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.

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?

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.

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.

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.

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.

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. 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.

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.

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. 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 importa

nt 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.

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?

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.

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. 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.

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?

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.

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.

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.

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.

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. 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 co

mpany 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?

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.

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.

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.

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.

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.

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 sy

stem. 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.

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.

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about leaders from the accounting and

finance profession. If
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