. This indicator, seldom discussed, measured, or optimized for, can indeed prove transformative for companies serious about innovation-led growth.

While tracking the ‘rate of failure’ offers insights into the success of innovation initiatives, an exclusive focus on this metric may not cultivate a culture of continuous improvement. Directing attention to the ‘cost of failure’ provides a more comprehensive understanding of the innovation landscape.

Opting for a cost-centric approach to innovation primarily encourages a mindset focused on cost-effective experimenting and prototyping. This acknowledges that not every idea will succeed initially and stresses the importance of learning from failures in a financially responsible manner. Executives, in particular, shifting focus from trying to select ‘winning ideas’ to allowing experimentation on every idea aligned with the innovation strategy, can benefit from tracking the ‘cost of failure’ over the ‘rate of failure’.

Additionally, tracking the ‘cost of failure’ ensures swift decision-making. A high cost of failure may signal an innovation process where ideas linger too long before being abandoned, delaying resource redirection to more promising ventures and hindering overall innovation funnel efficiency.

Moreover, the cost of failure reflects the company’s culture. A high ‘cost of failure’ may indicate a lack of honesty and transparency, impeding open communication about what works and what doesn’t, or what customers truly desire. This insight is vital for leaders aiming to foster an innovation-friendly culture.

Understanding the ‘cost of failure’ enables companies to make informed decisions about the number of initiatives feasible within a given budget, preventing overcommitment and ensuring a realistic innovation portfolio. While the rate of failure remains important, balancing it with the ‘cost of failure’ underscores the necessity of learning from failures without incurring unnecessary financial burdens.

In conclusion, tracking the ‘cost of failure’ is crucial for optimizing a company’s innovation system. By shifting focus from the ‘rate of failure’ to the financial ramifications of unsuccessful ventures, organizations can cultivate a culture of responsible experimentation, swift decision-making, and resource optimization, essential for sustainable innovation and long-term success.

Consider innovation as a lottery where your company invests $1000. Would you prefer buying 100 tickets at $10 each or 10 tickets at $100 each, with both options having the same winning likelihood? This analogy underscores the importance of managing costs and maximizing success potential within budget constraints.

A version of this article was first published on innovationaccountingbook.com