Innovation Accounting: how to measure innovation success

Innovation Accounting is an organized system of principles and KPIs established to gather, analyze and present data about a company’s breakthrough and disruptive innovation efforts – working to complement the existing financial accounting system.

Dan Toma and Esther Gons

To build successful innovation ecosystems, corporates should not exclusively look at traditional accounting methods to manage innovation and measure the impact, but at the same time, they should neither base their decision-making on intuition or faith.

To make informed investment decisions on corporate startups and ventures, managers need accounting metrics that are fact-based, and that reflect the entire process of innovation rather than just the financial outcome. Managers need an accounting system that is designed to complement the shortcomings of a financial accounting system when it comes to measuring innovation. 

To start doing so, we can use a combination of the innovation thesis, strategic goals, and the need to create a balanced portfolio. Innovation Accounting can then be used to measure and manage the progress of these corporate ventures from great idea to validated business model.

The term Innovation Accounting was first coined by Eric Ries in his groundbreaking book The Lean Startup. In his book, Eric Ries explores the topic of Innovation Accounting to measure the progress of a single startup.

In The Corporate Startup, we expanded the principle of Innovation Accounting to measure and manage the whole Innovation Ecosystem. In Esther and Dan's newest book, called Innovation Accounting, they do a deep dive into how to set up such an Innovation Accounting system.

Innovation Accounting is the process of defining and measuring innovation within an organization. When we are still creating and testing ideas, financial indicators are simply not enough. They offer insufficient data as they don't reflect the progress of the learning process when testing and validating ideas. That is why every modern organization needs innovation accounting next to traditional financial accounting. This new system must be in sync with the financial accounting system while mitigating its shortcomings. 

Innovation Accounting focusses on managing the following three innovation activities:

1. Making investment decisions on different ventures at different points in their innovation journey.
2. Tracking and measuring the success of specific innovation projects.
3. Assessing the impact that innovation is having on the business as a whole.

That means that Innovation Accounting needs to be implemented at different levels of the innovation ecosystem.

Within the innovation accounting framework, there are three layers of indicators that feed one into the other. It gathers data on an individual venture level to make sure that investment decisions are being made through data rather than gut feeling. That data is aggregated to make sure there is insight in the entire funnel of ventures and abstracted again to translate into strategic indicators relevant for the board and the overall strategy of the company.

• Tactical innovation accounting is connected to Measuring teams. These focus on product teams, the experiments they are running, the learnings they are having, and the progress they are making from ideation to scale.
  Read more: 3 Reporting KPIs to get started with innovation accounting
• Managerial innovation accounting is connected to Measuring funnel. The focus here is on helping the company make informed investment decisions based on evidence and the current innovation stages teams are in. 
• Strategic innovation accounting is connected to Measuring ecosystem. The focus here is on helping a company's board examine the overall performance of their investments in innovation in the context of the larger business, connecting to overall strategy as well as decisions on capability and culture. 

In order to measure your whole innovation ecosystem, and get the most accurate, reliant, and timely data, we encourage you to also measure:

• The startup collaborations to better manage your collaboration projects and maximize the value of the partnership between corporations and startups. 
• Innovation HR capabilities to make sure you have the right mix of people with the right skillsets. 
• Innovation culture to make sure that your organization has a setting in which innovation can drive. 

Besides the different levels of Innovation Accounting, there are also two different types of innovation metrics:

Performance indicators focus on how well the teams are doing in regard to the innovation process.

In contrast, Result indicators measure the tangible results that are emerging from this innovation activity. 

Innovation Labs have the tendency to focus on performance metrics rather than result metrics. That is fine to show early signs of success, but in the end, innovation has to have a real impact on the organization. Taking result metrics into account is not benchmarking the results with industry standards, it is looking at what the numbers are telling us, are they indicating a possible sustainable, repeatable, and scalable business model? It is wise to look at both performance and result indicators at every stage of the innovation framework.

Because this is all still very abstract, we’d like to give you some examples of KPIs you can use to measure innovation accounting in practice.

We created some example metrics for:

• Innovation Metrics for Tactical Innovation accounting
• Innovation Metrics for Managerial innovation accounting
• Innovation Metrics for Strategic innovation accounting

The Innovation Accounting book provides a practical guide for measuring your company’s innovation ecosystem. The book is a deep-dive on all the aspects of Innovation Accounting that are mentioned on this page and more. 

Why this book?
When a company is committed to growth through innovation – not just exploiting the existing business models – standard accounting methods offer insufficient and, often times. irrelevant data.

Who is this book for?

• Executives looking for a new way of measuring corporate performance in a world where accounting-recognized assets are becoming commodities
• Investors seeking better ways of looking at a company’s growth potential
• Managers who need to valuate innovation product teams using not only financial indicators