Creative minds and accounting metrics

Creative minds and accounting metrics

I have been doing plenty of reading lately about innovation, an area which has long fascinated me. Over the years I have worked with lots of artists and creatives to help them realise their splendidly innovative concepts in tangible form. Along the way I saw innovative projects go swimmingly and some, er, not go so well. The various factors and issues that support or impede innovation are many and diverse, and getting the right mixture of conditions to support innovators is something that continues to, well, obsess me.

I happened across a nice article today called The Seven Deadly Sins of Large Company Innovation by Rick Smith published on the Forbes website.

The sins that Smith lists include

  1. One and Done (“… a sign of failure, and the project is dismantled”).
  2. Product Development Over Customer Development
  3. Death by Committee
  4. Reliance on Lagging, Not Leading Indicators
  5. A Culture that Stifles Entrepreneurship
  6. Poorly Aligned Reward Systems
  7. Custophobia (or a fear of interacting with customers).

This article is well written and interesting, and very well-worth a read. I felt that it pulled together a lot of good ideas and issues that I have either seen other people talk about or felt I recognised because I have seen them unfold before my very eyes. But the one sin that really made me sit up and sigh ‘Hallelujah!’ was actually number 4:

“4. Reliance on Lagging, Not Leading Indicators.  Companies typically rely on traditional accounting metrics to track the progress of their new growth initiatives.  But metrics like sales, profit and market share are lagging indicators in a new growth business.  These appear after the business has already been validated and is scaling (or not), providing little guidance from which to manage the project during the critical discovery phase. Looking backward at sales and profit are uninformative at best, and misleading at worst.

Alternative Approach: The key is to manage a project based on leading indicators – quantitative and qualitative data that can better predict the future. Metrics such as customer trials, usage of the product after purchase, and referral rates foreshadow whether a business is not likely to grow as expected, or has the real potential to scale. Unfortunately, the most appropriate leading indicators vary greatly from project to project, and are unique to each situation. But it’s well worth the effort – uncovering true predictive indicators of the future can dramatically impact the ROI of any growth investment.”

I don’t actually recall ever hearing or reading anyone say this (and maybe this is just an indication that I read the wrong stuff) but it is so true. I work with people who are either just starting up a new venture or with people who have been making creative work for a while and are very new to putting a business framework around what they do. The traditional accounting metrics mentioned above mean very little to these folks and they always assume that it’s because they, themselves, are nuff-nuffs and not because those particular metrics are not appropriate to their business practice at this stage of its development. It is so refreshing to see Smith unpack this and suggest alternative measures. Thanks Rick!

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