Innovation Accounting: how to measure innovation impact

Manage the development of new products and business models and align innovation with your business strategy.

What is Innovation Accounting

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

 

To improve entrepreneurial outcomes, and to hold entrepreneurs accountable, we need to focus on the boring stuff: how to measure progress, how to setup milestones, how to prioritize work. This requires a new kind of accounting, specific to startups

Eric Ries - 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 the innovation within an organisation. Especially when we are still creating and testing ideas we need non-financial indicators for success. That is why every modern organisation 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 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.

Governance KPIs are connected to Innovation Management. The focus here is on helping the company make informed investment decisions based on evidence and 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 measure 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 organisation.

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:

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Example Innovation KPIs for Creating Ideas

KPIs

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

KPIs

Activity Metrics

Impact Metrics

Reporting KPIs

  • 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

  • experiment results
  • decisions made (pivot or persevere)
  • cost-per-learning
  • time-cost-per-learning
  • learning velocity
  • 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 KPIs for Scaling Ideas

KPIs

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
  • cohort analysis
  • pirate metrics
    (acquisition, activation, retention, revenue, referral)
  • Growth Engines
    (lifetime value, retention rates, viral coefficients)
  • revenues and profits

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

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