CFOs must go beyond the numbers and tough financial questions – championing innovation is now a key function of their role, says Mithran Doraisamy
This article was first published in the June 2018 International edition of Accounting and Business magazine.
Chief financial officers must drive innovation. This is particularly important in this so-called fourth industrial revolution that is led by rapidly maturing and converging technology. Driving innovation, as opposed to merely enabling or supporting it, means that CFOs should be held responsible, even though someone else in the business may be ultimately accountable for it. CFOs must also fully immerse themselves in innovation. Boards and chief executives should judge them by the corporate innovation output as well as the CFO’s own innovation outcomes.
Is this an odd assertion? Consider that CFOs are the stewards of profitable long-term growth and are the first of their peers to grasp the financial trends and implications across the company. They are also the first to understand key financial risks and opportunities, and they hold the purse strings for investment that could combat disruption and provide new opportunity.
In addition, CFOs are often closest to the market and understand market expectations and the boundaries that will guide trade-offs. They also run the planning and budgeting processes for both profit and loss budgeting and capital expenditure, which affect how innovation is encouraged and funded in corporations. Further, they are often also in charge of corporate strategy and/or IT, both core drivers of innovation.
In a stable environment, many CFOs can afford to adopt a laissez-faire approach to innovation. However, the uncertainty of the current environment does not allow them to adopt a passive position. Their peers are calling out for leadership and CFOs must respond accordingly. There are five ways of doing so.
First, develop a balanced and aligned portfolio of innovation initiatives. Innovation is often viewed as being disruptive and transformational, a high-reward activity that is typically high risk. There is a role for the CFO to ensure the risk and rewards are balanced. This covers both the type and extent of innovation initiatives.
Innovation types cover all parts of the business model and value chain, from products, brands and online channels to new engagement and revenue models. These types of innovation affect both revenue and cost.
Then there are different extents of innovation. Initiatives that feature just one or two types of innovation and are close to what the business is currently doing are generally seen as core or adjacent innovation, of an evolutionary nature, and offering lower risk and lower return.
Initiatives that stretch a business further away from its core capabilities typically feature multiple types of innovation. These are disruptive or revolutionary and can transform industries, but can be harder to execute.
CFOs should ensure that the balance of such initiatives reflects the circumstances of the company, with appropriate focus on the areas of need, such as new customer engagement models. While the corporate strategy typically serves as a guardrail, CFOs often need to set targets at a more discrete level to ensure that the most important types of innovation for the company are pursued.
Initiatives aside, innovation also requires an approach and an ecosystem to support it. The approach could involve deploying a variety of methods, such as agile design thinking, hackathons and accelerators; the ecosystem may include ensuring that the collaboration platforms are in place.
While the innovation officer may be accountable for constructing the innovation ecosystem and portfolio, the CFO has a legitimate and important role in providing guidance and support. Setting targets for each category of innovation by business unit and function is one way a CFO can ensure that the right mix of initiatives are present and that new revenue, new business models and lower-cost models are being pursued across the business.
Second, deploy nimble funding processes that support innovation. Funding is one of the biggest banes of the lives of innovators. Some of the issues arise from legitimate concerns, as innovation funding should not be a bottomless well. However, others present real challenges, particularly regarding the rigidity and annualised nature of funding.
CFOs need to ensure that funding processes are in sync with contemporary short-cycle approaches to innovation and development. This means setting funding stage gates that match the agile methods being used, and leaving sufficient funding for iterations once the minimum viable product is produced. New approaches to funding agile projects are being refined, and the CFO should determine what works best for their organisation.
Transparent but nuanced funding rules are set for the different types and extents of innovation. For example, CFOs may choose to ask business units to self-fund all evolutionary innovation out of budgets on the basis that much of the innovation should generate same-year returns. But they may hold special funding aside for the bigger bets: the revolutionary innovation.
There are no set answers for funding innovation, but CFOs need to structure it carefully to promote innovation with the appropriate level of governance.
Thirdly, focus on securing the portfolio benefits. Ultimately, innovation is expected to create real value. But this applies at the portfolio level and not on a per project basis, where there needs to be sufficient licence to fail fast on smaller projects. This fosters a culture of risk-taking and leverages learning for future successes.
The focus on securing benefits must therefore be nuanced appropriately to achieve both the financial and other objectives around risk-taking and culture. For early stage innovation, the focus should be on the indicators of progress, while for later-stage innovation, when funding and resource levels rise, a focus on outcomes is key.
Again, there are no rules for CFOs to follow. However, financial returns fall squarely within the CFO’s mandate and they are expected to pay particular attention to this.
The fourth way of demonstrating leadership is by transforming the finance function. As a function, finance has been widely disrupted over the past 20 years, particularly with the introduction of enterprise resource management systems, and outsourcing and offshoring.
Nonetheless, the maturing and convergence of technology holds much promise for further improving the efficiency and value of the finance function. It is imperative that CFOs innovate their own function to maximise the value of their role as well as to show innovation leadership.
A technology such as robotic process automation drives the automation of manual processes in financial processing areas and, critically, can offer returns on investment. Blockchain also has the potential to streamline trust-based transactions and offer productivity benefits.
Non-technological innovation can yield significant improvements too. In large companies, simplifying the budgeting process (sometimes a bloated six-month process that sucks energy out of an entire organisation) can improve outcomes and release energy for more creative endeavours.
As for increasing value, analytics (typically cloud-based) and cognitive technologies (artificial intelligence) provide significant opportunities for finance to offer new insights into the business that were hitherto unavailable. This can extend from growth and cost trends to risk management.
Finally, be hyper-aware and ask strategic questions. If one of the biggest issues for innovators is funding, then the other main problem is trying to convince uninitiated executives of future opportunities and getting them to focus beyond current issues. CFOs have been part of this challenge.
In this rapidly changing landscape of new business models and new-use cases for maturing technology, CFOs can add the most value by being hyper-aware of external environments and trends. This will allow them to move beyond asking the tough financial questions; it will enable them to seek more holistic solutions and innovations, and test whether the best innovation approaches are being deployed.
With innovation being so vital to future success, it’s time for all CFOs to make the leap from being bean counters to bean sprouters. CEOs, board members and shareholders would be wise to insist on this transformation.
Mithran Doraisamy FCA, consultant
"With innovation being vital, it’s time for all CFOs to make the leap from bean counters to bean sprouters"