Author: Peter Thomson

Metrics to help you build the case for design

The big consulting firms (McKinsey, Booz Allen and BCG) would all love to get you to use more metrics to analyse innovation. Partly because it allows them to apply their existing left-brain analytical skills to your right-brain creative design challenges. Everyone has their own take on the role of metrics in design. Whatever side you take there is a lack of easy metrics that you can use to quickly explain to your CEO and CFO why design is important to your company’s growth.

Below are the top 5 metrics that you can pick up today to benchmark your business against your competitors. These are not the only metrics but they are the ones that you’ll be able to use to make a strong case for investing in design:

1. Vitality Index

Sales from products created in last 3 years / Total sales

2. Contribution margin

(Sales – Direct costs) / Total sales

3. Return on assets

Net profit before tax / Total assets

4. Brand value

Expected net annual cashflow from your branded products / Your target annual return on investment percentage

5. Return on intellectual property

Total sales / (Market capitalisation – Physical assets)

Warning, these are not measures that you will be using to manage your design process. Later on, we’ll cover metrics such as delivery in full on time as specified (DIFOTAS), Return on innovation investment (ROII), Time to market (TTM) and a whole host of activity measures.

Next week we’ll calculate the numbers for these metrics for a couple of example companies so that you can compare your own performance.

Slides to help you build the case for design

Frog Design, Ideo, Stone Yamishita
I’ve learned a lot about presenting complex ideas from watching how design firms pitch themselves.

Powerpoint is a dangerous tool. Nevertheless, it’s useful to see how the top design and innovation firms describe what they do. Below are examples of how these design and innovation firms present to a general business audience. A couple of them were made for specific events so don’t get too distracted by the detail.

You can certainly take your time with them but the goal is to absorb an overall picture of what would work for yourself to use as a tool in describing your own work to your CEO, CFO, engineers and even the marketing team.

Adaptive Path: Subject To Change: creating great products and services for an uncertain world

 

Frog: Design In The Age Of Convergence

Ideo: Design Thinking

Stone Yamashita: The Worlds Largest Innovation Lab

Each of these presentations is a different take on the core issue of how we describe end-user centred design, design processes and design thinking to a business audience. Which do you feel are the best and worst?

Forecasting for new product development

It’s hard to forecast the impact of a new product on the whole business, but it’s important to try.

Each of the levers in the post on accounting for design will affect key parts of your company’s financial statements. To convince the CFO of the value of your project you’ll be forecasting scenarios based on the proposed investment in research, design and innovation. These scenarios can be as simple as guessing the number of units that you will sell of the new product or as complex as full financial models of the entire organisation based on discount factors for out-years.

If your CFO is seeking basic forecasts then your financial analysis of the project will be persuasive. If however, your CFO asks for scenario plans and mock-financial statements then you’ll want to enroll the help of a sympathetic accountant or financial analyst.

The first question that person will ask you is would you like your forecast “bottom up” or “top down”? The right answer is “both”.

  • Bottom up forecast start from your existing production and supply. They then build up to forecast the possible future sales.
  • A top down forecast starts with the potential market demand and builds down to answer the production and supply that would be needed to meet that demand.

    • The flaw of bottom up forecasts is that they are often boring and do not build a sufficient case to invest in break-through innovation. We see this most often in clients as, “We grew at 10% per annum for the last five years so I guess we’ll keep on doing that.”

    The flaw of top down forecasts is that they risk being “pie-in-the-sky” and ignoring the organisation constraints. We see this most often in clients as, “The Chinese market for this product will be USD$10 billion so we only need to get one percent of that and we’ll have a run-away success.”

    Work with your ally to create forecasts that both stand robustly in the present and aspirationaly in the future. The most powerful technique we’ve met to achieve this is future-casting five years ahead aspirationally and then looking back from there brutally to see each step involved.

    The second question your sympathetic accountant will ask is: “How are we going to account for the non-cash impacts of your project?” The safest answer at this stage is “We’re not.” Any brand benefits from a new product should be treated as a windfall.

    Podcasts from the UK Design Council

    Design thinking was cool in the 1990s and early 2000s. There were a lot of conferences talking about how important a “design mindset” was to business problems. I was lucky enough to be close to the center of this explosion in creativity within business.

    Design Thinking in Business
    The Intersections conference in 2007 was a landmark event in Design Thinking

    The UK Design Council ran a great conference in 2007. Even years later, the presentations still make powerful listening.

    Continue reading Podcasts from the UK Design Council

    How far has the economic case for design come?

    Your business case for investing in design will include both qualitative and quantitative evidence. This blog focuses on the economics of innovation so we won’t spend to much time on qualitative arguments like case studies, war stories and theoretical arguments. Instead, the focus is on ways that you can make a compelling financial and economic business case for design.

    Design Thinking in business
    The business value of design thinking is being more and more widely recognised.

    In 2007 by Brian Gillespie (who had just attended the DMI Conference “Improving and Measuring Design’s Role in Business Performance“) cried out for more case studies and more qualitative examples. He wanted to see more effort put into articulating the role of design in:

    • Influence on the purchasing decisions
    • Enabling strategy (new markets)
    • Enabling product and service innovation
    • Reputation/awareness/brand value
    • Time to market/process improvement
    • Customer experiences
    • Cost savings/ROI
    • Developing communities of customers
    • Good design is good for all: triple bottom line accounting for social, environmental, and business impact

    Since 2007 a lot of evidence has emerged on each of these and we’ll be reviewing them in turn over the next couple of weeks and including a few new areas where design can add value. Paste any of your favorite examples of end user centred design and design thinking adding practical economic value in the comments below and we’ll include them as we go.

    Accounting for innovation

    It’s surprisingly easy to use accounting to measure the impact of design. In accounting terms, the impact of your design project will be similar to the “economic” impact we discussed last time, but the language you use to articulate the impact will be very different.

    From a design perspective, you’ll need to apply some empathy to your use of terminology. It might not be fun, but like driving a car on a windy road, you’ll need to treat your accountant the way they want to be treated. If you’re going to get the best from them.

    Accounting gives us a language to measure the results of innovation.

    Wherever you are from in the world the technical accounting terms might differ but, your finanical controller, Chief Financial Officer and accountant will be interested in any project that can:

    1. Increase your revenue
    2. Lower your cost of goods sold
    3. Deliver a higher contribution margin (and gross margin)
    4. Lower your overheads from capital costs
    5. Create more earnings before interest in tax (EBIT)
    6. Ensure ongoing positive cash-flow

    Each of these areas are important to design and innovation. What you might notice is missing is the word “profit”. This is because in today’s business climate:

    Profit is an opinion, cash is a fact.

    Designing the business case for a new product is an integral part of bringing something new to life. For an idea to be sustainable it needs to fit into the company’s aspirations, investment profile and business model.

    Videos to help you build the case for design

    The Technology, Entertainment and Design conferences are an amazing collection of speakers, attendees and energy. What really makes them special for me is the arbitrary 18 minute format that forces every speaker into a high-energy summary of their best material.

    These summaries make the TED talks ideal ways for you to expose people in your organisation to new ideas in an easy, punchy and quick way.

    Picking a top five is a hard task but I’d suggest that you do make the time to watch a couple of these and send the links to your colleagues.

    Sir Ken Robinson on why schools kill creativity:

    Tim Brown on creativity and play:

    Paul Bennett on design in the details:

    William McDonough on cradle to cradle:

    David Kelly on human centered design:

    You can download mp3 versions or save these videos by visiting www.ted.com. I’ve found the best way to foward them on is to copy and paste the links to the page for each particular talk that you want to send to someone. Then they can choose the format to watch or download. For example:

    1. http://www.ted.com/index.php/talks/ken_robinson_says_schools_kill_creativity

    2. http://www.ted.com/index.php/talks/tim_brown_on_creativity_and_play

    3. http://www.ted.com/index.php/talks/paul_bennett_finds_design_in_the_details

    4. http://www.ted.com/index.php/talks/william_mcdonough_on_cradle_to_cradle_design

    5. http://www.ted.com/index.php/talks/david_kelley_on_human_centered_design

    Statistics on design investment

    The best defence in your business case for investment in design is the impact of design on the long-term financial value of the business. There are several reputable organisations that have spend quite some time and money to analyse how spending on design creates impact on the bottom line.

    Design Innovation Ireland
    Design Innovation Ireland has some great stats on business and design.

    Interbrand have some fantastic international analysis on the Best Global Brands 2008 and they discuss how to value your brand based on future earnings using:

    1. Forecast financials
    2. Economic analysis
    3. How your brand influences ongoing consumer demand

    The Design Council UK found in 2001 that a basket of companies using design grew by around 10% faster than the market. The Danish Design Centre found in 2006 that out of 800 companies (staff from 35-200) those that use design had growth in gross result (gross profit discussed above) of 250% compared with companies that did not.

    In 1993 Roy R. and Potter S. (of the Open University in the UK) found in a study called Winning by Design that 94% of projects using design that were implemented achieved a positive net return. On average the payback period was 14.5 months. Interestingly, product design projects took 15.9 months to pay for themselves and graphics/packaging projects took 11.5 months.

    The Irish Center for Design Innovation gets design and innovation in a big way and it’s worth pointing your finance team towards them to check out the financial models for assessing an investment in design.

    Armed with your economic levers, your accounting impacts, the specific forecasts and some aggregate data to support your assumptions you are now ready to face your CFO.

    Business case for design

    This post analyses the business case for design using the fundamentals of micro-economics and financial accounting.

    Let’s run through how you (as a product development professional) can use the language of economics and finance to articulate the return on investment of design expenditure. In particular, in the areas of brand, product and process. You can also look at how to articulate the business wide impact of incorporating design thinking into your company’s vision, culture and strategy.

    We can use a USD$100,000 engagement with an external product design and innovation firm as an example. The aim of this project will be to develop a product that anticipates latent needs, delights end-users and delivers an integrated holistic experience. However before you or your external product designers get to any of that you’ll need to get past your CEO, senior management team, CFO and their corporate finance team. We’ll address the CEO first.

    Economic returns from investing in design

    The key levers available to your firm’s senior management include the price, quantity, variable costs and fixed costs of your business. To convince the CEO and senior management team of the benefit of the project you’ll want to address the real life impact of the project in each of these areas. You will need to convince them that with the aid of a disciplined approach to NPD and an empathetic approach to design, your project will create a product that:

    1. Commands a higher price because it is differentiated from your competition.
    2. Sells a higher quantity because it provides more utility to the customer.
    3. Can be produced with lower variable cost.
    4. Is designed to allow for lower fixed costs.

    Each of these economic levers contributes to the ultimate goal of your CEO which is usually some variation on creating a sustained and differentiated high margin revenue stream.

    You will need to have command of the above financial terms and be able to structure your business case accordingly. The attention span of senior management teams is shortening and a good summary (in terms they understand) is important.

    The internal finance team will have their own requirements for your project so speaking their language can help increase you chances of getting a project approved.

    Why design?

    Everyone had a dream as a child. A fireman, a police officer, a pilot or a doctor. Every so often you meet someone who says their dream was to be a stockbroker or company executive. It throws you off balance because it’s so seemingly mundane, but it’s usually true. Some people just knew what they wanted to do from a young age and make it happen.

    Peter Thomson Design Strategy
    I love the discipline of design because it brings ideas to life as tangible products.

    My dream was always to be a management consultant. Mainly because I always noticed bad customer experiences and believed we can do better. My first adult book (at age 11) was Iacocca. It was a ridiculously nerdy book for a kid to read but I was inspired by the journey of turning around a distressed business. Reading it subtly changed the course of my life.

    Continue reading Why design?