Innovation Accounting is for Everyone

Innovation Accounting is for Everyone

Innovation Accounting is for Everyone

  • Posted by Dan Toma
  • On 23/04/2024

For a considerable period, I maintained the belief that innovation accounting, the practice of quantifying innovation, was reserved only for those companies that had reached the upper echelons of innovation maturity. My stance was that innovation accounting was a concern best addressed once a company had established fundamentals such as an innovation process, a framework for idea lifecycle, or a substantial influx of ideas annually.

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:

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

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.

Get a data-driven picture of the potential return you can expect from your investments in innovation.

This article was originally posted on the Innovation Accounting book’s blog.