Creating a US Design Index to measure ROI

Instead of waiting for IDSA to get the hint and create their own Design Index to track the stock performance of US-based companies that invest in design (a common-sense measure of design ROI) I thought we might do it ourselves.

Anyone interested?

If so, we need to figure out two things:

1. How do we track?
   I was thinking that one of the free “portfolio tracking” financial websites might help us do it visually over time. (I’ve tried Yahoo finance, but they don’t show composite graphs, only comparisons between two companies.)

2. Who do we pick?
   An obvious solution might be to seed it with the corporations with the most number of IDEA awards. (Any idea where to even find that? I remember seeing something like that in Business Week, but can’t find it on IDSA.org.)

#1…perhaps a brokerage firm might be interested in creating a design-index mutual fund…we could put our money where are mouths are.

#2…this used to be published a few years ago but i do not recall if it was on idsa.org or in biz/wk.

Count me in!

Maybe someone knows someone who can manage an investment fund that measures the companies who invest heaviy in innovation and have the product sales to prove it.

And then, dividends from these companies could be used as capital to startup design studios, or help fund design projects that directly assist developing countries.

related topic…Fitch, Inc. (design firm) had a fund as part of their 401k plan for employees that had a stock mix of Fitch clients. The fund outperformed S&P proving that… companies that invested in (Fitch) design performed better. Perhaps there’s a way to assemble a portfolio of companies (across industries) that spend x% and above on design—as a percentage of their operating cost. The performance could be tracked against S&P or other market performance indicators.

Whoa.

I remember a few years ago I had this idea. I would invest in every company to which I would consult - thinking that naturally they had an edge on their competitors becaue they were doing things in an enlightened way. One of my collegues pointed out the fact that aside from my naive hubris, the clients who were coming our way were coming our way because they were desperate - not because they were necessarily enlightened.

Some of the clients I had then are not doing so well now because of sins that they committed before they ever hired us. Some of them are doing better because they hired us. But blanket investment in companies that hire design firms I think would be a bad idea.

Do you really trust your clients that much?

Sorry, but this is silly idea, but one that appeals to designers with limited business understanding. I have written on how people confuse cause and effect here. Successful companies may win more design awards, but it doesn’t follow that it is because they win awards they are more profitable. For most big public companies, the contribution of an award winning design to profits is very small indeed. You can’t measure ROI of design by looking a stock price – it is like using a yardstick to measure a speck of dust.

On the misunderstanding of stocks and design, see:
http://michaelandrews.blogspot.com/2005/06/how-much-do-shareholders-care-about.html

Not even a personal anecdote to back up your argument??
Here are some facts that support mine (see hyperlinks for full story):

Design Index: Those who invest in design outperform the market by 3x
Samsung: CEO heavily invests in design, builds worlds fastest growing brand
P&G: CEO makes design their “key differentiator”
Chrysler: Creates hit-machine in 90’s/Regains US dominance
Whirlpool: CEO Creates hit-machine/Sells the “iPod of Washers”
Motorola: Regained the #2 mobile spot via cutting edge design
Apple: CEO refocuses on design, record turnaround fueled by must-haves
Dyson: Designs disruptive bestseller that commands premium price
Nissan: Turnaround CEO says “there’s no problem a good product can’t fix” achieves 10% op margin

In many cases all you need to do is overlay product launches on top of their stock performance for proof that stock price reflects the power of design. Look at Motorola and the launch of the Razr, or Apple in both the era of the iMac and iPod. It’s plain as day and designers need to get hip to this to sell the value up the chain. Chuck Jones did it at Whirlpool in '97 and I’ve done it, so don’t tell me that it doesn’t work.

alright, then define what “increasing shareholder value” means, if not a rise in the price of a company’s stock.

As John Heskett says, “An invention is not an innovation until it creates value for the company, which means it needs to be accepted by the user.”

You must be richer than Warren Buffet! To think all one needs to do is overlay a couple of graphs.

I am well aware of the hype in the media, encouraged by the public relations departments of companies profiled, to credit design with their success. It makes a good story, but oddly I don’t hear any Wall Street analysts saying watch a design index: it will predict stock price. No, all this is coming from design lobby organizations, journalists with a pet interest in design (mostly Fast Company/BW, who do ad nauseum) and the PR machines at companies. BTW, Fast Company and Business Week are not considered serious business publications in the way the Wall Street Journal is.

What is going on? To the entext there is a correlation in stock price and a companies enthusiasm for design, it is rarely a cause-effect relationship. Autos are a special case, because style does matter much more with autos. But it is absurd to say P&G’s stock price reflects their design ability. Hey, I own P&G, and I know I own it for reasons other than design. How much does “Oral B” contribute to P&G’s overall sales?

What actually happens is you get a management team that runs thing well generally, including recognizing design has a role to play. Stock price goes up because many things are managed well, not just design. I would argue that Apple is commercially successful now primarily because it has stopped its stupid policy to expecting people to pay through the nose for its products. They have had to pay attention to costs, and drop some arrogance.

I feel the biggest handicap of designers becomes evident when they gush about a simple linear relationship between hipness and profits. That handicap is their very poor ability to view things critically and skeptically. Designers aren’t taught this, whether they attended art school or even engineering school. You need a liberal arts education for that. As wonderfully imaginative as designers can be, it can blind them to seeing and considering the logical complexity of relationships.

Stock price goes up because many things are managed well, not just design.

If design is an indicator of a well managed company (what Wall Street is looking for) proof would come in the form of an anti-design index. ie.

Index 1: Good Management, Investment in Design
Index 2: Good Management, No Investment in Design
Index 3: Poor Management, Investment in Design
Index 4: Poor Management, No Investment in Design


Back to the question at hand, does anyone have a better way to select the companies for the index, or know of a good public site that would allow us to set up trackers?

I’m interested but is there a more effective method of organizing this than on a public forum?

I think tracking stocks is a bit too vague (a least for my clients) too many other factors creep into stock value (accountants go out of their way to make the number look more attractive to shareholders)…perhaps developing a database more specific to average project investment and the average return related to general markets (technology, household, transportation, SHOPA, etc.).

Just my experience, but any serious discussions tend to fall short of achieving anything on core due to random postings.

Perhaps after an appropriate task team/panel is established, one can set up a private discussion group to collaborate/organize information and post findings on core77/idsa/designaddict/etc.?

Any thoughts regarding this…I’m just interested in making sure anyone who puts effort into this has something significant to reference in the end.

DMD,

A group blog may not be a bad place to start trend watching. I’d be very interested as well.

As for the prior discussion between cg and user innovation :

I don’t know about a liberal arts education being required to watch the complex relationship between product and share value, however, I have studied valuation, using a model developed by Ken Lehn, consulting advisor to the SEC, and the concept of “goodwill” or “brand value” is very much becoming part of the valuation model. In fact, it was in New Zealand, at the Better by Design conference that Brian Richards presented this evolution in detail. Here is the link for your perusal.

http://sizematter.blogspot.com/2005/08/branding-and-design-as-investment.html

predictive markets could be and interesting way to predict, track, and evaluate the value of design.

It is a kind tought thing to do because companies that effectively use design also effectively use marketing, manufacturing, brand, etc.

Problem is, how do you distill the value of design from the other components, especially when they are so interconnected?

Guest,

But that’s also the larger story of how “design” itself is evolving. Firms like IDEO, Jump, Stone Yamashita et al are taking the conceptual definition of good design to not just focus on a specific product or offering but the entire experience.

Should we evaluate the entire experience? Take the ever famous iPod story as an example. It’s not just a well designed product, it’s a well designed product and marketing strategy with a sustainable business model that makes it a success.

From a recent interview with GE CEO Jeff Immelt in Business Week.
Do you have to do more than that to make your managers truly creative?
Creativity is important. It’s an ingredient in innovation, but it’s not the only thing. We’re trying to stimulate new thinking by bringing people in from the outside, such as [design consultants] IDEO, to make sure we’re not too internally focused.

What do you feel the outsiders have brought to the company?
They try to approach growth in unique ways by looking at unmet needs of customers. We do creativity sessions with them and things like that. It gives us some new, nonlinear thinking, which is something I’ve picked up from A.G. Lafley at Procter & Gamble (PG ).
Is Lafley a particular inspiration to you?
We used [P&G] as a benchmark. He has that innovation gym [to train managers and test new ideas] and he has found new ways to blow some of the walls out and do a better job of integrating ideas from the outside.
Why do you think innovation is more important today for GE, or for business in general?
We’re leaving a period, particularly in the late '90s, where global economic growth of the developed world was pretty robust. It’s just choppier now. You need new ways to boost growth.

Do you think managers have to become more like designers, or masters of creativity?
What I tell people is that we have to develop new leaders for growth – people who are passionate about customers and innovation, [people] who really know markets and products. [Traditional] professional management isn’t going to give you the kind of growth you need in a slow-growth world.

Do you feel you’ve become more innovative in the past few years?
[It all] goes back to people – those who want to take swings. I tell people that you have to view these [new leadership] traits as critical to your long-term development. You have to change…or else you don’t have a great future at this company. END

I think what we are failing to recognize as a community is that big business is no longer looking for just good Design to build their businesses. They need Innovation to do that. Now before we start a war over the semantics of Innovation with a capital I, let’s just agree for now that we are talking about the ability of Designers and Engineers to bring new breakthrough products to market. These corporations rely on multisdisciplinary teams to create, evaluate, continue to fund, execute, produce, and launch. Only in the most enlightened companies have designers been elevated to positions that allow for command and control responsibilities.

What the good news and bad news? Well, let’s just say if you are a designer that doesn’t read the business pages on occasion, you are in for a rude awakening. The good news is that if you are capable of working with those multidisciplinary teams, your stock just went up. Designers can’t get good work if their Design Managers don’t get a place at the ‘big table’. Start redefining ID in your head as innovation services and you’ll start to see what corporate America is seeing. Look at what GE and P&G have done in the last 4 years.
The bad news? Design services are in danger of being largely commoditized. However, the design firms that are part of P&G’s Design Board have more to bring to the table. Rip DC all you want for all the Swiffer hype lately- but they have a seat at the ‘big table’.

Back to the larger question. I believe you can track very simply the companies that have leveraged design and innovation. Using the Swiffer as an example, how many of you can say you were an integral part of building a 500 million (going to a Billion with a B) dollar brand? I think that it is a damn fine example of the impact of design and innovation on a companies bottom line. It bodes well for the firms that can play at that level.

But here is the rub. Most companies do not share the information we as designers seek. Public corporations show some of their cards in their annual reports. Some more examples:
Client A hires us to tackle a new portable medical device to build on their first, single product line. New line is so successful company is sold to larger competitor for 23 million.
Client B hires us to design a new medical device. Design wins major award. Company sold for 45 million.
Client C hires us to design over 3 dozen products over the years. We design breakthrough product. Wins a number of design awards. Company is sold for 166 million.

See a pattern? See the value of good design? I’m sure the owners of these private companies did when the cashed those checks. What’s the larger problem? As I see it, it is the fact that too few designers are willing/asked to promote their business successes vs. their design awards. If you asked me whether or not I’d rather have a Gold IDEA award or have my client’s new product gain double digit market share, which one do you think is the right answer?

Looking forward to hearing more…

Cheers.

So, we need to control for externalities so we can track the impact of design. Well, instead of coming up with list of design firms and then track their performance, shouldn’t we get an unbiased list of firms, research them, and see if there is a relationship between R&D and profits? Lets take for example, a random sample of 30 or so firms from the S&P 500, figure out which ones have design initiatives, and then compare the historical data with product launches. It is certainly a more involved way to gather the information, but it is definitely the best.

When you do regression analysis, you have to eliminate as many variables as possible, so that you can have a strong argument to establish the relationship between the remaining variables. As useinnovation said, our findings still won’t be enough to establish a causational relationship, just a correlation.

By the way, send me the link of the blog if you get it set up.

OK, so go back to your relationship between R&D and profits. Last quarter P&G racked up a huge profit surge to 44% on a 10% rise in sales. This is while they have been able to reduce R&D spending from 4.5% to 3.5% of sales. I don’t think that relationship is accidental. It points to the trend of doing more with less…

I am not pumping P&G, but they have the easiest numbers to find right now. They also operate in notoriously low margin sectors of the marketplace.

I think this a great discussion, as it is surfacing many issues that feed into the equation.

There have been mentions about the positive role of creativity and a strong brand. While these concepts are certainly related to design, they are far broader than design. I believe some organizations such as the Design Management Institute tend to conflate these things, and selectively claim credit for design anytime creativity or brands are involved.

Creativity can be applied to anything – including boring back office processes that hardly resemble design.

Strong brands reflect the behavior of a company more than any specific product the company sells. For example, Fed Ex is a strong brand because of how it delivers to customers. Fed Ex does incorporate good design in its services, but its brand value (and by extension, stock value) is mostly a reflection of its capacity to deliver packages quickly, on time, and with confidence.

Just so we don’t get tempted to overstate the role of design on company earnings, think about all the carp design that is out there and still the companies that make them continue on, sometimes quite profitably.

I found this quote today on another list from Don Norman, who certainly values good design. But he notes it doesn’t explain everything:

“Companies succeed because they make sales (more accurately, because
they make a profit from those sales), and for the company to succeed,
all aspects of the product must perform well: the business model, the
marketing and sales effort, the cost structure, the competitiveness, and
of course, the product itself, in appearance, function, and usability.
Which particular aspects dominate will depend upon the context.”

• Don Norman

And even those generalizations are hard to agree with if we were to look at specifics. Good logo and packaging design, perhaps, but terrible interaction design that causes some pretty major annoyances (based on a quick study I was involved in early this year) for users. Presumably, in their corporate culture, visual stuff versus software stuff are regarded as very different arenas and are handled entirely differently. So how would one assess FedEx overall?

i’m just starting to get into the meat of my MBA, but one of the things I’m learning is that ROI is not a good indicator of success. You ID people should be first to jump on market share… since marketing is so closely involved. ROI doesn’t mean much if you’re loosing market share.

I don’t have a better answer and how it should be measured… except the ROI is dangerous.

Also, as someone else pointed out… good management and marketing decisions are often part of the success… plus companies who are performing better can afford to spend more on overhead costs like product design.