How to measure corporate innovation in a large enterprise
Practical innovation accounting.
How can organisations measure innovation in a meaningful way, without stifling creativity and tripping on bureaucracy?
For the last couple of years, Dan Toma and I have been closely collaborating on cracking the above question.
In this webinar, we discussed:
- why measure innovation performance at all,
- how are existing accounting practices lacking when it comes to measuring innovation,
- what is a better way to measure innovation in a large enterprise,
- principles of innovation accounting,
- measuring innovation on a strategic, managerial, and tactical level, and
- our favourite innovation metrics.
We also tackled questions about what is the best way to introduce innovation accounting to your organisation and leadership team.
You can find the webinar recording, resources, transcript, and licence below.
- The Innovation Accounting book, addressing in great detail all the topics Dan and I discussed during the webinar.
- The Corporate Startup book, a practical guide for established companies that aspire to develop and sustain their innovation capabilities.
- Outcome, an innovation consultancy Dan co-founded.
BRUNO: Hello. Welcome to the “How to Measure Innovation in a Large Enterprise” webinar. My name is Bruno Pesec and I help business leaders innovate profitably. Today, I'll be joined by a good friend and collaborator Dan Toma, the co-author of this chunky book, one of the best books on innovation management on the market and a co-author of forthcoming book on, well, measuring innovation.
And since that's the topic of today, that's why I also invited him over. Now, before Dan joins us, I just want to go through some technical stuff since we are on Zoom. On the bottom of your screen, you should see a chat box, a Q&A box, so please feel free to share your reflections, comments, questions, whatever comes to mind and expresses through your fingertips. And we are going to address that slightly at the end of the webinar. Some of you have sent your questions in advance and I have written them down. So, I'll make sure that we also address them during the webinar. This is recorded and you're going to receive the recording in a couple of days. It's Thursday today. So probably sometime next week. With that being said, Dan, please show your pretty face if you're still here.
DAN TOMA: Yeah, I'm here.
DAN TOMA: Hey, thank you very much for having me.
BRUNO: Where are you calling in? I'm tuning in from Oslo, and yourself?
DAN TOMA: Barcelona.
BRUNO: Barcelona. So it's getting quite warm here in Oslo. I said that actually to an acquaintance in Spain and they started laughing at me when I told them about the degrees. I said, “It's starting to get hot in Oslo, it's 25 degrees.”
DAN TOMA: That's pretty much what we have here in the evening. Throughout the day, goes up to like 28, but in the evening, it goes below 25.
BRUNO: Europe is so small but there is a lot of diversity.
DAN TOMA: At least climatic.
BRUNO: What I was thinking for today, and why I invited Dan, as I said, the topic is measuring innovation. And what I specifically put, I mentioned two words: corporate innovation and large enterprises. Because in my experience, large enterprises do encounter different challenges and a different set of challenges from smaller companies, or startups, or scale-ups, etc. So, they also require a different approach. But one of the questions that I have seen, and I know, Dan, you have seen as well, is why should we measure innovation at all? Why should we dare to measure innovation? Why shouldn't it happen organically, naturally, and in an unlimited way? I do have my answer on that, but I'd be curious to hear from you since I invited you as a guest.
DAN TOMA: Fair enough. I'm going to venture to answer here and then feel free. I will be actually very curious to hear yours. In spite of us having worked a lot together, it's always refreshing to hear what you're thinking about.
Well, the answer is twofold. On one hand, we discuss about innovation as being part of a - discipline part of management. Let's put it this way. And being a discipline part of management, we have all the other disciplines part of management that have their own specific metrics. Looking here at project management, for example, which is a very established school of thought, they have specific metrics for different types of methodologies of project management, right? If you want to run an agile team, you have your own metrics. Like for example, breakdowns, burndown charts and all that stuff.
If you run more waterfall, you still have your own metrics there. So it's only logical they should have their own set of metrics like all the other disciplines. That's one part of the answer.
The second part of the answer is the fact that there was a survey that was done by Gartner. I think in 2000. Late, 2019, early 2020 is when I think it came out. And that was very interesting for me. Obviously, I was biased when reading it, because I was working on the book, but the survey said that the number one reason why executives in large organizations are hesitant of investing in innovation is the fact they can't measure innovation. This was cited as the number one reason for not being super happy about investing in innovation. And this answer was given by more than eight-hundred executives worldwide. So it does not skew towards the U.S., as some of the reports in Europe or towards your other geographies.
So it's only obvious, let's say, that we need to have a system for innovation. And there can be other reasons behind it. But these are the ones that I usually prefer to look at. What would be your answer, Bruno?
BRUNO: So I was just reflecting as you were talking. It's quite fascinating what you said that comes from the study. For me, it kind of boils down to two things.
So, you know, I'm an engineer at heart. I've been trained as an industrial engineer. How I have always seen innovation is, if you look at the field of quality management, basically ensuring quality. A lot of people have this misconception that quality management is as old as humanity itself. But what is old is quality inspection. So you have the master craftsman who did the work, and they inspected their work. If it was a good quality then they would use it. If not, they would rework it or discard it.
But quality management is trying to actually measure quality, ensure quality, prevent defects before they're happening. And that was the big revolution in the 50’s and 60’s with Deming and Juran, Toyota Production System, everything coming from them. What was critical in that moment was understanding that quality just doesn't have to be that it just happens by chance, but that we can actually develop skills and management systems and sets of measures in order to ensure and drive quality.
And I'm seeing both entrepreneurship and innovation management going through this transformation in the last fifteen-ish years. So that's one. And it's a big challenge. And it's a painful evolution and growing up and maturation. That's one argument.
The other argument, that's a bit more emotional, to me it sounds rational, but to me it's completely irrational, and that is this whole narrative of creative versus analytical. They're always posed as opposition. Right-brain, left-brain. “I'm not a right-brain person. I'm a bit more of a left-brain person.” To me, that is ridiculous because the right and left sides of the brain are in one person. Being creative and being analytical are in one person and they need to be like this. So, to me, it doesn't make any sense to drive a hard separation between the two and say, “Well, measuring is only for the analytical people, and innovation and expression is only for creative people.”
It's a combination. Each one of us has this combination in them.
DAN TOMA: We should distinguish between them. I mean, innovation. Everybody thinks innovation is being creativity but it's not just pure creativity. Everybody has done a start-up or studied a new innovation project. They know that creativity is probably an early stage of the journey. But then you need to be very disciplined about how you approach everything you do. We need to get more pragmatic about what we refer to when we're doing innovation.
BRUNO: Now to go back to what you shared from this survey. So around, what, eight-hundred or so executives? They said that they're hesitant. I noticed this hesitancy, as well, as we did it together, the executives cannot measure innovation. Which is a little bit ironic because modern management has a bunch of measurement and control mechanisms.
DAN TOMA: Yeah. But they are not suited for innovation, that's the problem. That's actually the biggest issue. The fact that they see the problem of, “Hey, I want to invest in innovation. Oh, I can't measure it. Well, let me use the metrics that I already have that I'm so used to and let's just throw those at innovation and see what happens.” And that's where all the horror stories are where you have teams that launch products a month ago. And then you have the head of a lab where the head of innovation is asking for ROI. And then you have teams discontinued because they can't compare their results with the core of the offering that the company has been doing for twenty-something years. That's where all the horror stories are.
The thing is, we needed another system that complements the shortcomings of the first one, right? We know how to measure the core business. We've been doing this for years and there's nothing new there. I mean, obviously, you can improve, you can get better, all that stuff. And there's an entire school of thought on indicators. But the problem is that those are not necessarily suited for innovation, not suited for highly volatile situations. And what we propose is that innovation accounting is not replacing the other system, but creating a system that complements that system.
We have a nice graph in one of the chapters. Where basically, we look at the growth of a very popular start up back in the day. I don't know if it was Uber or Airbnb, one of them. Doesn't matter. The idea is that there was like a flat line in profit and then all of a sudden that thing just spiked. The thing is that, innovation accounting addresses that particular bit where the line is pretty flat on standard indicators. Innovation accounting addresses just that. As the product transitions to a more mature stage, that's when the standard indicator comes in.
BRUNO: And I just noticed a, I wouldn't say a mistake, but let's address that right now. So to everybody who is listening and will be listening, because innovation has so many interpretations. So, what do we mean by innovation? You and I, right now speaking. So that is clear to everybody.
DAN TOMA: That's why we have Chapter One about defining innovation in the book. I agree we can't, you can't actually start talking about innovation accounting if you don't define what innovation is. Again, every company, and I think this is one of the shortcomings of most companies we work with, is that they don't have a clear definition of what innovation is.
You have people sitting at the board level, right? It's a handful of them, the board level, and even in that tiny circle people can’t align on what innovation is. You have people write definitions of innovation in a group of twelve people - you're probably going to find about six or seven definitions of innovation. And I'm not joking. Like this is literally what’s going to happen if you do this exercise with them.
And again, it's okay. You can imagine what happens underneath one level or two or three, five levels underneath, right? You have people in Department A talking about innovation and have people in Department B talking about innovation and they actually mean different things.
We discuss that in the book. And again, for the sake of this conversation, we refer to innovation as being the breakthrough type of innovation, if you want. So not how the incremental project management: you launched the diesel engine last year so now you're building a better designed or a Hybrid engine. We're talking about, you've been building engines for the past hundred years and all of a sudden you move to a car service, or you move to helicopters, or you move to kick scooters. And not just building kick scooters or helicopters, but more like having a different business model around transportation. This is what we refer to when we talk about innovation, but it's very clearly stated, at least in the book, like starting from this page whenever you see the word innovation, think breakthrough, think disruptive.
BRUNO: And you mentioned around the definition, my experience is that the most important thing is not to have, not even to have the best definition of innovation. It’s not like some professor is going to come into your organization to acknowledge it. But the people in your organization should all have the same view of what is supposed to mean. And that applies to strategy, whatever other term you want. And it's really important, because collaboration is so much easier when we have agreement around the basic terms.
DAN TOMA: Yeah, exactly. The people should not copy the homework from the company across the street. But again, I've been speaking with this bank in Singapore, DBS, and they have their own definition of innovation. Do I agree with it? Not a hundred percent. But does it matter? Not at all. As long as the company is united behind that particular definition. And if that's what they think is going to move the needle for them in their particular setting, in their particular geography, I'm fine. What's really important is that they are one of the few companies, and I'm not just talking about banks, one of the few companies in the world that have a very clear definition of what innovation is.
BRUNO: Although, I would definitely expect every definition to include somehow value creation. It would be a bit weird…
DAN TOMA: Yeah, exactly, exactly. They talk about value creation. They talk about the novelty of the idea. Again, it's probably just semantics, I don't necessarily agree with it, but again I'm not opposing what they've put there. I'm just saying that they probably could have done a better job or I would have done a better job. It's just personal preference, I'll say.
If people here on the poll want to read this definition of innovation in DBS, there is this book called, Eat, Sleep, Innovate. And in that book, Paul describes their definition of innovation.
BRUNO: You were mentioning the deficiencies of existing accounting systems, etc., and I like the metaphor that you use, kind of despite that the existing system is really good for following the flat line, that existing system shows a flat line, an existing set of measures like our own, not just ROI, but in general, revenue, then profitability, even cash flows, things like that. Everything that will look pretty horrible in that flat line. And this is really where the innovation accounting steps in and offers. Is there a breakdown of the innovation accounting system that you could offer? Okay, it starts with the flatline, but what does it actually include? How does it help the flatline? What does it transform that flatline into?
DAN TOMA: I think when we talk about innovation accounting, we should not refer to it as one single metric. A lot of companies, and a lot of people, have a tendency of boiling everything down to one metric. Boiling everything to a couple of metrics. Even four metrics won't be enough. When we talk about innovation accounts, we talk about an entire system of measuring stuff, right? And this entire system of measuring things is designed so that it surfaces what's happening in that flatline if you want, while at the same time, mitigating some of the shortcomings of the existing system which are independent of the flatline.
Like, for example, your existing system won't tell you anything about your value creation system in the company, right? It's just going to tell you stuff about the final outcome of your assets being deployed, right? It's not going to tell you how you're utilizing those assets. How efficient are you doing that? The existing system is not telling you anything around it. Take for example, the logistics company, right? If you look at the accounting systems of two logistics companies, set them side by side, it's going to be very difficult for you to pick a better one, or the most profitable one, or the one that has the best outlook for the future. Why? Because essentially there you are going to see assets. “Well, I have trucks. You have trucks. I have planes. You have planes. I have employees. You have employees, right?”
It is very difficult to differentiate what they actually do with employees, with the planes, with the trucks, with the cars, whatever. So again, innovation accounting is an entire system and it starts with measuring your teams. It goes one layer up at measuring your entire investment portfolio, or the funnel. And then it aggregates all this data and puts it at the highest level where it basically shows you how your entire company is performing. Considering culture, considering capability, considering your strategy. Everything gets activated.
I think in the book we have probably more than twenty metrics that we propose. I haven't actually counted them all. But from what I can remember from one of the images that Astor drew, we're probably looking at twenty. Twenty indicators, and the thing is that they're all interconnected. You cannot just pick one and say, “Hey I'm going to focus on this single one.” Because you need to understand, first of all, what impacts a particular one and you need to understand how it can fire back if you just focus on that one indicator, right? Regardless of what that indicator is, right?
If you want to optimize, I’ll give you an example. If you want to optimize, if you're managing a couple of things in your lab or you’re an innovation coach, and you just want to optimize for experiment velocity, how many experiments people perform in a unit of time. If that's the only metric you're going to focus on, then you're going to force the team to claim that everything they do is an experiment. only to move the needle on experiment velocity. So you need to consider experiment velocity in the context of obviously other metrics.
BRUNO: I think I remember what you're talking about. I think it was twenty-seven metrics unless you reduced that number.
DAN TOMA: At least.
BRUNO: But it is what you mentioned and this interrelationship between the measures is also important. However, everything trickles down and adds up. Everything is connected and that's why it's an innovation accounting system and not an innovation accounting measure. It’s plural. And since for today, the topic is primarily focusing on the large enterprise, and this is where I think that they have the most to gain. Because when we talk about measuring themes and experiment velocity, learning velocity, it's all cool measures. But I would say it's a pretty - I don’t want to say a well-researched area, but a well-practiced area. Like from pirate metrics: acquisition, activation, retention, revenue referral. We have a lot of metrics, you know, how to measure products, how to measure service, how to measure team efficiency.
But regarding measuring innovation, going up, that was really lacking. Like how to measure managing innovation. How to measure the innovation funnel. How to measure innovation portfolio. How does that relate to the overall performance of the organization? And this is where I really see the work that you put in, and that we put it in the book, where it comes really, really helpful because it adds that whole system, the whole layer that was, for whatever reason, underdeveloped.
DAN TOMA: One hundred percent. The problem is that even though we have those metrics that we have in product development, there's twofold here. So first of all, even those product metrics that people like, and I personally really enjoy looking at Double A Triple R for various products. I actually enjoy creating them and working with teams on that. Yeah, a hobby of mine. The thing is that even those are not suited for every team. You have to be above a certain maturity level to benefit from that. If you're starting your idea tomorrow, being that you're an entrepreneur, or that you are an intrapreneur, you're starting tomorrow. And if I come in and say, “Hey, let's build a Double A Triple R for you.” It's going to be totally useless for at least the next six months. Even if you're lucky and you're growing like crazy, you won't be needing this for at least the next three months. Right. But usually six months in, twelve months in, you are going to have a need for that.
The thing is that the other side of the answer for that is, that people need to distinguish, at least intellectually, if not in practice, between performance indicators and result indicators. As it's a big, big thing that we need to discuss. It's probably one of the biggest things that need to be discussed alongside the definition of innovation.
Seriously, we've been hearing the term KPIs being used and reused by everybody. KPI stands for key performance indicator, right? And there's another set of indicators that are called key result indicators. People tend to use KPIs as a synonym for everything. It's a one size fits all big bucket, toss-everything-inside type of word. But actually it is not, if you think of the Double A Triple Rs, right? If you look at the acquisition, just the acquisition bit. That is a result indicator. That is telling you how well you've been performing in your marketing campaign. But it's not telling you anything about the marketing campaign, right? Because the acquisition is a KRI, it's a key result indicator. Where the performance of the marketing campaign, it's a KPI. Like people who have been engaged with the campaign, clicks, all that stuff.
Again, financial metrics. KRIs, those are not KPIs. KRIs are key result indicators. And the problem is that most leaders really focus on the KRIs. And I kind of like to say that if you just focus on KRIs, you don't actually understand how value is being created in your company. If you just focus on, “What is my bottom line? How am I growing? Am I growing by five percent, or by ten percent, or am I making a hundred million a year, over two-hundred million a year?” You actually don't understand how that value is being created. And for all intents and purposes, please sell the buildings. Please sell the buildings, please sell the headquarters and then you're going to see a lot of impact on the bottom line. And actually I know CEOs that have done that. I know CEOs of banks that sold the buildings and then they leased those buildings, and their one-year or two-year revenue was just ginormous. Obviously, they took a healthy bonus home at the end of the year but they couldn't care less because they were retiring anyway in two years. I'm not going to give names. This is like I would say from a German-speaking part of the world, I would say.
Again, these stories are very well documented. Why? Because people were focusing on the KRI rather than focusing on the value creation system.
BRUNO: So the distinction you make, I agree. It's very important and I would go even lower in a sense that I would say, the generic problem with measuring or establishing anything as a metric is that of course we try to leverage existing bodies of knowledge. The first thing we try to do is we try to find someone who has designed a good measure and then just pick it. “Hey let's, let's measure this, let's measure that. Let's measure learning velocity; let’s measure experiment velocity; just because Dan recommends them.” And that comes without the understanding of what this measure is actually for. Any measure has a singular purpose. And that is to change your behavior. That's it.
DAN TOMA: One-hundred percent.
BRUNO: When you see a change in a metric, you will either do something or you won't do anything. That's it. If you just have a measure to take a look at it to have a sexy dashboard, it's a useless measure.
And what you say I think is very, very important. If you don't understand what goes into your measure, like if you're dividing A with B, why A and why B? And how does a change in A and change in B impact your business? You're in trouble. It doesn't matter if you pick the best measures or best practice or best-of-breed. If you don't understand what changes your numbers, it will be very, very difficult to do anything meaningful.
Here, I’m a little bit…since I have seen a lot of innovation accounting books and not necessarily everybody has, what I can say for a fact, is that Dan and Astor went a long way to try to explain the purpose and the logic behind every metric that they're proposing. Which I think is critical to understand. Yes, you can start with copying, “Okay, let's start this measure. Let's start measuring the efficiency of our innovation investments. What is it, EII? Let’s copy that number. Yeah, let's copy that number. It makes sense.” That's a good start. That's a humble start, but you definitely must make sure to go back and understand why is that measured as it is and what does it actually show you? And this goes back to what we discussed in the beginning. Analytical versus creative. Everybody can understand that if you sit down and spend a few minutes thinking and going through it, it's not rocket science.
But as I said, this is more focused on large enterprises, so I would like to spend some time on measuring at the strategic level and I'm not asking you to pick one measure, but if I remember, I cannot remember now exactly, but I think three measures were very, very important at the strategic level. So one of those was efficiency of innovation?
DAN TOMA: There's like seven of them there. I don't know which one you like. I have my own preference.
BRUNO: What's your preference? Let's go with that. Let's start with that.
DAN TOMA: I would say that it's very important to measure your investment distribution. The idea of, basically, you're looking at your funnel and you say, “Oh great, we're investing a lot of money in innovation, what does this money go towards.” Right? How much of the one-hundred million you're investing every year for building new products goes to incremental innovation and much of that goes to actually disruptive and breakthrough innovation. Because the future of the company can actually be viewed in the funnel of today. If you look at what, what, what the company is working on today, you can have a rough idea of how they will be performing and what's coming up for them in the next couple of years. No more than five years from now.
If you see they're only doing incremental innovation, incremental investments, they don't invest a lot in startups, in partnerships and all that stuff, then you know probably they're not really thinking about the future. Who knows, maybe they're an industry where they don't need to think about the future. But for the industries where this is important and that's at least 90% of the industries around the world, it's very important to look at the investment distribution.
That's one of the things I like. The other one is the EII: the efficiency of innovation investment, which basically is telling you how many dollars have you spent to generate this one dollar of new revenue this year. So basically, you look at three years in the past and say, “Okay, over the past three years we've invested x amount. And today in 2021, we got y amount from new products that we've launched in the past three years. EII is essentially telling you how many dollars from that x you spent for getting a dollar off the y. Obviously, you want that to be at least one to one, if not above one, right? You want to have a multiplier factor of probably two, three, or five. That would be, let's say, a personal favorite.
And then again, I'm looking at other indicators like speed through the funnel, conversion in the funnel, all that stuff. Those would be my preferred indicators, my favorite ones.
BRUNO: And just to clarify, for those that are listening here, the funnel refers to your innovation funnel in the organization. Which should have some sort of stages or phases. So we are looking at conversion in maturity, so from discovery, exploration, call it whatever, into some sort of validation scaling phase and etc. Because we know with innovation, especially breakthrough innovation that you said that you're focusing on, it can take more than three years, easily. If you are talking about genuine, radical and disruptive innovation it can take years. So you really want to keep a tab on, “Okay, how are these innovation projects, innovation teams evolving? How fast are they evolving? How much are they spending stage to stage?”
Now I don't remember. I'm a bit biased, so I don't remember if this is in the final edition of the book, but if you remember the set of measures that we were working on. And I quite like a bit of a complex one, but I think it's really rich. If you're able to wrap your head around it, it was roughly showing you the percentage of innovation investment that converts to a higher margin product or sale.
DAN TOMA: We simplified that one. I ran it by a lot of people, practitioners in particular, and a lot of them were basically telling me that, “Hey, this is a good indicator. However, very difficult to compute.” And again, we optimized for usability rather than intellectual prowess, I would say.
The idea was, again, I think we converted that to something a bit simpler. Like actually compute your multiplier for the new ideas and compare it to the core business.
BRUNO: It makes sense at the end of the day. I mean this needs to be accessible. And people like you and me we can geek out in our free time.
DAN TOMA: Exactly. I think I can ask you to come over here. We can discuss some ideas. It’s a pleasant way to enjoy the city.
BRUNO: And then we could try to make them as convoluted as we want to, as difficult. So that when we take a look at them two or three months later in real life, we’re like, “Dan, what the hell were we thinking here? What is this supposed to be?”
DAN TOMA: And that happens. That happens many times between us. We all know that.
BRUNO: But I completely agree with your selection. Of course, those aren't the only strategic measures, but really looking at the portfolio and how it trickles down is critical and it really comes to the sense of control, right? So, it helps alleviate this sense of fear, like if I'm putting in, not just the investment, but first, a CEO needs to sign it off and then there needs to be an executive champion who is basically putting his or her credibility and security on the line as well by endorsing such a big investment.
So, of course, there is some apprehension around, “Okay, is my money going to be handled well?” And this is where I really think that managerial innovation accounting starts to shine because it gives the tool and set of measures to managerial level to actually pull the levers and control. Because it's impossible to guarantee the outcome. The final outcome is impossible to guarantee.
But what everybody is, is in full control of is the investment, the expense, are you people working five hours or fifty hours? Are you getting any external help or not? No help at all? How much are you spending? So all of this, you're in full control. You cannot say, “Oh, we didn't have it.” What didn't you have? You're in full charge of that.
DAN TOMA: Yeah, exactly. I agree. I mean there is nothing to add there.
BRUNO: Well I just wanted to do this. I need to get some lever sticks next time because I've been mentioning levers way, way too much.
It's kind of when we go back to like, oldie-but-goldy, like lean startup and engines of growth, I think that that was a really valuable lesson from the Lean Startup movement. Find your engines of growth through disciplined lean experimentation and then, you know, pouring in the effort and the money there. And again, this is where I think where the innovation accounting system shines. Because it helps you identify those engines. Those levers that you need to push and pull, and that is why it's also important that every innovation team does need to create their own set of metrics. That's what makes measuring innovation difficult because it is peculiar to your industry. What's relevant in your market? What's relevant for the company of your size? Etc. But there are some principles that need to be followed.
DAN TOMA: I agree.
BRUNO: And if I remember in the book, you have advice both around the principles and some of the common mistakes around such systems.
DAN TOMA: Yeah. We put together a set of principles, about six of them in total, regarding how you should design your own innovation accounting system. Also, we discuss some myths regarding innovation. I don't want to go into detail there, but again, essentially we're talking about, you know, having the system for innovation and not just an indicator. It needs to show the disruption risk. There are six of them in total.
BRUNO: So, I'm just looking at the time. What I'm thinking is that we could start taking questions. Let me just open. So, as I said, some people sent in the questions in advance. I apologize because I'm going to merge them into two questions. Because they're really boiling down to two very similar questions.
So one question I would sum up like, “How can I introduce innovation accounting in my organization?” That's how I would sum it up based on all the questions that have been asked.
DAN TOMA: Yeah, it really depends who asked this question. Who are you that wants to introduce innovation accounting in your organization? Because depending on who you actually are, hierarchical position and otherwise, there are different avenues you can take. So, I would ask back a clarifying question. Tell me more about the circumstances. If the person that asked this question is tonight online with us? Maybe he or she can answer this clarifying question.
BRUNO: So I can see from my list, it's mostly managers. Not CEOs that are asking this, but different layers, like senior vice president or VP and things like that. So, consider the broad sway of middle management.
DAN TOMA: Right. Yeah, if you were somebody that has a bit of an influence in your organization, obviously, I would personally advise you to have a conversation with the top decision makers about the important stuff, measuring innovation I would say, to begin with. And then second, I would try to apply a bit, some of the things that we discuss in the book with, maybe some teams, see what the benefits you get from that particular activity of measuring some innovation. All of these things, that's where I would start.
Depends on seniority. Depends on the appetite organization has for change. If you have been, let's say, running an accelerator program for, I don't know how many years, then maybe it will be better to just go all in and try to measure the performance of that accelerated program. If you don't have an accelerator program, it really depends where you are on the maturity curve, if you want. The more mature you are, the easier it is going to be to convince people of hey, we need an innovative accounting system. The less mature you are, the more I would take the grassroots approach where you're essentially just, you know, experimenting with some metrics, doing it under the radar, trying to get buy-in. Again, if the person would have been on the call I would have liked to have a conversation with her about it.
BRUNO: I think it's fine advice. What makes it really difficult is, grassroots is a great approach, but it's difficult to make a breakthrough to the strategic innovation accounting, because, especially when it's tied to performance and bonuses and the career of people in high positions, it’s difficult. So you need to get it started from the top if you can.
DAN TOMA: Yeah, but like, with every indicator it’s very good to decouple it from bonuses. Every single indicator that gets coupled with bonuses and performance reviews will get gamed. And I'm not talking about innovation here, I'm talking about any single type of metric. You will see the wrong behavior the moment when you say to people, “Hey, I'm going to monetize you against that particular indicator.”
BRUNO: It’s kind of…how does it go? Talented employees can make the worst of strategies work, and the worst of leaders shine. And vice versa.
DAN TOMA: Yeah. Mostly. Of course. But that's with every indicator. It’s not just, it's not just for innovation.
BRUNO: Exactly. So, similar question, but different. This is coming from an educator. I believe it's a person from university. Professor or something. So he is asking how to train leaders about innovation accounting. I’m paraphrasing here. “How can I get them to be more receptive to that, when they are so accustomed to the traditional method of accounting?”
DAN TOMA: Well, there's only one way, just education. We have to understand that the majority of the people that are leading companies today haven't had any type of formal training on entrepreneurship or innovation management.
This is something fairly new, right? So we need to educate them. There is no sexier answer, and there's no silver bullet for that. It's just educate, educate, educate.
DAN TOMA: So what kind of education worked for you?
BRUNO: You have to take people on a journey and you have to understand who these people are that you want to take you on a journey. How do they react to threat, how do they react to opportunities? Maybe some people are more susceptive to, you know, agreeing with something if you frame it as an opportunity rather than a threat or vice versa.
It really depends what your endpoint is. Again, I would just start by showing the facts, showing them that the standard metrics are not telling you anything about the future of a certain ideal for a certain business. And just use anecdotal examples from the company, your own. Don't come in with Tesla and Facebook and Airbnb and stuff like that. Those are good, but you won't be taken seriously if you only use those examples.
And I'm not saying just go and say, yes but we are a manufacturing company, look at this other manufacturing company. What have they done? That's again, a very good anecdotal example. But you should essentially paint the picture of why it's needed through essentially examples from your own company. Look what happened five years ago and we discontinued that idea. Look what our rationale was behind that decision, and so on and so forth.
BRUNO: All right, I completely agree. I believe there's been some research recently surfacing around the fallacy of the burning platform, like how it's overused and how it also drives a lot of burnout. And what I'm a big fan of is using actually opportunity costs and similar things to argue more than necessarily a burning platform, because there are businesses that really aren't on a burning platform, that are making good money. That doesn't mean they'll be making good money five or fifty years from now, but today.
DAN TOMA: Most businesses are not on a burning platform, no matter how much we'd like to think of them being on a burning platform, most of them are not. People will still need banking regardless of how much they hate the banks. And yes, you can use your small internet-based, super agile bank but at one point when you need a mortgage or when you need health insurance, or when you need an insurance for your vehicle, you will probably have to speak with one of the existing established players. And that's just a fact.
BRUNO: So I'm just going to take one more question-slash-comment. So in my view, you need a portfolio strategy first, and to know what the goal is within different portfolio categories. There will probably be different measurements for different types of innovation. Do you agree?
DAN TOMA: What was the question again?
BRUNO: If it was more of a comment, really a reflection, than necessarily a question. But the question is along the lines that, when you have a portfolio and a strategy behind it, that for different types of innovation, you will need to institute different measures.
DAN TOMA: Yeah, for different types of innovations, yes, but not necessarily for different projects. Different types of innovations, as I said, if you do incremental innovation then you need a different type of metric than if you do radical or disruptive. I agree with that.
BRUNO: Perfect. I'll stop with the questions. Now if anybody has a question, either you are watching this right now, or you can always follow up on email at firstname.lastname@example.org. Dan, which website would you like to use for this one that people can go to?
DAN TOMA: Yeah, you can go to weareoutcome.co. I think that's the best one.
BRUNO: Perfect. Dan, thank you very much. I think we can wrap it up here. We already shared plenty. Of course, there is much more to be taught and talked about innovation accounting, but I think this gives a pretty good idea on kind of the philosophies and the approach behind such approach. I don't know if it would be possible for you to summarize innovation accounting in a nutshell. Would you dare?
DAN TOMA: How should I phrase it? First of all we should use an innovation accounting system, and innovation accounting system is a system of measurements that are complimenting your existing financial system by helping you understand how value is being created in your company. And by value, I don't necessarily mean core business value, but by innovation value.
BRUNO: Full stop. You dared, and you delivered! Again, thank you very much. Thank you everybody for joining, for asking great questions. I wish you all the best and see you all soon.
DAN TOMA: Thank you very much.
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