Five ways for finance to become an innovation partner
The finance function is rarely expected to be the originator of a breakthrough product or technology. But it has an important role in ensuring that great ideas are spotted, encouraged, financed and delivered efficiently to the market.
There are few innovations, or innovation-led organisations, that are truly successful without the input and influence of management accountants and the finance team, according to Managing Innovation: Harnessing the power of finance, a new CGMA report based on interviews with global finance leaders at companies including Coca-Cola, Royal Dutch Shell and BT Group.
“The role of finance in all of this is multifaceted,” Royal Dutch Shell CFO Simon Henry, FCMA, CGMA, explains in the report. “A finance function needs to be able to understand the business well enough to know what is a worthwhile activity but also, in this part of the business, to have a bit more of an open mind. It is less mechanistic and has the ability to live with ambiguity, to identify risk and to manage it.”
Achieving balance between a company’s creative desires and its needs for fiscal responsibility can be difficult, but it’s not impossible, says the report, which recommends five tips for finance teams to be successful innovation partners:
1. Create an innovation mind-set: Successful companies put innovation at the heart of their business, fostering a culture in which ideas are allowed to flourish. That culture needs to start at the top: the chief executive must set the vision, and the CFO has a vital role in setting the framework in which innovation can thrive. The innovation culture must then permeate every layer of the organisation.
Promoting an innovative culture can deliver tangible results and enhance competitive advantage – by designing incentive schemes for employees, for example. And the attitude toward failure is important, too. Senior managers need to accept that individual projects may fail if the overall strategy is to succeed – something that can be anathema to finance professionals steeped in the art of risk mitigation. If it is to support innovation in an organisation, the finance function needs to transform itself into a business partner that can help innovation teams succeed.
2. Nurture creativity: There can be a clash of cultures between those responsible for coming up with ideas and the finance professionals who are the guardians of financial integrity and rigour. This is because, for most organisations, operational excellence is driven by predictability, reliability and standardisation. By contrast, promoting innovation requires a high tolerance of uncertainty, ambiguity and constant change.
Companies need to adapt their financial processes and metrics to the specific needs of the operational business and the innovation pipeline. Finance can help by protecting early-stage ideas from premature testing against traditional financial metrics or, for example, by creating ring-fenced budgets with more relaxed criteria for early-stage innovations. Above all, finance must work in an environment where uncertainty is part and parcel of the process.
3. Prepare the path to profit: Innovation is not an end in itself. It is the means to corporate renewal and long-term sustainability, and that means that successful innovations must, ultimately, create value for their organisations. Finding the path to profit when an innovation project moves toward implementation is a core capability of management accountants.
Building cash-flow models, advising on financing approaches and allocating resources are just some of the many ways in which management accountants can bring rigour to the process of commercialising ideas. Finance can also be a valuable partner of innovation teams – for example, by constructively challenging an innovative idea, by helping build a more robust business case to gain further backing or by ensuring that plans are carried out with maximum efficiency.
4. Match metrics to the stage of development: Companies must beware of the dangers of trying to put the firm metrics used in business operations around early-stage innovation. A phased, or staged, process gives an innovative idea room to breathe and limits downside financial risk while also providing organisations with a structured approach to evaluating innovations.
Finance can add immense value by creating the “stage gates” for innovation, the report says, through which each idea can be challenged and refined to prepare it for the next stage of investment.
5. Take a balanced view on innovation risk: Innovation and risk are two sides of the same coin. While there can be a natural tendency to try to manage risk out of a business, this approach will stifle rather than encourage innovation. Companies therefore need to recalibrate their attitudes to risk if they are to create an environment in which innovation can flourish.
Three factors are key to this. The first is defining an organisation’s risk appetite in the context of its strategy. The second is tolerating failure and judging risk across the whole innovation portfolio, as well as on a case-by-case basis. The third is considering intangible “soft” risks as well as tangible “hard” risks in their risk strategy. To support this, management accountants should seek to create a framework that promotes clarity, transparency and discipline across the total portfolio of innovation projects. Companies that excel in this realm of portfolio management are often also the most successful businesses in the world – even if in reality a lot of the ideas they bring to market are bought in from outside.
Related CGMA Magazine content
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“Gender-Diverse Leadership Fosters Innovation”: Innovation and idea generation are the greatest benefits to organisations that embrace male and female leadership, but boardroom diversity is still low across most developed countries, according to new research by Deloitte.
“Manage Fears Without Stifling Innovation”: Fear of making errors on the job was the most common workplace fear cited by workers in an Accountemps survey. Experts say being averse to errors and mistakes is healthy, as long as fear of failure does not prevent workers from capitalising on opportunities for innovation.