Innovation accounting for teams, managers, and strategy – for product managers Today we are talking about measuring innovation effectiveness in organizations. To help us is the person who has written the book on the topic, Innovation Accounting, Esther Gons. Esther is the CEO of GroundControl, an Innovation Accounting software platform to help corporate ventures with the development of new business models. She has been an entrepreneur for over 20 years and mentored several hundred startups. Summary of some concepts discussed for product managers [1:59] Why did you write Innovation Accounting? There’s not much information about measuring innovation effectiveness. Eric Ries coined the term innovation accounting in his book Lean Startup. My background is in startups, where innovation accounting is the metrics and accountability of the team to make data-driven decisions. Later, I worked with corporates and realized there is a huge need to report on and measure innovation progress. My coauthor and I decided that to help corporates do disruptive innovation, we needed to write this book. [3:58] Who needs an innovation accounting system? People use innovation as a catch-all word for everything, but if you want to do disruptive innovation—new markets, new business models, high-risk, high-return—you need a structured approach. You need to de-risk the innovation, and you need indicators you’re going in the right direction. Your financial accounting system can’t provide these. You need an innovation accounting system for disruptive innovation to take off. [7:44] In your book, you address innovation accounting on several levels. In the first level, tactical innovation, what metrics should teams use to measure innovation? The tactical or team level is the most important level. In this level, we find out what the teams need to move forward and make decisions. Teams use venture-based and team-specific indicators to make decisions. Metrics should also help the company see how fast the team is learning. You can measure the number of experiments done over time or per sprint, but these metrics are easy to game; you don’t want to do experiments just for the sake of doing experiments. Measure the insights and learnings from each experiment and the amount of time and money spent on each experiment. Any metric should be something you can improve or make decisions upon. [14:34] What specific metrics should we be using? The most important one is the learning ratio, which is the experiments you found insights from divided by all the experiments you conducted. Learning is what you should be doing; if your team is doing other things, it’s not going well. Once you’re more mature, you can measure the value/cost ratio. [18:37] How is innovation measured at the managerial level? The managerial level focuses on having a venture board or decision board that can help the teams move forward. The board makes small bets in the beginning and funds the projects that are promising and have a higher confidence level. The venture board wants to see the confidence level with evidence. The metrics are about managing the funnel of investment decisions. [24:04] How does innovation accounting influence strategy? It’s a loop—strategy influences innovation accounting and innovation accounting influences strategy. The strategy level has two pillars of indicators. The first pillar is understanding why you’re looking at a particular area, finding out if your core portfolio is under threat, and looking at new business models, new markets, and diversification. The second pillar is understanding your ROI. Even if you just started and have no revenue, look for progress toward the vision of where you want to go. See if your innovation thesis is validated. Action Guide: Put the information Esther shared into action now.