A while ago I wrote a post on how standard methods of valuing business opportunities hindered innovation. Somewhat foolishly I called it “How accountants kill innovation” and it received a lot of comment from our blog readers, which was mostly very positive. Deb Schofield pointed out the uses of alternative valuation methods in her work as a VC and Ralph Ohr directed us to a Clay Christensen piece in HBR which almost said the same thing.
Interestingly, CPA Australia also picked it up and tweeted it to their members. The only strongly negative reaction was from my academic accounting colleagues who eventually calmed down when they read the research paper that the post was based on and conceded that I did have a point (but I should have called it “How finance kills innovation”).
I had a follow up call from the CPA who wanted to do a story for their magazine “In the Black” on how different valuation approaches influence innovation performance. They were particularly interested in the idea of real options and how this incremental investment approach could be used by accountants. As it turned out, the story turned into a feature article with many comments from executives and practitioners. I’d talked with Peter Williams (Deloitte Digital CEO) before about some of the problems with trying to use discounted cash flow to value innovative projects and his quote from the article sums his position up very well.
NPV is a useful tool for situations where there is a low level of uncertainty. But in a completely unknown state, NPV is like using a hammer when you really need a screwdriver
Other comments also supported Peter and his issues with managing innovation with standard financial tools. However, something that emerged from these quotes was how these financial tools can be inappropriate but standards and tradition still meant that they were being used anyway. As one CEO said:
I don’t know how I could use a real options valuation because it would be impossible to convince prospective investors as they all focus on net present value and cash flow. We have to work within boundaries that people who use conventional wisdom understand.
So what’s the solution to changing the conventional wisdom? Peter Williams give a clue when he says:
Standard accounting processes can create an illusion of certainty. But they don’t reflect the way that innovation happens.
If we don’t really undertand how innovation works then we are going to apply the wrong tools and measures for managing it. Perhaps a course in innovation should be a standard requirement for accounting degrees? Not many business schools have a genuine innovation subject as core to their MBA. In understanding lies hope……