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Innovation Accounting: how to measure innovation success

Manage the development of new products and business models and align innovation with your business strategy, by applying innovation accounting to your innovation ecosystem.

What is Innovation Accounting?

Innovation Accounting is an organized system of principles, tools and KPIs established to gather, record, classify, analyze and present accurate and timely 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 look exclusively to traditional accounting methods to manage innovation and measure the impact. To make informed investment decisions on corporate startups, we can use a combination of the innovation thesis, strategic goals and the need to create a balanced portfolio. Innovation Accounting can than be used to measure and manage the progress of these corporate startups from great idea to validated business model.

The term Innovation Accounting was first coined by Eric Ries in his ground breaking book The Lean Startup.

In his book The Lean Startup, Eric Ries explores the topic of Innovation Accounting to measure the progress of a single startup. In The Corporate Startup, we expand the principle of Innovation Accounting to measure and manage the whole Innovation Ecosystem.

Innovation Accounting is the process of defining and measuring innovation within an organization. Especially when we are still creating and testing ideas we need non-financial indicators for success. That is why every modern organization needs innovation accounting next to traditional financial accounting.

Innovation Accounting focusses on managing the following three innovation activities:

  1. Making investment decisions on different products 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.

Levels of Innovation Accounting

5 components of an innovation ecosystem
Within our innovation accounting framework, there are three types of key performance indicators (or KPIs) each company should be tracking for innovation:
  • Reporting KPIs are connected to Innovation Practice. These focus on product teams, the ideas they are generating, the experiments they are running and the progress they are making from ideation to scale. Read more: 3 Reporting KPIs to get started with innovation accounting
  • Governance KPIs are connected to Innovation Management. The focus here is on helping the company make informed investment decisions based on evidence and the innovation stage.
  • Global KPIs are connected to Innovation Strategy. The focus here is on helping the company examine the overall performance of their investments in innovation in the context of the larger business.

Types of Innovation Accounting Metrics

Activity versus impact metrics

Activity metrics focus on how busy the company has been with innovation. They measure the level of innovation activity going on (e.g. number of new products launched, number of experiments run, ideas prototyped).

In contrast, impact metrics measure the tangible results that are emerging from this innovation activity. Revenue and profits are the ultimate measures of impact.

Innovation Labs have the tendency to focus on activity metrics rather than impact metrics. That is fine to show early signs of success, but in the end, innovation has to have a real impact on the organization.

Innovation Accounting in practice

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 Accounting Infographic

We created a printable infographic poster of everything there is to know about innovation accounting. You can download and print it for free.
Download Innovation Accounting infographic

Innovation Accounting Book

Innovation Accounting book cover

The Innovation Accounting book provides a practical guide for measuring your company’s innovation ecosystem.

Why this book?
When a company is committed to growing through innovation – not just exploiting the existing business models – standard accounting documents 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

Example Innovation KPIs for Creating Ideas

Level

Activity Metrics

Impact Metrics

Reporting KPIs
  • number of ideas generated
  • number of ideas chosen
  • assumptions identified
  • hypotheses developed
  • minimum fail criteria set
Governance KPIs
  • number of ideas submitted
  • number of decisions made
  • products moved to next stage
  • average amount invested
  • alignment with thesis
  • alignment with portfolio
  • assumption-to-knowledge ratio
Global KPIs
  • number of products by innovation type (core, adjacent, transformational)
  • number of products per substage (generate, select, review)
  • not applicable

Example Innovation KPIs for Testing Ideas

Level

Activity Metrics

Impact Metrics

Reporting KPIs
  • Experiment Velocity (Number of experiments run)
  • number of customer conversations
  • number of customer interviews
  • number of customer observations
  • number of prototypes/MVPs built
  • number of hackathons/design sprints
  • Learning Ratio (Successful experiments)
  • experiment results
  • decisions made (pivot or persevere)
  • cost-per-learning
  • time-cost-per-learning
  • validation velocity
Governance KPIs
  • number of products in pipeline
  • number of applications
  • submitted number of decisions made
  • number of products moving stages
  • average amount spent per stage
  • stage-gate criteria
  • assumption-to-knowledge ratio
  • % of products at problem-solution fit
  • % of products at product-market fit
  • % of products ready for scale
Global KPIs
  • number of products by innovation type (core, adjacent, transformational)
  • number of products per substage (problem, solution, business)
  • % of products aligned to thesis
  • number of patent filings
  • partnerships and collaborations
  • process improvement metrics
  • number of patents granted
  • new business models ready to scale
  • cost savings
  • innovation conversion
  • new market segments entered

Example Innovation Metrics for Scaling Ideas

Level

Activity Metrics

Impact Metrics

Reporting KPIs
  • number of growth tactics tested
  • number of experiments run
  • number of customers engaged
  • number of channels tested
  • number of usability tests run
  • validation velocity
Governance KPIs
  • number of products in pipeline
  • number of reviews submitted
  • number of decisions made
  • number of products moving
  • sub-stages average amount
  • spent per sub-stage
  • stage-gate criteria
  • average growth rates
  • growth hypotheses validated return on investment (ARR, IRR, NPV) process
  • improvement metrics
Global KPIs
  • new products by type of innovation (core, adjacent, transformational)
  • % of products aligned to thesis
  • number of patent filings
  • number of products built using lean
  • partnerships and collaborations
  • innovation contribution
  • cost savings
  • innovation conversion
  • market share (new segments, shelf space, share of wallet, distribution footprint)
  • patents granted
  • customer satisfaction

Innovation Accounting articles

September 29, 2020
Frequently asked questions about Innovation Accounting

GroundControl is heavily built around the principles of Innovation Accounting to measure innovation success. If you’ve used our platform before or read about it, that shouldn’t come as a surprise. However, we often notice that there is confusion about what Innovation Accounting is and isn’t and where it should and shouldn’t be used. Measuring innovation […]

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August 27, 2020
The best way to start measuring innovation

Here at GroundControl, we’ve seen that some managers don’t (initially) like to add startups to their portfolios when trying our product. Instead we see them taking a lot of time figuring out on their own how they should structure and measure their innovation program. While it’s completely understandable that they don’t want to throw their […]

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August 4, 2020
How to measure that innovations are moving forward

We struggle to iterate quickly – I’d like to identify metrics to demonstrate that innovations are moving forward? This challenge from the first Group Call at Innov8ers really caught my eye. It is a struggle that we’ve seen a lot with both our own startups and the corporate startup teams that we’ve coached over the years. Especially […]

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February 24, 2020
The 3 Innovation KPIs to get started with innovation accounting

How to start with innovation accounting? We start with measuring the following three innovation KPIs from corporate startups.

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April 26, 2016
A deep dive at getting Mixpanel right

Table of Contents Forest for the treesWhat to trackIdentify and aliasNaming events and propertiesHow Cocoon tracks the Pirate Metrics in MixpanelRetentionNEXT steps Last weekend Diego Menchaca, founder of Teamscope and apparently also a big fan of our blog posts, proposed that I should write a blogpost about Mixpanel. “Most blog posts tell what to track on Mixpanel, but it […]

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April 1, 2016
The Early Adopter from an Analytics perspective

Table of Contents High yield, low volumeHigh LTV, low CACNext steps Yesterday we had the first introductory session with a potential portfolio company and tried once again to explain why it is so important to focus first on a clear early adopter. We often compare the early adopter with a person who fell of his bike (we’re […]

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February 2, 2016
Dig deeper to find the pain

In the first 5 blog posts about Analytics we covered Vanity Metrics, the Pirate Metrics framework, the criteria of a good metric, the key activity, the key metric and cohorts. The final problem we need to overcome is one we wrote about in almost all the previous blogposts: The danger of having metrics that make […]

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January 20, 2016
Cohorts: because averages hide the pattern

When I first started using good metrics (I was no longer focussing on vanity metrics like total registered users) I had a hard time wrapping my head around Retention. What does it mean when you have 25% active users. Do they come back every day? Or every week? How do you measure that 25%? It […]

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January 5, 2016
One metric to rule them all

If there is one thing important for startups, it is focus. The same applies to analytics. Startup life is chaotic enough and you can not have an overview of everything at the same time. To effectively apply analytics to your startup, it is important to focus on one metric at a time. We are basically […]

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December 23, 2015
AARRR — An analytics framework for startups

Table of Contents AcquisitionActivationRetentionReferralRevenueFunnel In the previous two posts we gave you an introduction to analytics, discussed vanity metrics and the criteria for good metrics. In this post we’d like to introduce the Pirate Metrics, an analytics framework created by Dave McClure of 500 startups. It’s called Pirate Metrics not just because Dave McClure seems […]

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December 9, 2015
What makes a good metric?

Table of Contents UnderstandableComparableBehavior changing Last time we did a short introduction on analytics. We explained that numbers that can only go up and to the right are called vanity metrics. Metrics that only exist make you feel good. For example, the total amount of signups since the beginning of your startup is a vanity […]

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December 2, 2015
An introduction to startup analytics

One of the most requested topics when mentoring startups are analytics. Startup founders know that they have to measure things and that analytics are the solution, but not a lot of people know how to actually apply it. The problem is that even after reading the books (like Lean Analytics, which I can highly recommend), it is still hard to apply to your own startup.

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