Digital Economy Dispatch #151 -- What is Digital Value?

Digital Economy Dispatch #151 -- What is Digital Value?
1st October 2023

There is a joke I heard many years ago that has haunted me throughout my career. It is told in various ways and with different emphases, but the simplest form is as follows:

Two sales people, Jane and Dave, meet up to discuss their experiences at the end of a busy week.
Jane: How was your week?
Dave: I had an amazing week! I met the CEO of a great new startup company to discuss his new venture, held an offsite with my team taking them through our strategy, I published 2 new blog posts, and visited 3 customers to hear about how they use our products.
Jane: (after a long pause) …. yes, I didn’t sell anything this week either.

This short interchange captures much of the tension I felt in many of the roles I have held over the last 20 years. It touches on so many of the challenges I faced as I looked to engage my team, build relationships with partners, and deliver impact to clients. On the one hand, there has always been the urge to be innovative, learn as much as possible, and try out new things. While on the other hand, the organization I worked for wanted measurable objectives to hold me to account for near term concrete deliverables against short-term targets.

It’s a compromise we all face and must find ways to address. While meeting the needs to produce today’s outputs and drive revenue, we must also increase understanding, build relationships, and develop opportunities for our colleagues and clients. Both are important. Yet, at times they seem to be pulling us in different directions.

The challenge, of course, is when these 2 perspectives significantly diverge. We find ourselves in an endless cycle of questioning how we spend our time, double-guessing each decision, justifying every action we take. This creates a stressful work environment and contributes to a daily struggle that few of us can sustain. We end up asking “what is my value?”.

Counting What Counts

At the heart of the dilemma lies an uncomfortable question: How do we measure value creation and delivery in a digital world? Many would argue that an important consequence of digital transformation is that it forces a new way to define and manage value. Something that has come to be called Innovation Accounting.

Innovation accounting is a concept and set of practices used to measure and manage value creation within innovative organizations. While it is particularly relevant in the context of startups and businesses that are focused on creating new products, services, or processes, I have found it to be an essential concept for rethinking how I approach value creation in a wide range of contexts. And how I think about the value I bring.

The primary goal of innovation accounting is to help businesses understand and track the progress of their innovation initiatives, especially when traditional financial metrics may not accurately capture the value and progress of innovative projects. Or more often, perhaps, to accompany a traditional set of value measures with some additional ways to represent the more innovative activities undertaken. Think of them as expanding the value equation.

While there are several variations, key elements of innovation accounting typically include several components, depending on the specific context:

• Putting focus on both leading and lagging indicators: Innovation accounting involves identifying both leading indicators (predictive metrics) and lagging indicators (historical metrics) that are relevant to the specific innovation project or initiative. Leading indicators help assess the potential success or failure of an innovation before it's fully realized, while lagging indicators measure the outcomes after implementation.

• Investing in validated learning: This concept, popularized by Eric Ries in "The Lean Startup", emphasizes the importance of learning from real-world experiments and customer feedback. Innovation accounting often involves collecting data through experiments, prototypes, or MVPs (Minimum Viable Products) to validate assumptions and iterate on ideas. Rather than experiments for their own sake, it’s spending time and effort on the validated learning that matters.

• Establishing a Build-Measure-Learn cycle: Innovation accounting aligns with the iterative process of building a product or service, measuring its performance, and learning from the results. This cycle helps teams refine their innovation strategies and make data-driven decisions.

• Re-establishing metrics and Key Performance Indicators (KPIs): Organizations define specific metrics and KPIs that are relevant to their innovation initiatives. These metrics could include customer engagement, adoption rates, customer feedback scores, conversion rates, and more. The choice of metrics depends on the nature of the innovation project.

• Managing the innovation funnel: Similar to a sales or marketing funnel, the innovation funnel represents the stages of innovation, from idea generation to market launch. Innovation accounting helps track progress through these stages and identify potential bottlenecks.

• Deciding whether to Pivot or Persevere: One of the key outcomes of innovation accounting is the ability to make informed decisions about whether to pivot (make a fundamental change in the innovation approach) or persevere (continue with the current strategy). This decision-making process is based on the data and insights gathered during the innovation journey.

• Celebrating learning milestones: Organizations establish learning milestones that indicate progress and validate assumptions. Being explicit about such milestones is essential. Meeting these milestones can trigger further investment or a change in direction.

Cutting the Cord

Experience in driving value for innovative organization has led to the emergence of an important set of activities aimed at accelerating the innovation process. By following these recommendations, innovation accounting allows an organization to establish a systematic approach to managing and measuring the innovation process. It helps organizations avoid wasting resources on unsuccessful projects and promotes a culture of continuous learning and adaptation. By focusing on validated learning and relevant metrics, businesses can make more informed decisions about their innovation initiatives and increase their chances of success in the rapidly changing business landscape.

Yet, much more than that, by learning from an innovation accounting approach we can begin to define an appropriate balance between the need to meet short term delivery metrics and the challenge to drive innovation within and across the organization. And this might help to smooth the conversations you have at the end of a busy week.