This article was first published in the February 2018 international edition of Accounting and Business magazine.

Despite the idea that CFOs are increasingly acting as business partners, they seem to have a blind spot over research and development (R&D). This is strange given the importance of investment for strategic direction and financial performance.

The absence may be caused by a belief that CFOs don’t have the skills or background to make a meaningful contribution to project selection. Or they may just have been overlooked in the first place.

Research by the Institute of Management Accountants (IMA) and ACCA found that R&D managers believe the finance team’s involvement in early-stage project evaluation may stop or slow down authorisation. The report, The CFOs’ guide to technology roadmapping, noted that: ‘Finance should not be invited to be involved in the early stages because they are less likely to encourage highly risky projects.’ R&D want some projects to fail, as it proves that their selection was ambitious.

The study focuses on the capital-intensive semiconductor industry – which globally spent US$56.4bn on R&D in 2015. While the finance team is absent when projects are selected, it participates in the development stage of project evaluation. In semiconductor companies, after the proof of concept has been established, CFOs prepare a business case to decide whether to continue to fund development or to terminate. Then one of finance’s favourite methodologies – the discount cashflow analysis – is deployed as part of the decision process.

However, the research stage is so high risk and speculative that a net present value (NPV) calculation is considered a waste of time. A CFO of one of the largest integrated device manufacturers explained: ‘You don’t typically do NPV calculations on research because it is highly speculative and high risk. At some point, probably five years from when we think it will be in production, we will start doing a more formal analysis on it. By then you are starting to look at whether it will turn into something you can get a return on.’

Gradual shift

Although few CFOs are currently involved in the early stages of project evaluation, the report suggests that in several leading firms there is a gradual shift in thinking about their role. They see that role as evolving into one in which the CFO can help the organisation to take a more disciplined approach to project evaluation. For instance, one CFO explained that the role should focus on facilitating better project evaluation processes, which requires the CFO to be prepared to ask difficult questions: ‘I don’t want finance people telling the technology people, “we should go and do that technology”. That is not their job.’

He said that even when a CFO agrees with a strategy, they should challenge it. The problem, he says, is that executives often believe they understand the organisation’s risk tolerance. Questioning can help to reveal the different attitudes that those involved in project evaluation hold towards risk.

Report author Jodie Moll PhD, senior lecturer in accounting at Manchester University, argues that an industry technology roadmap (TR) would provide a basis for the CFO to work with R&D right at the early stages of project evaluation.

Industry-specific and organised industry-wide by the International Roadmapping Committee (IRC), a TR is designed to prevent technical roadblocks and identify growth opportunities. A decision-support tool, TR helps identify the risk of a particular R&D path.

The problem is that for CFOs without a scientific/technical background much of the TR appears indecipherable. But Moll argues the TR is accessible to CFOs through visual maps, allowing users to understand industry forecasts and investment opportunities for a specific technology. A colour scheme gives a rapid overview: colour 1 means a solution exists; 2 – interim solutions are known; 3 – manufacturable solutions are known; 4 – manufacturable solutions are not known. Once finance understands TRs, Moll says, it can use a three-step process to integrate them into a project appraisal process (see box).

By grabbing the TR, CFOs can use their skills to minimise the chances of their company’s R&D being dysfunctional. It’s time CFOs were back in the room from the start.

Peter Williams, journalist