Innovation Accounting: Three basic guidelines towards a better framework

Innovation signifies novelty and uncertainty. It is an exploration into unchartered and unexplored waters and is synonymous with an adventurous quest. Just the word alone paints excitement and curiosity in one’s mind. Accounting, on the other hand, does the stark opposite. It paints a dull image of tediousness, monotony and boredom. It is all about looking back and figuring out the standard little details that not many people want to know. Stringing these two contrasting dimensions- “innovation” and “accounting” is almost counterintuitive. But what is the promise that “innovation accounting” entails? How can we “account” for something that has not happened yet, or has no certainty of happening?

Well, here is what innovation accounting proposes: Innovation accounting is all about making educated guesses about what the future may (or may not) hold. Unlike its traditional counterpart that measures success by the bottom line, innovation accounting is simply a structured way of measuring progress. As much as innovation deals with the uncertain and the unexplored, it can also be seen to be based on the foundations of hypothesis-driven entrepreneurship and evidence-based investing. In essence, both of these dimensions can be measured with a bit of common sense, discipline and well-defined metrics. As Peter Drucker once said, “Most innovations, especially the successful ones, result from a conscious, purposeful search for innovation opportunities.” And this is the promise that innovation accounting holds to measure progress and to provide a glimpse into the future. Furthermore, it is also good to mention that innovation accounting is not some elusive, hyper-technical silver bullet solution to predicting the future with crystal clarity. It is just a structural way of measuring progress with clearly defined metrics and asking the right questions to see if we are heading out in the right direction. The essence is in being roughly right than being precisely wrong.

While it may now sound relatively straightforward, more often than not, the innovation labs end up with a dashboard that ends up looking like this:

It is a spaghetti of measurements with unclear inputs and outputs, hockey stick graphs and vanity metrics. Why? The combination of pressure from the boards to demonstrate financial potential, unclear strategy, siloed organizational structures, absence of a shared language and having no existing information to go about make innovation accounting a tedious challenge. Furthermore, another challenge is the inherent fear of the “expected opportunity loss” that comes with making a wrong decision with the information provided. The cost of measuring innovation is meagre compared to the cost of the decisions that these measurements support. Hence, the lack of existing information, metrics and benchmarks create a certain degree of apprehension in the minds of those measuring innovation.

So, how do we actually go about measuring innovation then? What are some fundamental guidelines that can help tackle these challenges? Below, are three basic guidelines that can help you form your innovation accounting framework better.

Understand how your metrics drive behaviour

It starts with recognizing that the very act of measuring will inevitably impact employee and organizational behaviours since measurement is essentially a means to management and steering. We are inherently aware of what is being measured, and we use the data from these measurements to interpret situations, make decisions and guide our activities and behaviours. For example: your manager starts measuring the number of projects you support not taking into account the quality of the support offered or the time spent on each project. Odds are that you will start supporting more projects and maybe focus less on the quality or the effectiveness with which you contribute towards each project. Hence, the basis for measuring your innovation starts with understanding what you want to measure, and why, along with an idea of how it could potentially influence your organization’s/team’s behaviour. Furthermore, it is also important that you change and adapt your metrics as you learn and understand how your metrics influence behaviour. Linking this back to the previous example, as you may learn that just measuring the number of projects your team has supported is not giving across the right message, you could tweak your metrics to something along the lines of “number of projects that had an 8+ satisfaction rate from clients”.

Drop the one-size-fits all approach to metrics

The choice of metrics ultimately depends on the maturity, uncertainty and the context of the business you are in. In terms of maturity and uncertainty, early-stage projects are essentially in a learning stage. The degree of uncertainty is extremely high, and seeing the correlation between activities and results is not possible. Assessing your project on impact at this stage could result in worse decisions. It is imperative to sketch out your organization’s innovation lifecycle, and design the measurements that are suitable for each lifecycle stage. It is also good to keep in mind that the choice of metrics and benchmarks should be adapted to the context of the business. For example, having the same measurements and benchmarks for a business-to-business proposition and business-to-consumer proposition would not work. The same goes for projects that are focused on cost savings within the organizations versus those focused on revenue generation. Hence, it is crucial that you start with a framework that maps out the metrics across the different stages of the innovation life-cycle, taking into account the differences between the projects. It is also important to note that while some degree of flexibility is needed with your innovation metrics, a complete freestyle design to metrics would result in chaos and confusion.

Align Top-Down, Sideways and Bottom-Up

Innovation Labs must approach measuring innovation from both top-down and bottom-up. This vastly helps in ensuring that the bottom-up project activities are aligned with the strategic goals of the organization. For example, the management defines the overarching innovation goals and objectives and this could be anything ranging from improving customer satisfaction, creating new business models to generate new income streams, expanding the current customer base to digitalizing all internal processes. This top-down measurement creates focus and alignment across the organization. Take this a step ahead, and further define your strategic KPIs: We want to achieve a Customer Satisfaction Score of 8 on a scale of 10, we want to generate 50 million in revenues by launching new business models by 2025, we want to grow our customer base by 1 million new users by 2022….you get the idea. Next, “managing sideways” comes into play. This is all about designing and developing an efficient innovation process. Having a “lean” innovation process allows project teams to quickly validate or invalidate their business ideas. And this is where, the design of an innovation accounting framework comes into play- what are the metrics you are going to track across this process lifecycle, how can we take into account the differences between the projects and how do we ensure alignment to our strategy. At the bottom-up level, project teams working on innovation formulate their own planning and activities, guided by the innovation process and focused by the strategic goals. Hence, by aligning top-down, sideways and bottom-up, you circumvent a number of challenges and have a good alignment with your strategy and shared language and definitions.

While it is definitely a complex and challenging task, innovation accounting is no rocket science. Like many situations in business or in life, the seemingly impossible measurements starts off with asking the right questions. And innovation accounting is a structured framework that allows managers and innovators to ask and answer the right questions at the right time. Having the above-mentioned guidelines: understanding how metrics drive behaviour, drop the one-size-fits-all approach and aligning top-down, sideways and bottom-up could possibly make this innovation accounting challenge a little less daunting. Meanwhile, always keep in mind that innovation accounting itself is a continuous learning process. It is innovative and transformation in itself. Start small, learn from your mistakes, keep evolving and keep improving.