Innovation Accounting: The Right Question At The Right Time

For many people, the term “innovation accounting” appears to be contradictory. You have “innovation,” which is typically associated with future-focused creativity. Then, there’s the practicality, logical thinking, and stability that traditionally define “accounting.”

It can be tough to imagine that these two extremes can ever get along. At most companies, innovators and accountants seem to be at odds with each other. But according to Tendayi Viki, founder and principal consultant of Benneli Jacobs and Company and speaker at Intrapreneurship Conference Stockholm, both sides can work together in a way that is productive and mutually beneficial.

Tendayi has worked with some incredible companies over the last few years, including American Express, Pearson, Standard Bank, The British Museum, The World Bank, General Electric, and Whirlpool. And somehow he has managed to find time to write two books, “The Corporate Startup” and “The Lean Product Lifecycle.”

We sat down with Tendayi recently to find out how the right mindset can help innovation accounting become a guiding force behind strategic breakthroughs that yield long-term success.

Why is the relationship between innovation and accounting so important?

Innovation accounting is a debate between two ends of the innovation spectrum. Managers are typically apprehensive about investing in any project, unless they are absolutely confident that the final product will generate revenue for the company. This person will ask every question imaginable to make a decision, which can be incredibly aggravating when an innovator has a great idea, but no evidence of traction yet. This often results in companies only investing in sure bets.

On the other hand is the innovator. They mostly want to be left alone to get on with it. They would prefer to ignore all requests for information and build the product anyway. This is often based on the misleading notion that innovation in only about the vision.

This tension between the manager and the innovator is all about the fear of failing.

Companies of any size view wasted time, effort, and money as frightening possibilities, especially for organizations that prefer control and predictability. The executive sponsor and accounting manager expect the innovator to know how to bring the idea to life within budget and start generating revenue quickly.

But there is a third way. What if management could get the data they need to make decisions and allow the innovator to get on with their work? This is where innovation accounting comes in. It is a process that allows management to make small incremental investments, while giving innovators the space they need to test their ideas in the marketplace. 

Does innovation accounting follow a structured framework that lets executive sponsors and innovators know when to ask the right questions?

Successful innovation is about the combination cool new ideas with sustainably profitable business models. This definition tells us what innovators should be doing. Ideation and creativity are only a first step.

The next step is to test whether we have a good business model. A good business model is made up of 1) understanding customer needs and jobs to be done, 2) making sure the solution we have created meets those needs, and 3) ensuring that we can make and deliver the solution profitably. This is the structure that managers can use to make investment decisions.

Through innovation accounting, the manager and the innovator can work together to transform ideas into profitable business models:

1. Strategy Informs Ideation: By no means should innovation happen in a vacuum, hidden and protected from the business. It must be aligned with the organization’s strategic goals. Connecting the dots between the inspired idea and the enterprise helps ensure that everyone involved understands the value of the innovation to the business as a whole.

2. Test Then Scale: Beyond ideation, it is them important for innovators to test their ideas. At the heart of this practice is the principle that no products should be taken to scale before their business models have been tested and validated. Given the three steps we have noted above that define innovation, managers can use innovation accounting to make investment decisions based on each step. In response, the teams can use the resource to demonstrate evidence of customer needs, then the solution, and then the business model. If during these steps innovators can demonstrate traction, then they are ready to scale.

3. Incremental Investing: Taking a cue from Dave McClure’s Moneyball for Startups, I strongly encourage managers to make small incremental investments in ideas based on the current innovation stage. This stops teams from getting a huge sum in the beginning. It is the request for huge sums that cause managers to pause and ask for all the information before they pull the trigger. But what if teams only requested small amounts to first test their ideas. This would change the conversational dynamics in the boardroom. Throughout the innovation cycle, progress should be measured based on how well teams are doing in their journey towards product-market fit. This allows managers to stop projects that are not working and double-down on those that are having some success and becoming more attractive to the market.

4. Culture Transformation: Culture in a company is created by what managers reward and celebrate. If the managers only recognize and reward success on core products, they will only get ideas about core products. If managers only invests after seeing 40-paged business plans, they will stifle innovation. Innovation accounting practices can transform the culture of a company by bringing into play best practices.

What is the one thing that has made you realize that innovation accounting is a unique – and sometimes transformational – opportunity for businesses?

With incremental investing, companies can now make many small bets, rather a few huge bets. This is transformational because the more bets a company makes, the more likely they are to find something that works.

Innovation accounting, in itself, is also transformational because it now provides a methodology to manage innovation, whereas before innovation was mostly thought of as a creative process.

For example, at Pearson, the multinational publishing and education company, we have created the lean product lifecycle in which we defined innovation steps – not just as an approach to build products, but also as a way for managers to ask the right questions at the right time and make investment decisions.

When we are finished, we hope this approach will provide the company with a unified language they can use to manage their innovation process. 

Originally published on Intrapreneurship Conference