A Valuation of Innovation

There is a lot going on at Schneider Downs these days! Service offerings are expanding, our geographic footprint is growing, and new talent continues to come onboard, roughly doubling the number of SD employees over the past 15 years. It is an exciting time to be part of Schneider Downs and one of the things that I enjoy about working at SD is the focus on “Big Thinking”. To that end, a group of employees took part in a two-day training seminar on innovation with the Luma Institute, a group that explores the methods behind human-centered design.

Human-centered design is the process or philosophy of solving complex problems or designing products, services or systems to serve people in new or meaningful ways. Herb Simon, Nobel Laureate in Economics and champion of human-centered design, remarked, “Everyone designs who devises courses of action aimed at changing existing situations into preferred ones.”

Human-centered design provides new ideas and perspectives to help us see the world in a different way and use innovation to respond to the challenges around us. To make a business case for innovation, one does not need to look very far. Entire industries have recently been upended by innovators who have asked how we might do things differently.  Think about the effects of companies like Apple, Amazon, Netflix and Uber, whose innovations have made permanent changes in the ways that we live out our daily lives in large and small ways.

Naturally, as an accountant who specializes in business valuation, I can’t help including some empirical data to support the value of innovation and design. McKinsey & Company, a global consulting firm, published a report in October 2018 that studied the correlation between human-centered design and financial success. McKinsey tracked 300 publicly listed companies in various industries and countries over a five-year period. Company design practices were documented and tracked through interviews and surveys of executives and design leaders. Overall, the survey recorded more than 100,000 design actions.  Advanced regression analysis indicated that there were twelve specific design actions that showed the greatest correlation with improved financial performance. These actions were then grouped into four overall design areas—analytical leadership, cross-functional talent, continuous iteration and user experience—and companies were given a score on the McKinsey Design Index (MDI) based on their proficiency in each area. McKinsey then looked for financial trends based on companies’ design scores. The study determined that companies with upper quartile design scores outpaced other companies, outperforming industry benchmark growth by as much as two to one. For example, companies with an upper quartile design score, achieved revenue growth that was 32 percentage points higher over a five-year period. 

The 300 companies selected by McKinsey for this study operated within three industries: medical technology, consumer packaged goods and retail banking. The upper quartile MDI scorers outperformed the benchmark across all three industries, indicating that design-fueled growth is achievable regardless of whether a company provides digital products, physical products or services. Interestingly, differences between the second, third and fourth quartiles were marginal, indicating that only the market leaders will reap the greatest rewards.

We have always been aware of the fruits of innovation in the marketplace, but studies like McKinsey’s allow us to back it up with hard data and research. Stay tuned for future posts on innovation and human-centered design. As we approach the 50^th anniversary of the Apollo 11 mission and man’s first steps on the moon, I think it is appropriate to say that with innovation, the sky is the limit!

Jennifer Doering also likes to focus “Big Thinking” on management advisory services, such as business valuation and compensation consulting, and would be happy to discuss any future needs or questions you have in these areas.