Evaluation is assigning a value to an innovation or project in order to help assess or determine how successful it was. In most workplaces, assigning values using the same currency that the organization operates with is the easiest way to managing the expectations and resources required to implement these innovations.

Evaluations are useful for making the following decisions:

• Deciding if a proposed innovation is worth funding by comparing the forecasted costs with the benefits.
• Comparing one proposed innovation with other proposed innovations that may be competing for the same limited funding.
• Assessing how successful a completed innovation was in achieving its forecasted cost and benefits.
• Assessing if a completed innovation is worth continuing.

“True genius resides in the capacity for evaluation of uncertain, hazardous, and conflicting information” — Winston Churchill

There are different ways to evaluate an innovation or project.

The most basic way is to compare the cost with the benefit. If the cost is higher than the benefit that it is not worth doing until adjustments are made to make the benefit greater or the costs lower. For example, if the total benefit of project A is $10,000 and the total cost is $1,000 then it is a promising project. If the total benefit of project B is $10,000 but the total cost is $20,000 then logic would dictate that it is a project that shouldn’t be implemented.

The best way to estimate the benefit in dollars is to estimate how much the organization will gain in revenues after the innovation is implemented, minus how much they will gain if the innovation is not implemented. This is the benefit of implementing the innovation. For example, if the organization stands to make $40,000 in revenues per month without the innovation, but stands to increase that to $60,000 per month after implementing the innovation, then the benefit of the innovation is the difference, ($60,000 — $40,000) $20,000 per month.

Sometimes the value of a benefit is best estimated as being what is saved when a cost is eliminated or reduced for an organization. For example if an organization has a problem that is costing them $100,000 a year, then the value of the benefit of a solution to eliminate that problem would also be $100,000 a year, because the organization would be now saving that amount of money instead of losing it as a result of the innovation. If the cost to the organization is not fully eliminated but is reduced by half, then the value of the benefit would be $50,000 a year because that is what the resulting estimated savings will be.

It is easy to convert benefit evaluations to different time frames simply by multiplying or dividing by the appropriate factor. For example, a $20,000 per month benefit could be multiplied by a factor of 12 to calculate the annual benefit. ($20,000/month X 12 = $240,000 per year)

The cost of the innovation is simply what it will cost to implement the innovation. This should be the total of all costs to the organization, including the time of everyone involved, manages, instructors and participants. This could also be presented related to a time frame, such as, $10,000 per month, or depending on the context and time frame in focus, it could be presented as a one-time cost, as an amortized cost over several years, or anything in between. This usually depends on the time frame of the benefits evaluation as well. For example, a project that promises to produce a benefit of only $20,000 per month but its one-time cost is $100,000 would not look appealing from the short time frame of only one month. But if you expanded the time from one month to a year, assuming the benefit will continue each month for a year, then the benefit is converted to $240,000 over the year which is now significantly higher than the cost.

Net Benefit

A common evaluation method is finding the net benefit of an innovation project by subtracting the dollar value of the costs from the dollar value of benefits. For example, if the annual benefit is $240,000 and the cost is $100,000 then the net annual benefit is $140,000. If the net benefit is large then the project is a more promising investment than another project with a smaller net benefit.

Benefits — Costs = Net Benefit

Return On Investment

A more advanced method for evaluating innovation projects is to calculate the Return On Investment ratio or ROI. This is done simply by dividing the net benefit (Benefit — Cost) by the dollar value of the Costs. For example, using the same numbers as above, ($240,000 — $100,000) ÷$100,000 = 1.4. Normally because these ratios are small numbers they are multiplied by 100 and converted into a percent. So in this example, the ROI would equal (1.4 X 100) 140%.

Calculating an ROI evaluation is useful to providing a fair way to compare competing innovation projects. For example: If project A has a net annual benefit of $120,000 but will cost $100,000 to implement then it is a higher risk project and has a lower ROI than project B that also has a net annual benefit of $120,000 but will only cost $50,000 to implement. In this case, the ROI for project A is 20% over a year and the ROI for project B is 140% over a year.

Comparing ROI evaluations of projects makes it much easier for decision makers to select the innovation project with the highest potential benefits compared to the risks of the investment. Projects with higher ROIs are better than lower ROIs because that means the potential to gain benefits is larger compared to the risk of not recovering the investment of the costs.

When comparing ROI evaluations, it is also necessary to convert these percentages to the same time frame. For example, comparing a project with an ROI calculated over a month with a project with an ROI calculated over a year would not be helpful.