The definition of Innovation Accounting

Innovation Accounting is “an organized system of principles and indicators designed to gather, classify, analyze and report data about a company’s breakthrough and disruptive innovation efforts – working to complement the existing financial accounting system.”

From “Innovation Accounting, a practical guide for measuring your innovation ecosystem’s performance”

Why do we need a second system?

Financial accounting only paints half of the picture of how a company is doing because it only measures outcomes, not the process used to reach it, nor cost avoidance or learnings. Despite its fact-based nature, financial accounting is a poor tool for understanding the potential of a new idea. For it does not consider people, culture, ecosystem, or process as assets.

Connecting Innovation Accounting to financial accounting will give everyone a trusted scoreboard that paints a complete picture, making it easier to know when your team is ahead. An open partnership based on information and trust with everyone looking to innovate for change.

Prerequisites & Principles

Before you start, agree on a company-wide definition of innovation. You need an innovation accounting system for managing and evaluating new initiatives with a high level of uncertainty, such as breakthrough innovation initiatives and disruptive innovation initiatives. The innovation that impacts top-line growth by creating new business models. 

The six basic principles every innovation accounting system should adhere to:

1.  It’s a company-wide system.
2.  It’s made up of layers of information that abstract from each other.
3.  It surfaces the investments the company is making in innovation.
4.  It highlights the company’s risk of disruption.
5.  It helps improve the innovation ecosystem.
6.  It focuses the entire company on the critical success factors of innovation.

Layers of information

The Innovation Accounting system consists of 3 layers of information that aggregate and abstract data to the layer above to ensure that teams, managers, and the board have the relevant information to make decisions.

1. The first layer measures teams. These are Indicators to assess the likelihood of individual ventures making it to the next stage of the innovation framework. To achieve this, it is essential to have a clear innovation framework to help teams focus on what needs validating in each step and managers to ask the right question at the right time. 
   Read: How to get started with measuring teams.
2. Next, in the managerial layer, data from individual teams is aggregated to show the performance of the company’s innovation funnel on cost, time spent, and potential future revenue. To compare the data from individual teams, use a structured and systematic approach to innovation. One unified way of working for all innovation teams will help evaluate how teams are doing based on their learnings and (in)validations.
3. The last layer is the strategic layer. To build a comprehensive innovation strategy, it is essential to understand the risk of disruption by looking at the Portfolio. The innovation funnel of today represents the Portfolio of tomorrow. Therefore, leaders need to focus on the ROI of the innovation funnel as a whole and not the ROI of individual teams.

There are other elements in the company’s ecosystem to consider for measuring. Since improving on them can help improve the results of innovation efforts. Investments in human resource capability development directly affect the innovation ecosystem. Innovation is a skill that can be taught, although some people are more inclined to be innovators than others. Finally, innovation culture is part of the overall culture of the company. Culture in itself can’t be measured: but you can measure the attributes of the culture through the impact they have on the results.

Have a look at how our GroundControl Software platform can help you implement Innovation Accounting in your company, or buy the book here. Or take a look at the other books written by Esther.