The Innovation Potential Estimation Tool (IPET) has been developed to measure the capacity of companies to be innovative. The focus is how to estimate the potential of innovation in an industrial (sub)sector and thus the economic impact of funding initiatives. The objectives of this concept paper are to introduce IPET as a means of estimating innovation in a sector; to report on the outcome of a survey of 200 ICT SMEs in the West Midlands (WM) region of the UK and to evaluate the findings in terms of the potential to aid government in investment decisions. The IPET development project has been active for a few months and is already of interest to several government departments. More research is needed to fine tune the tool’s accuracy in its estimations. However, even at this stage, the potential and usefulness of the tool is apparent. It is specifically designed for public sector organisations to have access to a quick tool to help them estimate businesses in their respective areas. This tool will assist in identifying specific barriers to innovation, and produce key information for strategic planning and decision making.