This is where innovation accounting comes in. At its core, innovation accounting is a systematic way to measure progress, reduce uncertainty, and align innovation investments with business outcomes. But here’s the reality: introducing innovation accounting into a company is never an easy task. Done too suddenly, it can backfire—sparking resistance, skepticism, or outright rejection.

The solution? Treat the introduction of innovation accounting as a change management initiative.

Why Innovation Accounting Feels Risky to Organizations

Most organizations are comfortable with performance systems that track efficiency and predictability—sales revenue, customer acquisition costs, or operating margins. Innovation, however, thrives in environments of uncertainty. It’s iterative, messy, and full of ambiguity.

That’s why pushing a rigid set of new innovation metrics on a company is risky. It creates friction with existing behaviors, invites detractors to push back, and overwhelms employees who may already be skeptical about “yet another system.”

To mitigate this, organizations should layer innovation accounting on top of existing behaviors. By building on what people already know and do, leaders reduce resistance while fostering gradual adoption.

The Psychology of Adoption: Focus on the Undecided

When introducing innovation accounting, many leaders make the mistake of trying to win over the strongest detractors. This often leads to wasted effort. A more effective approach is to focus on the undecided majority—employees who are neither champions nor opponents.

Converting undecided employees into supporters builds momentum and creates proof points that naturally weaken detractors’ arguments. Over time, this incremental approach helps establish innovation accounting as a credible and useful system rather than an imposed burden.

Introducing Innovation Accounting in Phases

Rolling out a full innovation accounting system overnight is not only unrealistic but also counterproductive. Instead, organizations should aim at introducing a minimum viable innovation accounting system and do it in phases. These phases can be linked to specific behaviors or timeframes—for example, a year per phase or a milestone-based progression.

Phase 1: Build on Existing Behaviors and Indicators

If the company already tracks indicators like Number of Ideas submitted or Number of People participating in Events, continue tracking them—even if they aren’t fully actionable. This keeps the system familiar while gradually shifting toward more meaningful measures:

• Start tracking the ‘Number of Ideas’ actively worked on and their distribution across your ILC framework (ideas in each stage).

What it tells you: How many ideas do we have in each stage.

Why is it important: It shows how many ideas are currently in progress and how far along they are in their lifecycle—highlighting when it may be necessary to initiate new ideas if the funnel is too thin. 

• Track the ‘Average Time Spent’ by teams in each stage of the ILC framework.

What it tells you: How long are our ideas taking to clear each funnel (ILC) stage.

Why is it important: It highlights which stages of the idea lifecycle are most difficult to pass, provides benchmarks for new ideas entering each stage, and may reveal skill gaps if teams consistently take too long or exceed benchmark thresholds.

• Measure the ‘Investment Distribution’ across innovation types in your pipeline.

What it tells you: What kind of ideas are being invested in

Why is it important: It reveals whether the company is actively pursuing growth beyond its core business and whether its investments align with its strategic priorities in terms of disruption prevention.

• Capture the holistic confidence decision-makers have in each team.

What it tells you: How much do we trust this particular idea to be on the right track to progress to the next ILC stage.

Why is it important: This metric functions as both a reverse indicator of risk and a proxy for learning velocity. High confidence from decision-makers typically signals a lower-risk business model that is ready to advance through the innovation funnel. However, this confidence should be grounded in evidence—not intuition—which means it should grow as teams conduct experiments and validate key assumptions. 

• Track the estimated impact that can be expected from each active idea.

What it tells you: What can we expect from this idea

Why is it important: This metric estimates the potential impact of a specific idea, ensuring that its projected value remains above a minimum threshold set by the company. It helps prioritize investment in ideas with the potential to meaningfully contribute to EBITDA, preventing resources from being spent on low-impact initiatives.

Phase 2: Build on Phase 1 with Broader Performance Metrics

In addition to Phase 1 indicators, begin monitoring:

• Aggregated estimate impact

What it tells you: How much is the innovation investment expected to contribute to growth.

Why is it important: It reveals whether the company is investing in ideas with the potential to significantly impact EBITDA, or merely in low-return initiatives—bringing pragmatism to innovation investment decisions. 

• Average time-to-market

What it tells you: How fast are our ideas making it to market

Why is it important: It will help you set goals and align innovation investments with your company’s strategic timeline by offering a realistic estimate of how long it takes for ideas to progress from concept to maturity.

• Average funnel conversion rate

What it tells you: How many ideas make it to the market.

Why is it important: It will help you set goals and align innovation investments with your company’s strategic intent by providing a realistic view of how many ideas are likely to reach maturity based on the number of new initiatives you start today.

• The number of ideas being stopped at each stage of the ILC framework

What it tells you: In which stage of your idea lifecycle framework (ILC) is the company stopping most ideas.

Why is it important: It reveals whether the idea lifecycle framework and innovation process are working as intended—stopping unpromising ideas early to enable fast, low-cost failure. If ideas are stopped too late, it may indicate flaws in the lifecycle criteria or a culture affected by sunk cost bias.

Phase 3: Move Toward ROI-Centric Measures

Once Phase 1 and Phase 2 indicators are established, the organization can graduate to ROI-driven metrics:

• Average time to ‘kill’ an idea

What it tells you: How long it takes for your company on average to decide to stop an idea

Why is it important: This indicator reflects whether your company fosters a psychologically safe environment—one where teams feel empowered to present evidence that may invalidate an idea without fear of blame or career risk. A high score may also signal a culture that is intolerant of failure. This metric can serve as a valuable tool for self-benchmarking and identifying areas for cultural improvement and it impacts the ‘cost of failure’ indicator. 

• Average cost of failure

What it tells you: How much are we paying for every failed initiative.

Why is it important: A low cost of failure indicates an effective process and idea lifecycle, enabling ‘fail fast, fail cheap’ and allowing the company to test more ideas with the same budget. Conversely, a high cost of failure may signal cultural issues such as sunk cost bias or failure intolerance. This metric can also serve as a valuable self-benchmarking tool. This is why it is probably one of the most important indicators in the innovation accounting system. 

• NPVI (New Product Vitality Index)

What it tells you: How much of today’s revenue comes from products we launched in the past 3/5 years.

Why is it important: It shows whether the company’s past innovation investments have contributed to EBITDA—and quantifies the extent of that contribution. It combines with Investment Distribution to paint a clear picture of where does growth come from in your business.

By the time a company reaches Phase 3, it has a robust system for measuring innovation ROI with actionable insights for resource allocation, pipeline management, and portfolio balancing.

The Role of Sponsors and Leadership Alignment

No measurement system can survive without executive sponsorship. Leaders introducing innovation accounting should ensure that sponsors are aligned not just on the plan but also on the end goal: to connect innovation activities with tangible business value.

Sponsorship does more than unlock resources—it signals legitimacy, reduces organizational skepticism, and establishes innovation accounting as a serious priority.

Building a Sustainable Innovation Measurement System

The introduction of innovation accounting is less about enforcing a new dashboard and more about driving organizational learning. By layering metrics on existing behaviors, phasing the rollout, and focusing on undecided employees, leaders can ensure their innovation measurement system sticks.

Ultimately, innovation accounting enables organizations to do what traditional accounting cannot: measure uncertainty, track learning, and connect experimentation to ROI. And in a business environment where innovation is no longer optional, but essential, that capability is what separates companies that thrive from those that stagnate.

This article was originally published on the OUTCOME BLOG.

The post How to Introduce Innovation Accounting Without Alienating Your Organization appeared first on Innovation Accounting Book.

With our book, Innovation Accounting, we aimed to shift that paradigm by providing a practical framework to professionalize innovation management. We propose a set of more than 25 key indicators that allow leaders to clearly evaluate their innovation portfolios, understand the impact innovation has on the growth of the company and help evaluate the performance of individual innovation teams prior to revenue. The proposed indicators are structured across four levels with each layer catering for the needs of a certain persona and answering a clear question:

1. Strategic layer for C-suite executives interested in knowing if the innovation efforts of the company are contributing to long-term growth or are just adding to OPEX?
2. Funnel layer for innovation leaders who want to know where projects are in the pipeline, and how efficiently are they progressing?
3. Tactical layer for team leads and coaches curious to know which teams merit additional investment, based on performance and potential?
4. Cultural layer for HR leaders keen to learn if the organization is fostering a culture that enables innovation to thrive?

That said, we recognize that implementing a full-scale innovation accounting system can be daunting for some companies. For these companies, the better path is to begin with a Minimum Viable Innovation Accounting System (MVIAS)—a simplified framework that delivers transparency and focus, without the burden of too much complexity.

To that end, we’ve identified 12 foundational indicators that belong in the minimum innovation accounting system. These metrics serve as a starting point for organizations looking to treat innovation not as a side project, but as a measurable, manageable, and scalable business function while at the same time allowing the company to further develop from here in a second phase. 

Strategic layer indicators for the minimum viable innovation accounting system

• Average funnel conversion rate (ACR) 

What it tells you: How many ideas make it to the market. 

Why is it important: It will help you set goals and align innovation investments with your company’s strategic intent by providing a realistic view of how many ideas are likely to reach maturity based on the number of new initiatives you start today.

• Average time to ‘sustain’ (ATS)

What it tells you: How fast are our ideas making it to market 

Why is it important: It will help you set goals and align innovation investments with your company’s strategic timeline by offering a realistic estimate of how long it takes for ideas to progress from concept to maturity.

• Investment Distribution (ID) 

What it tells you: What kind of ideas are being invested in

Why is it important: It reveals whether the company is actively pursuing growth beyond its core business and whether its investments align with its strategic priorities in terms of disruption prevention.  

• Aggregate estimated impact

What it tells you: How much is the innovation investment expected to contribute to growth.

Why is it important: It reveals whether the company is investing in ideas with the potential to significantly impact EBITDA, or merely in low-return initiatives—bringing pragmatism to innovation investment decisions.

• New Product Vitality Index (NPVI)

What it tells you: How much of today’s revenue comes from products we launched in the past 3/5 years.

Why is it important: It shows whether the company’s past innovation investments have contributed to EBITDA—and quantifies the extent of that contribution. It combines with Investment Distribution to paint a clear picture of where does growth come from in your business.

Funnel layer indicators for the minimum viable innovation accounting system

• Number of ideas in each stage

What it tells you: How many ideas do we have in each stage. 

Why is it important: It shows how many ideas are currently in progress and how far along they are in their lifecycle—highlighting when it may be necessary to initiate new ideas if the funnel is too thin.

• Number of ideas stopped in each stage

What it tells you: In which stage of your idea lifecycle framework (ILC) is the company stopping most ideas. 

Why is it important: It reveals whether the idea lifecycle framework and innovation process are working as intended—stopping unpromising ideas early to enable fast, low-cost failure. If ideas are stopped too late, it may indicate flaws in the lifecycle criteria or a culture affected by sunk cost bias.

• Average time spent in each stage

What it tells you: How long are our ideas taking to clear each funnel (ILC) stage.

Why is it important: It highlights which stages of the idea lifecycle are most difficult to pass, provides benchmarks for new ideas entering each stage, and may reveal skill gaps if teams consistently take too long or exceed benchmark thresholds.

• Average cost of failure

What it tells you: How much are we paying for every failed initiative.

Why is it important: A low cost of failure indicates an effective process and idea lifecycle, enabling ‘fail fast, fail cheap’ and allowing the company to test more ideas with the same budget. Conversely, a high cost of failure may signal cultural issues such as sunk cost bias or failure intolerance. This metric can also serve as a valuable self-benchmarking tool. This is why it is probably one of the most important indicators in the innovation accounting system.

Tactical layer indicators for the minimum viable innovation accounting system

• Holistic confidence

What it tells you: How much do we trust this particular idea to be on the right track to progress to the next ILC stage.

Why is it important: This metric functions as both a reverse indicator of risk and a proxy for learning velocity. High confidence from decision-makers typically signals a lower-risk business model that is ready to advance through the innovation funnel. However, this confidence should be grounded in evidence—not intuition—which means it should grow as teams conduct experiments and validate key assumptions. 

• Estimated impact

What it tells you: What can we expect from this idea

Why is it important: This metric estimates the potential impact of a specific idea, ensuring that its projected value remains above a minimum threshold set by the company. It helps prioritize investment in ideas with the potential to meaningfully contribute to EBITDA, preventing resources from being spent on low-impact initiatives.

Cultural layer indicators for the minimum viable innovation accounting system

• Average time to ‘kill’

What it tells you: How long it takes for your company on average to decide to stop an idea

Why is it important: This indicator reflects whether your company fosters a psychologically safe environment—one where teams feel empowered to present evidence that may invalidate an idea without fear of blame or career risk. A high score may also signal a culture that is intolerant of failure. This metric can serve as a valuable tool for self-benchmarking and identifying areas for cultural improvement and it impacts the ‘cost of failure’ indicator. 

Innovation can no longer be treated as a black box or a side bet—it must be managed with the same rigor and clarity as any other core business function. The Minimum Viable Innovation Accounting System (MVIAS) offers a practical entry point for organizations to begin measuring what truly matters in innovation, without being overwhelmed by complexity from day one.

By adopting even a basic set of indicators across strategic, funnel, tactical, and cultural dimensions, companies can shift innovation from intuition to insight, from chaos to clarity. Over time, these metrics not only guide better investment decisions but also foster a culture that values learning, rewards evidence over opinion, and aligns innovation with long-term strategic growth.

Ultimately, what gets measured gets managed and metrics have the power to chance behaviors beyond the numbers that they are displaying. When innovation is managed well, it becomes a repeatable engine of growth rather than a gamble.

The post The Minimum Viable Innovation Accounting System  appeared first on Innovation Accounting Book.

My conviction was backed by empirical evidence. Our analysis of innovation maturity across nearly 400 global companies revealed that those hovering around a maturity level of approximately 3.08 on a scale of 0-4 exhibited the greatest necessity for innovation measurement. This correlation seemed logical, since our book, Innovation Accounting, outlined a comprehensive system of over 20 interlinked indicators, necessitating certain governance prerequisites.

But lately, I’ve been reassessing my stance. Even though I still stand by the fact that a company needs to have a basic level of governance in place to even start considering measuring innovation, upon reflection, I’ve come to realize that I may have been mistaken by saying that ‘innovation accounting is a luxury problem’.

Innovation accounting is relevant to every company, irrespective of their maturity level in innovation. The differentiating factor lies in the specific indicators each company chooses to monitor relative to their maturity and the reasons they have in tracking those indicators. 

Here are some indicators you can consider tracking relative to your company’s innovation maturity level. And some reasons you might be interested in tracking these indicators.

If you believe your company to be at a Novice Level, in other words a company that is just starting up on the innovation journey. And there isn’t much in place in terms of governance and the company doesn’t have that much experience of doing internal innovation, you can consider using the following innovation accounting indicators:

Indicators to track:

• Number of ideas in the innovation funnel 
• Number of ideas in each stage of the innovation funnel 
• Number of ideas progressed from one stage of the innovation funnel to the next

Reasons to use innovation accounting: 

• see if innovation sticks in your company, 
• see if the company is interested in investing in innovation
• prove that innovation can happen in the company

However, if you believe your company to be at the Competent Level of the innovation maturity scale, in other words a company that has some governance in place, but the innovation system is not yet fully developed as it is missing some components. And the company has been investing in innovative ideas but is not yet doing innovation at scale (ie. playing the number’s game), you can consider tracking the following innovation accounting indicators:

Indicators to track:

• Number of ideas in the innovation funnel by innovation type (core, adjacent, transformational)
• Suitability rate of each stage in the innovation funnel 
• Innovation funnel’s estimated value 
• Average estimated value per venture/idea

Reasons to use innovation accounting in addition to the previous maturity levels: 

• see what kind of innovations is the company typically getting behind
• see if the governance system is working
• see if certain skills and/or cultural elements are missing
• understand how can the governance system be improved
• prove  the potential of the investment in innovation to the company’s c-level 

Lastly, if you are fortunate enough to be with a company that is at the Expert and Leader Levels in terms of innovation maturity. In other words companies that have a fully working innovation system in place, are playing the number’s game and have been using innovation as a growth engine for some time can consider tracking the following indicators:

Indicators to track:

• New Product Vitality Index
• Efficiency of innovation investment 
• Portfolio Distribution 
• Investment Distribution
• Cost of Innovation 
• Cost of Failure
• Average funnel conversion rate
• Average time to sustain (or average time to market)

Reasons to use innovation accounting in addition to the previous maturity levels: 

• see if innovation is indeed contributing to the growth and how much  
• see if innovation is a sustainable investment for the company
• see if innovation is proofing the company from disruption 
• use the data from innovation accounting system to set goals for the innovation investment or determine the budget needed for innovation 
• use the data from the innovation accounting system to validate or invalidate the innovation strategy

So as you can see measuring innovation is not a switch to be flipped, today you don’t have an innovation accounting system and tomorrow you do. It’s a journey that starts with the most basic indicators used for the most basic needs, and goes all the way to the most complex ones. 

Your ability to measure innovation is going to evolve with the need for measuring innovation as well as with your ability to manage innovation. In other words innovation accounting can be used by any company regardless of how professional they are with innovation management today.

So don’t trick yourself into thinking that measuring innovation is something you can put off until later or until you’ve reached ‘an enlightened level’. You’ve gotta dive in right now and start learning the ropes. Then, as you gain experience, keep leveling up by adding more complex indicators and finding smarter ways to use them in your innovation practice. 

As the old Chinese saying goes: the best time to plant a tree was 20 years ago, the second best time is TODAY. 

The post Innovation Accounting is for Everyone appeared first on Innovation Accounting Book.

SUMMARY

• Deciding to focus on the cost of failure instead of the rate of failure will have many positive consequences in your company innovation system
• Tracking the cost of failure will encourage a mindset gravitating around (cost effective) experimenting and prototyping while, an emphasis on rate of failure will prompt leaders to do the impossible and pick winners from the start of the innovation journey 
• Tracking the cost of failure will ensure that decisions are taken fast. A high cost of failure can mean an innovation process where ideas are allowed to mature way too long before the plug is pulled.
• Tracking the cost of failure will tell you a lot about the culture of your company. A high cost of failure might mean that the work environment is not really allowing for honesty. 
• Tracking the cost of failure will give you an idea of how many initiatives you can kick off in a year given the budget you have.

Without a doubt, many businesses today consider innovation a cornerstone for growth and sustainability. As companies strive to foster innovation-led growth, prioritizing wise investment in innovation becomes essential. Consequently, there is significant emphasis on the success rate of innovation investments, measured through metrics such as the number of pilots implemented from those started, the number of ideas reaching maturity, and the number of products launched from initiated ideas, all variations of what is typically termed the ‘rate of failure’.

However, as important as this metric may seem, another metric, the ‘cost of failure’, carries even broader implications for a company’s innovation system. This indicator, seldom discussed, measured, or optimized for, can indeed prove transformative for companies serious about innovation-led growth.

While tracking the ‘rate of failure’ offers insights into the success of innovation initiatives, an exclusive focus on this metric may not cultivate a culture of continuous improvement. Directing attention to the ‘cost of failure’ provides a more comprehensive understanding of the innovation landscape.

Opting for a cost-centric approach to innovation primarily encourages a mindset focused on cost-effective experimenting and prototyping. This acknowledges that not every idea will succeed initially and stresses the importance of learning from failures in a financially responsible manner. Executives, in particular, shifting focus from trying to select ‘winning ideas’ to allowing experimentation on every idea aligned with the innovation strategy, can benefit from tracking the ‘cost of failure’ over the ‘rate of failure’.

Additionally, tracking the ‘cost of failure’ ensures swift decision-making. A high cost of failure may signal an innovation process where ideas linger too long before being abandoned, delaying resource redirection to more promising ventures and hindering overall innovation funnel efficiency.

Moreover, the cost of failure reflects the company’s culture. A high ‘cost of failure’ may indicate a lack of honesty and transparency, impeding open communication about what works and what doesn’t, or what customers truly desire. This insight is vital for leaders aiming to foster an innovation-friendly culture.

Understanding the ‘cost of failure’ enables companies to make informed decisions about the number of initiatives feasible within a given budget, preventing overcommitment and ensuring a realistic innovation portfolio. While the rate of failure remains important, balancing it with the ‘cost of failure’ underscores the necessity of learning from failures without incurring unnecessary financial burdens.

In conclusion, tracking the ‘cost of failure’ is crucial for optimizing a company’s innovation system. By shifting focus from the ‘rate of failure’ to the financial ramifications of unsuccessful ventures, organizations can cultivate a culture of responsible experimentation, swift decision-making, and resource optimization, essential for sustainable innovation and long-term success.

Consider innovation as a lottery where your company invests $1000. Would you prefer buying 100 tickets at $10 each or 10 tickets at $100 each, with both options having the same winning likelihood? This analogy underscores the importance of managing costs and maximizing success potential within budget constraints.

The post Cost of Failure vs. Rate of Failure appeared first on Innovation Accounting Book.

This said, setting goals for innovation becomes even more critical in times when resources are scarce and the company needs to reshuffle its priorities. 

Experience has shown us that, when it comes to setting goals for innovation, leaders are typically interested in finding a concrete answer to one of two questions:

1. How much do they need to invest given what they want to accomplish with innovation?
2. What is a realistic goal for their innovation efforts given how much they are prepared to invest?

We usually refer to the first question as the Future-to-Present way of setting innovation goals, and to the second question as the Present-to-Future way. One way is not superior to the other and every leadership team picks the one that best suits their company’s context. 

Future-to-Present or “How much do we need to invest given what we want to accomplish with innovation?”

Present-to-Future or “What is a realistic goal for their innovation efforts given how much they are prepared to invest?”

Note that in the absence of a company’s innovation accounting data, data from startup accelerator programs or venture capital companies active in the same industry as the company can be used. Although this data needs to be taken with a pinch of salt, it can serve as a decent proxy for the company’s own innovation perforce data.

Many companies today still consider innovation to be more art than science. However, nothing could be further from the truth. If management principles, logic (common sense), discipline and pragmatism are applied to innovation, what was once viewed as art can become a science. Furthermore, clear goals for innovation will have a ripple effect, impacting capability development strategies, organizational structure or hiring policy, just to name a few.

Visual summary of the article.

This article was originally posted on the OUTCOME Blog.

The post Setting Goals for Innovation  appeared first on Innovation Accounting Book.

We’ve been approached a handful of times by corporate leaders asking us to give them tips on how to measure innovation performance – in essence how to implement innovation accounting. But after a brief conversation we both realize that what they actually need is to sharpen up their innovation practices instead. In other words if companies don’t do innovation or don’t do it professionally enough there’s no point in spending time implementing a fancy accounting system. There are bigger things that need solving before the lack of performance indicators becomes an issue.

Below we have summarized our way of figuring out if a company really needs innovation accounting or it just wants it in order to tick things off a ‘to do’ list.

If you wanna know if the lack of innovation metrics is a real issue for your company answer (honestly) the questions below:

Interpreting your answers is really straightforward. Basically if you answered NO at 4 or more of the questions above, innovation accounting is not yet a real problem for your organziation. What you need to focus your efforts on instead is improving the innovation practice.

Conversely if you answered YES to the majority of the questions, your company will benefit massively from innovation accounting and you need to start building that metrics system sooner than later. Now that you validated that innovation accounting is actually needed in your company, here is a list of three things you need to have in place before you can start implementing innovation accounting.

The post Does Your Company Actually Need Innovation Accounting? appeared first on Innovation Accounting Book.

But for long, innovation was seen more as an art form than a science. There is a common tendency to conflate creativity with innovation. 

Corporate leaders often see successful startups coming up with great new products, which motivates them to pursue the development of similarly cool, new, shiny products. Companies fall into this trap every time. They think that the best way to become better at innovation is to put a bunch of “creatives” under one roof and ask them to think of the next big thing. To be clear, as any seasoned entrepreneur or product innovation manager would tell you, awesome ideas are an important input. But just putting a bunch of subjectively creative individuals together isn’t a foolproof recipe for generating growth. 

Furthermore, adding the inability to clearly measure innovation to the mix, only contributes to many executives shying away from making bold innovation moves. But, as many would argue (and as examples have proven) innovation is a discipline to be mastered and managed. And, since innovation is more about discipline and routine than about creativity, it can be measured, just as any other company process can. The caveat being that innovation accounting has some prerequisites:

1. Be clear about what you mean by innovation 

If you want to start measuring innovation by building an innovation accounting system, you would first have to define innovation. As trivial as this might sound, this is an important step, as your definition of innovation will impact what indicators you will need to put in place. 

Some people in your company might refer to innovation as being something entirely new that the company hasn’t done or offered before, while others might consider an incremental improvement of an existing offering as innovation. Being an evergreen word, innovation might mean different things to different people in your company, and they are all correct in their views.

If your company agrees on it’s meaning of innovation as more on the incremental side of the spectrum, indicators from the financial accounting and project management spheres might be better suited for measuring your innovation efforts. On the other hand, if your company’s definition of innovation tips more towards the disruptive side of the innovation spectrum, you might need to consider alternative indicators to financial accounting – indicators that present progress and impact in the absence of immediate financial data. 

Aligning on a clear definition of innovation is the first step on the journey, not only for measuring innovation, but for driving innovation in general. Companies such as DBS were able to ‘rally the troops’ behind the idea of growing through innovation and building a culture of innovation by creating a simple definition that everyone in the company understands and can act on: “something different that creates value”.

2. Put the right governance in place 

Innovation measurement starts with innovation management. The companies wanting to measure innovation first have to have a solid innovation management process (governance) in place. 

This governance needs to cover everything from the stages ideas pass through from the moment they were created to the moment they reach maturity, to how often investment or divestment decisions are being made. And from how budgeting for innovation is done to how progress is being tracked at team level. 

For example, without clear stages ideas pass through, it is impossible to measure progress ideas are making – you will only be able to track the costs incurred. The company won’t know if that incurred cost was converted into progress by the innovation team aside from some personal opinions. 

An innovation governance system is at the heart of a company’s ability to measure innovation. Therefore if you want to get clarity around how much innovation is costing and what’s the potential upside you might get from innovation down the line, you need to invest in bringing clarity around how innovation is managed.  

3. Train people on how to manage and measure innovation 

Any system is as good as the people operating it. After building the governance for innovation, companies need to invest in developing the innovation management skills of the employees across all levels of the company. Only once these skills, and the innovation governance, are put into practice, can companies hope to get data around their innovation investment. 

In the absence of innovation management skills, employees will revert to the ‘traditional’ way of working, which might be fitting for the core business but detrimental for innovation. The investment in the governance system for innovation needs to be matched by the investment in the HR capabilities of the organization with training programs touching on all aspects of innovation management. From how to generate ideas aligned with the company’s growth strategy, to how to run business experiments, to assessing the progress of innovation teams and measuring certain innovation specific indicators, everything needs to be considered and developed if the company is to have transparency over its innovation investments.

You may have been tasked with measuring innovation or developing an innovation accounting system in your company, or you may have taken the project on as one of your roles and responsibilities within your organization. Either way, being mindful of these three prerequisites and acknowledging the fact that building a measuring system for innovation is a complex endeavor worth pursuing are the first steps towards success.

The post Three Things Your Company Needs to Have in Place to Implement Innovation Accounting appeared first on Innovation Accounting Book.

In simplest terms, they are special-purpose governing bodies with mandate to invest into innovative projects and ventures that are expected to contribute to the organisation’s revenue and margin growth.

Hence, why they are sometimes called different names.

Expected benefits from having such a board are:

• Faster decision making.
• More efficient resource allocation.
• Aligned innovation efforts.
• More satisfied innovators.
• Better use of internal innovation capabilities.
• Better ROI compared to traditional innovation management approaches (e.g. smashing hits like “the loudest guy gets the budget” and “everybody is at a standoff so the fastest way to innovate is by hiring an external agency”).

None of the above manifest if the board acts as a committee.

Does that sound interesting? If yes, here are the basic ingredients for a venture board that stands a chance.

Inputs for establishing a Venture Board

• Investment mandate. What is the case for innovation in your organisation? Not fluffy, PR piece, but hard expectations like “30% of our revenue should come from products and services introduced in the last five years.” What investment & innovation vehicles are acceptable? What innovation types? Freedoms? When does the innovation board have to escalate? And so on.
• Budget. How much is to be invested and over what period of time? Is it sizeable enough, relative to the organisation? 100 million Euros might be a good number for some, but won’t matter much for a multi-billion organisation.
• Decision making power. One of the key jobs of this board is to make yes or no decisions. Domain experts and talented interns make for fine guests, but if the board is to deliver on their mandate, core members must be from top management ranks. A well respected member with gravitas and critical thinking facilities is better than an innovation fan.

Above make for the very basics. Without them, you risk burning cash.

Operating a Venture Board

Depending on what led to the creation of the board, some of the initial tasks might include:

• Formulating an innovation strategy. Should be complementary to the corporate and business strategy. Should breakdown and clarify how innovation will contribute to overall goals. Should specify what kind of investments are acceptable and what aren’t. The last point is to ensure that collected ideas can be filtered efficiently.
• Establishing an innovation portfolio. Define different portfolio views (e.g. type of innovation versus project maturity, type of innovation versus risk adjusted return, and so on).
• Founding a core innovation management team. Since the board will mostly consist of executives, it is worth appointing an operational innovation manager who takes care of minute details, organises necessary workshops and discussions, ensures the numbers and information are up to date, and so on.
• Issuing a call for ideas and projects to invest in. Once the Innovation Board has clarified the above, they shouldn’t assume employees will be aware of them. Hence, it is worthwhile communicating it in plain language: this is the type of projects we are looking for, this is the type of funding and support we provide, this is how you can apply, and this is what you can expect to happen once you apply.

With that in place, the board should meet on a regular cadence. Again, the main job of the board is to fund innovative projects that are aligned with the strategy. They should regularly review the portfolio, and adjust as necessary. One of the key success factors is to release limited funding.

The board should consider the following questions when evaluating an innovation project:

• What’s the maturity level of this idea?
• What has the team told us they will do?
• What did they do?
• What were the results?
• What were the learnings?
• What is the team proposing to do next?
• What are they asking for to do that?
• What are data and insight are they basing their proposal on?

When convening innovation teams and projects, the board should strive to avoid the following mistakes:

1. Not taking a deliberate decision.
2. Not documenting taken decisions.
3. Inconsistent scheduling and cadence.
4. Inconsistent structure and timing.
5. Running it as a status meeting.
6. Running it as a brainstorming session.
7. Running it as a pitching competition.
8. Asking ill-suited questions.
9. Handing out minute tasks.
10. Framing it as “us” versus “them.”
11. Failing to create a transparent and collaborative space.

And most importantly: the Venture Board should adjust the strategy, portfolio, and themselves, based on the market response. It is a dynamic governing body, not a static one.

Suggested resources

• How to run effective corporate venture boards. The most important function for maximising your returns on innovation investments.
• The 9 Mistakes Venture Boards Make.
• How to formulate a winning innovation strategy. A practical framework you can immediately use to formulate your innovation strategy.
• Create your own innovation portfolio in three simple steps. Disciplined innovation management at scale.
• Innovation Accounting book.

Getting started

Since every organization is different, it stands to reason their Venture Boards would be different as well.

The above advice is based on my experience working with companies in different industries. I attempted to generalize it as much as possible, and leave it up to you to adjust as needed.

It should be sufficient to plan and launch your first Venture Board. Feel free to reach out should you have any questions or require further help.

A version of this article has originally been published at pesec.no.

The post Getting started with a Venture Board appeared first on Innovation Accounting Book.

But in the absence of indicators it is difficult for corporate leaders to know if middle management is a blocker for innovation or a catalyst. Understanding the impact middle management has on the company’s innovation efforts can prompt leaders to take certain actions such as investing in innovation specific training for middle managers, changing certain processes or investing in culture development.

Here are five indicators that can be used to measure if middle managers are indeed driving innovation, and the questions they help leaders answer with respect to the performance of the middle management. 

1. Decision time. 

Is middle management efficient in their decision making process?

Middle management makes the connection between the company’s innovation strategy and the innovation practice. They represent the group of people that have the most say in the deployment of the innovation strategy. Also, middle management acts as the internal ‘Venture Capital fund’ of the company, being tasked to take investment or divestment decisions in the various innovation initiatives the company has decided to kick off. 

Tracking the time it takes for the middle managers to take a decision with respect to a certain innovation initiative after the innovation team has presented their progress and evidence gathered through experimentation can help leaders understand if the middle management layer is stifling innovation or not. 

Ideally, persevere, pivot or stop decisions should be taken immediately after the innovation teams present their progress. Any delay will have consequences on the company’s cost of innovation as well as the morale of the innovation teams.

2. Investment distribution or type of innovation ideas backed.

Is middle management investing in ideas that will help our company grow and/or prevent us from getting disrupted?

Through the budgets they have at their disposal, middle managers have a freedom to back certain initiatives and ignore others. Obviously the company’s Innovation Thesis should help them decide what type of initiatives they should invest in and what type of initiatives they shouldn’t invest in.

In organizations that have a low tolerance to risk, middle management will be more inclined to back incremental improvement ideas or evolutionary innovation instead of radical or disruptive innovation. 

Leaders need to understand that the innovation funnel of today represents the company’s portfolio of tomorrow. Tracking the type of innovation initiatives that middle management backs, paints a picture, on the one hand, of what the company’s future might look like, and on the other, what kind of innovation culture the company currently has.

For companies that are active in industries where there’s a high risk of disruptions, such as for example banking, telecommunication, automotive or energy, tracking the type of innovation middle management supports can represent a proxy for how likely it is for the company to get disrupted in the future. 

3. The ‘time-to-maturity’ of the ideas. 

Is middle management a blocker for innovation in our company?

Through their decisions middle managers have a direct impact on the time it takes from the moment an idea is kicked off and that idea producing tangible results. Measuring the time it takes for an idea to reach a certain maturity stage from the moment it was created can offer a window into the effectiveness of middle managers’ decisions. 

Failing to progress an idea in the face of irrefutable market evidence gathered by the innovation team, will take a toll on the time it takes for that idea to have an impact on the company’s growth. 

The longer the time it takes for an idea to reach a certain mutiny stage, the more innovation will cost the company and the more the company will be seen as an innovation laggard. Ideas taking a long time to reach a certain maturity level can indicate a need for training the middle managers on how to invest in innovation.

4. Funnel Conversion Rate. 

Are the decisions taken by middle management effective?

Looking at the number of ideas reaching maturity from the number of ideas that were kicked off can offer a perspective on the decisions middle managers take.

If the innovation funnel’s conversion rate is low it might mean that middle managers are ‘killing’ too many ideas. With a high number of ideas killed the cost of innovation for the company will be high. The cost of innovation represents not only the cost incurred to bring that one innovation idea to market, but the cost incurred by the company in the entire innovation exercise. 

At the same time, a high funnel conversion rate might mean that middle managers are not ‘killing’ enough ideas, resulting in the company spreading itself thin when it comes to the innovation investment.

5. New Product Vitality Index (NPVI). 

Have our middle managers taken the right decisions with respect to innovation?

A long established innovation performance indicator, the NPVI is telling corporate leaders what percentage of the current revenue comes from products launched 3 to 5 years ago. In essence painting a picture of how successful the innovation process is. 

Through their decisions, middle management can sometimes back ideas that are only good on paper. Ideas that will (for a variety of reasons) fail in the market. Therefore tracking NPVI can offer a perspective into the quality of middle management’s investment decisions. Low NPVI figures might suggest that middle management is not taking the right decisions with respect to innovation – investing in initiatives that are not moving the needle or failing soon once they are deployed in the market.

None of the indicators above should be used as a stand alone. None of them are perfect and all of them can be misleading or can be easily gamed. However, if they are used in conjunction they will complement each other and the company will be able to know if the middle management layer of the company is driving innovation or if it, indeed, represents the permafrost of the company.

The post Five Innovation Accounting Indicators that are Telling you if your Middle Managers are Stifling Innovation appeared first on Innovation Accounting Book.

Definition of Innovation Accounting:

“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.”

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 company, or 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. 
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.

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