Ep. 172: Dan Toma - Innovation Accounting

February 28, 2022 | 29 Minutes

Dan Toma, innovation thought leader and the co-author of the award winning book "The Corporate Startup and Innovation Accounting", joins Count Me In to talk about accounting, innovation, and the ways to implement innovation accounting. Dan started his career in entrepreneurship, being involved with technology startups across the world. He was featured on the Thinkers50 2020 Radar list of management thinkers to watch and is a member of the World Economic Forum’s working group on accelerating digital transformation. In this conversation, he discusses myths relating to innovation, the value of people in change management, and what implementation of innovation accounting looks like across the organization. Download and listen now!

Contact Dan Toma: https://www.linkedin.com/in/dantoma/

Outcome: https://weareoutcome.co/

Dan's other podcasts:
  1. https://theinnovationshow.io/episode/ep-230-the-corporate-startup-how-established-companies-can-create-successful-innovation-ecosystems-with-dan-toma/
  2. https://thinkers50.com/blog/thinkers-50-podcast-dan-toma-and-innovation/
  3. https://open.spotify.com/episode/2HeJjCHvNvCrD6vydCPsG4?si=u3kBTT3yR4W1D1Z_ie3Fxg&dl_branch=1
Mitch: (00:05)
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. This is your host Mitch Roshong, and I'm here to introduce our featured guest for episode 172 of our series. This conversation features Dan Toma, an innovation thought leader and the co-author of the award-winning book, The Corporate Startup and Innovation Accounting. He joined Count Me In to talk about elements of the book, specifically the importance of the people in the organization and further defining innovation, accounting, Dan shares practical examples from his own experience as a product owner, entrepreneur, corporate transformation leader. So keep listening as we head over to the conversation now.
Adam: (00:55)
So Dan, as you know, some something that companies have always done is look at their employees as assets and many times when there's a financial crisis, the first step is let's cut half the staff and move forward. But with the ever changing times of business and acceptability, that's not acceptable anymore. And so as businesses grow, they're encouraged to grow the value of their assets and the same approach probably should be taken toward people. What benefit do you see that in the workplace?
Dan: (01:22)
Right. What should I say? I mean, you know, you walk in those corporate buildings, you work into various offices and you see slogans on the wall. Employees are our biggest asset on all that stuff. Right. But when you go and look in the financial records, you actually end up seeing the fact that employees are listed as cost as liability because they have obviously a salary attached to them. Right. So, yes, it would be great to have more companies, think of their employees as real assets, beyond the slogan, beyond the mottos, if you want, and start investing in them, if they will start treating people as assets, they will obviously start investing and nurturing their skills, care about their mental wellbeing. Do all these things that you would normally do to an asset.
Dan: (02:19)
Like if you have a truck you are going to wash it and, you know, change your oil and put the best parts in it. But if you have a UX designer where if you have, a great HR person, how do you make sure that you actually treat that, that particular individual as an asset? But there are actually companies that do that. And, these companies are, you know, football clubs and in general sports franchises, they have their players list as assets. I'm not saying now that we should go in that direction and trade my accounting person from my bank, with your accounting person, from the whatever automotive company. But it would be fun, right? So yeah, in general, the, the benefits will, obviously go towards the employees themselves. Like they will have the most to benefit from. And obviously by them being treated as assets, the company will, obviously benefit. But I think, short term, the benefit will be with the employees later, the benefit will come to the company as a result of the employees being, regarded as assets, however, financial accounting considers them as liabilities. Hmm.
Adam: (03:32)
That makes sense. So I want to kind of bring the conversation, back to your book. My co-host mentioned has mentioned your book in our intro and in your book, you cover nine myths, about measuring innovation. And I found them very fascinating. And I was wondering if you could walk us through a couple of those on how they relate to accounting.
Dan: (03:51)
Yeah. So, we've uncovered those myths as we were working with our clients and, we decided to put them in the book because we fought and we, know there is a lot of people out there that still unfortunately live by those myth. So one of the first ones, and we actually wrote about this in the first book in the corporate startup as well, is that people tend to view R&D expenditure as a synonym for innovation prowess. And, this is very far from the reality, if you go, and, I encourage you actually, the audience to go and research two tops. one top is the BCG most innovative companies, of this year, I think is 50 companies they put in the top and the other one is the, top that comes from the European commission, if I'm not mistaken.
Dan: (04:46)
And it tracks the biggest R&D spenders off that year. And if you put the top side by side, you're going to realize that the company that is number one R&D spender of the year is probably where near the top three or five is, in the innovation top. Take, for example, pharma industry. In the pharma industry, they're about three to four companies on the most innovative company list. And then there's probably 12 or 15 of them on the, on the R&D spenders, same for automotive and other industries aerospace. Again, it's a good example. So this is one of the biggest myths that we uncovered, while working with, while working with the companies. The other one was that innovation can't be measured because innovation is about creativity and creativity can't be measured.
Dan: (05:42)
Anybody that worked in innovation, either being, employed in a large organization, part of the innovation department, or, had their own startup know that, creativity is probably 1% of, what it means to be successful in the innovation world, the rest 99%. And again, don't quote me on the percentages here, are, the 99% refers to discipline refers to, being methodical in, in your work, being very diligent in your actions and in the follow up to your actions. So again, obviously since we're talking now about a process, processes can be measured so you can measure innovation very well. Another myth is that the success of innovation venture can only be measured once it's in the market. Actually you can measure success or the potential success of innovation ventures very early on. This is how investors live.
Dan: (06:45)
This is how VCs companies, exist. The fact that you wait until something is in the market to return a certain dollar amount, it's another form of success. And, some people could see already that success happening early on. Therefore they invest in early stage in that particular startup or in that particular idea, another myth that we found, and this was well, we were researching indicators. People tend to fit that everything is a KPI, right? Everything is a key performance indicator actually. We need to make a distinction between, and everybody that's in business needs to make a distinction between KPIs and the KRIs, key results indicators. The KPI, the ones with the P referring to the performance of the process, the KRI is referred to the outcome of that particular process. So, usually if we want to improve something, we need to understand the process behind it.
Dan: (07:53)
Otherwise we won't be able to improve it, say you are a manager. And, I don't know, you're working in a plant, you want to improve, output. You need to understand the process that leads to that particular output increase. if you are working in a bank and you want to increase the revenue, that's great, but, there are many ways for you to increase revenue for once you can just sell the building. Yes, that will increase revenue, definitely. But is that sustainable in the long run? I think that if you don't understand how something is made, you won't be able to improve it. So it's very important for people to pay very, clear attention to how things are being made, the process, the value creation process, if you want, and then start putting measures on top because not everything is a key performance indicator.
Dan: (08:48)
Some things are key results indicators, and those are a, results I'm repeating myself here. Those are, that's a result of a process. Obviously we uncovered other things as well, like, all innovation measures, measurements work, successfully for any type of innovation. Again, that's very far from the truth because, depending on the innovation you are doing, you need to adjust the form of indicators you put on top. If you're doing, more sustainable innovation, continuous improvement, different indicators are needed, than in case of an organization that does more disruptive stuff. The indicators need to fit, the purpose and the purpose is to improve something, right. I measure it in order to improve it. I can't just copy the homework from the company across the street. And, again, I can't copy it from, one industry to the other, those need to speak to my reality. Those need to speak to my context and to my circumstances is why I very important to, first of all, define what you wanna measure and why you wanna measure that before you put indicators on top. And obviously these were just like, I let's see half of the myths we uncovered in, in the book. I would encourage people to, you know, pick up the book and find the other myths by themselves. These are the ones that are probably the closest to my heart.
Adam: (10:19)
Thanks so much for that, covering those myths for us. And I wanted to kind of help our audience kind of see where you were going. This podcast is for all things affecting. It touches all things, affecting the accounting and finance world. And, you know, your book talks about innovation accounting. So maybe we can start there. What do we talking about when we talk about innovation, accounting, and then we can kind of more dig into it a little bit?
Dan: (10:42)
Sure. My pleasure. Just, just so you know, topic that I had my lowest grade in the MBA was, accounting, finance, and accounting. So, yes, I'm in a great position to write the book that it's called innovation, accounting. That recommends me, the, the idea of, of innovation accounting. again, it's not to replace standard or financial accounting in any way. The idea of innovation accounting is to build a system that's fit for purpose. And that purpose is to measure, progress and to measure results in environments that are, high on uncertainty and, environments that are, let's say more volatile than the standard core business, plus environments, where there are no financial metrics to go by. What do I mean by that? There are many companies out there that are successful today, financially that probably for the first five, even 10 years were totally unsuccessful.
Dan: (11:54)
However, there were investors that were willing to bat on those, Tesla is one example, Netflix, again, another example, Amazon, it's a very known example of a company that wasn't profitable for, I think at least five years, how however their valuation was through the roof. So, with innovation accounting, we're essentially proposing a complimentary set of metrics to the financial ones that are to be used in the absence of financial metrics, where in the absence of financial results, those metrics are, designed to prove to investors, to prove to decision makers that yes, this particular venture should be considered for growth in the future. You should nurture that you should invest in that further because there is a gold pot waiting on you six months down the line, five years down the line in two years down the line. So basically it takes the guessing out of investing in risky ventures.
Dan: (13:01)
And again, it's there to compliment financial accounting. we're not proposing a different set of indicators. We're not proposing to scrap the, the accounting books. We are that actually accountants and innovators work together for the greater good of those particular ideas, be it startup ideas, or be it ideas within an existing organization. There is a research by professor at, New York University, Baruch Lev, and he studied, the way investors take decisions whenever they invested in companies listed at the stock exchange. And, he analyzed data for, I think, 20 years then at least if not 20. And, he concluded that, as the years have gone by the use of finance information for investors as a meaningful way of predicting the company's future has gone down. If, one in three decisions were being taken based on financial results in the nineties.
Dan: (14:09)
I think now it's one in 10 being taken solely on, on financial performance. So now investors are looking at alternative sources of information when they wanna place those bats, the stock exchange, yes, some of them actually go to Twitter and see what that particular CEO tweeted about. I'm not saying that's not a good thing to do, but that's probably further from the science than other methods are. So we, this is why we encourage organizations to adopt a system that's able to, present to investors, but also internally the picture of growth over the coming future. Again, in the absence of financial results, we're talking about what's going on in your R&D, we'll actually discontinue that. How many ideas from that particular, innovation hub, can you count on to drive growth in the near future? How does your portfolio distribution look like?
Dan: (15:11)
Are you heading to a Kodak moment, right? Are you heading to becoming disruptive in the near future? Are you diverse enough to go through something like COVID, that was totally unexpected, you know, talking about COVID it was very funny because just at the beginning of it, Zoom's valuation was equal to the valuation of all us based airline companies, just, you know, to get an idea, get a sense of, how COVID changed everything. And I was just wondering then how many of the CEOs of those airline companies had ideas in their pipeline three, five years ago that had to do with communication, with self disruption, essentially like, Hey dear CEO, we know that we have a lot of business travelers let's invest in a zoom like idea. I'm wondering if any of the CEOs had that on their, you know, in their pipeline and they willingly discontinue it because of fear of self disruption. I don't think I'll ever get the question to that. The answer to that question.
Adam: (16:20)
I don't think you ever will. Definitely not. Yeah. So as I'm thinking about, you know, what you've been saying, you know, the examples you gave of where that applies are very applicable to many businesses, but one of the main things that a lot of companies are realizing, especially with the onset of COVID is they've gotta implement new systems all the time, like, you know, new financial systems, new Zoom systems, Teams, everything, you know, you gotta get all those things together. And so let's maybe, maybe if we can look at, you know, implementing a system, because that's a lot of things we talk about is people need to implement systems all the time. What if we look at implementing a new system, you know, obviously it looks different from company to company, but if we look at the principles that you laid out for innovation, accounting, do you think that you could apply that to implementing a new system? Obviously there are the financial aspect of it and the accountants will take care of that. You know, how much does it cost, but there's other intangibles that I think your principles kind of help out with.
Dan: (17:23)
Yeah. So, essentially in the book, we talk exactly about that, about the fact that, the innovation accounting systems should speak to your company and your company needs. Obviously we propose KPIs. We propose what needs to be in the system, but I believe, or actually know from experience that what we propose, will get customized probably at least 30 to 40%, when it gets, when it gets applied because the pharma company is not an airline and the automotive industry is not the banking industry and fast mover, consumer goods are not media companies or telco companies. I mean, no, I'm not kidding myself that we build something that works across the board. However, I think that what we've built is good enough for people to start and, to customize on. What's important is to follow the principles. The tactics will follow, the customization will follow.
Dan: (18:26)
So we lay down six principles. First of all, if you are building an innovation accounting system, it needs to be company wide. You should not allow your retail, banking arm to have different measures than your wholesale banking arm. Why? Because at one point, those teams need to talk with each other and the CEO or the CFO needs to have transparency over what's happening in retail, as much as he needs to see what's happening in wholesale. If the indicator is different, you won't be able to compare apples with peaches. So it's very important. That's going to be company wide. So everybody in the company is talking about the same thing. Another very important principle is that the system needs to be able to abstract information. Now, abstracting information means that you take something from the team level and you are taking it through multiple layers and taking it all the way to the executive board.
Dan: (19:24)
You don't expect an executive to have time to understand, for example, the learning we're experimenting and velocity of a certain, team. However, they will understand cost of innovation or they will understand time to market, or they will understand average conversion rate of your innovation practice. This is done for abstraction. Plus abstraction for another benefit. It forces you to only track indicators that are connected to water indicators. Cause otherwise if you just track this one indicator and it doesn't do anything, but just show you a number and it's not actionable, it doesn't inform any other layer of the organization. It doesn't have any impact downstream, better not track it. So abstraction is probably, or at least the one that is the closest to my heart. The third principle will have to be around, surfacing intangible assets. The innovation accounting system needs to surface those assets such as cultures, such as skill, such as process.
Dan: (20:28)
Again, we started a conversation talking about, about skills and talking about upskilling people and treating them like assets, innovation, accounting, an innovation accounting system should be able to do exactly that. Another thing that again, ties back to our previous company, you know, question, an innovation accounting system needs to highlight the risk of disruption the company is under. It needs to be there flashing that red light guys. We only have this on this core banking product, and we're only living off that. Yes, we can milk that cow for, I don't know how long, but let's not kid ourselves and be honest and say, we only have that one cash cow and there's nothing else in the pipeline. And in case people will stop using credit cards tomorrow, we are screwed. And in case people will stop flying for this tomorrow, we are screwed, right?
Dan: (21:29)
That's the role of the innovation accounting system to be there, to warn people or at least, make people pay attention to the fact that disruption might happen. Nobody's saying when it will happen or what form it will take. And even if your company will be affected, but at least, have that warning sign there. That's that's flashing, Hey, you have to do something about it. Obviously, another important principle is that the innovation accounting system needs to help you improve the innovation system. Every company has an innovation system, has processes has a real governance on it. If you are using, we're thinking about deploying innovation, accounting system, that particular outcomes, that particular insight from the innovation accounting system needs to inform how you're going to go about improving your innovation system, being by upskilling people or, hiring other people. We're focusing in one area and not in the other, or deciding to go only for open innovation programs rather than internal innovation, whatever whatever's gonna end up being what's important is that that particular decision for improvements of your innovation system needs to be rooted in data.
Dan: (22:42)
And that data can only come from the innovation accounting system. Financial accounting system can help. You can tell you what at the innovation accounting system is doing, but it's taking way too long for you to learn that. And, it doesn't cover everything. So this is why it's important to have an adjacent system running side by side. And lastly, probably again, an important principle to have in mind is that, whenever you're designing your system always consider the key success factors of your industry. Don't design a indicator system without understanding what it takes to win within that industry and starting from what it takes to win. Try to understand what are the indicators that are telling you if you are going to actually win. So it's very important to have that in mind when you build your innovation accounting system,
Adam: (23:39)
That makes a lot of sense what you were saying about the principles. And as I'm thinking about that, and as we kind of wrap up our conversation, any initiative needs to be implemented by the people within the organization. You said that if there's an innovation accounting, it needs to be a company wide implementation, you know, so you have the one aspect of change management of getting that implemented, but then the other side of it, how are you able to take all these things that we're learning through different aspects and put it in a format that the leaders of the organization can read and digest? You know, like what, how are we looking at these KPIs or these KRIs and seeing how can, how can they digest those things? Because they have to see the big picture and understand is it actually working? And like you said, it may not, you may not see the results right away. It may take a little bit to see those results,
Dan: (24:28)
Right. We usually try to keep things very simple. So top layer indicators for us usually revolve around, time being saved, money being saved, profitability being increased, and revenue being increased. That's it? Those, those four, yes, there might be another one, as I said around disruption. And how likely are you to get disrupted? Do you have a diverse portfolio? That's very qualitative if you want. Yes, it's a quantitative indicator, but it's very qualitative. You can't deposit that into a bank account, right. But what you can deposit in a bank account is profitability, is top line growth, is reduced time to market, reduced time to success. Those are things that obviously you can go and deposit to the bank, diversity of your portfolio, not really but it's good to have a check on that.
Adam: (25:25)
So what about the change management and getting everybody involved? Because I can imagine that implementing this on top of everything else that somebody's doing can be overwhelming.
Dan: (25:35)
Yeah, of course, no, this is not a job for one person. And, this is, definitely not a job for, for an intern or a summer student. You should actually dedicate a, a good amount, good amount of people to this initiative by good amount. I don't mean hundreds of people, but probably more like four or five people that are full time on this for probably at least a year, I would say, given our experience of having done this with, with banks, with engineering companies typically, yeah, it's like four or five people for about a year and you go going to have the system. But what's very important to remember is that you need to have innovation happening in your organization. You can't talk about let's create an innovation accounting system, but there is nobody working on innovation in our company.
Dan: (26:22)
So if you are one of those companies that hasn't yet started the journey on innovation, I would encourage you. First of all, start your journey, do some mistakes, accelerate some teams, invest in the local startup community. Do those early things before you build the innovation accounting system. Innovation accounting is required for organizations that have been at this game for a good amount of time, three, five, even 10 years. They will have a need for that. Starting with innovation accounting day one is just going to be too much of a hustle, putting it together for very little benefit. I would encourage you to spend end that money doing innovation first, before building the system. Now, in terms of who's on the team, try to not having one sided, try not to have it stuffed only with people from innovation, because then they will tend to have an us versus them conversation whenever they refer to the people in finance or control. So I would encourage a cross-functional team that, includes people from HR, people from product, people from innovation, people from finance, obviously, you know, try to consider all aspects of what your organization is doing. Because innovation is not something that is done in a lab is not thing that's done on an island in the sun it's everybody's job. And, by being everybody's job, that should also be reflected in the team. That's putting together an innovation accounting system.
Speaker 4: (27:58)
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