Not that it’s a bad time for innovation. In fact, now is an ideal time for a focused form of it. In a study of 275 senior finance executives conducted by CFO Research, in collaboration with American Express, just 13% of respondents said that they expected their companies to spend and invest “substantially more” in the coming year, with about a third (34%) choosing “about the same amount.” (See Figure 1, below.) (The full report, Reinventing Innovation, can be downloaded from cfo.com/research.)
That said, investing in innovation during the early stages of a recovery can yield abundant benefits when the economy regains its full sheen. Armed with new offerings, a business can position itself to grab market share from its less-prepared rivals. As aware of this as they may be, finance executives aren’t about to cast away the cost-consciousness that has served their companies well during the downturn. What they are doing, instead, is bringing a new level of discipline to the innovation process.
While few CFOs are likely to weigh in on which product prototype or emerging technology is the most promising, they can set limits on spending and apply their questioning skills to pinpoint, for example, time-to-market considerations.
A Small Notion
Finance executives, as the study found, are determined to extract as much value as they can from every dollar they spend. Among respondents, nearly half (45%) said that their companies would focus on extracting more value from their spending. By finding the balance between near-term profits and long-term growth, finance leaders can help their companies make meaningful investments — comparatively minor changes that add up to major value.
Such cost-tethered innovation is more likely to be incremental than transformational. Yet the power of these so-called “little ideas” is undeniable. “As companies, we’re all battling against an unprecedented amount of business complexity,” says Mark Verbeck, CFO of Coupa Software, a provider of cloud-based spend-optimization applications. “In order to survive, you have to innovate to become more efficient.” Verbeck’s assertions challenge traditional views of efficiency — namely, that it stifles the creativity that fuels innovation.
Incremental innovation may mean finding novel ways to re-engineer the cost structure or identifying new applications for existing products or technologies. “For us, innovation has meant trying to find different ways to impact our results without impacting our ability to market or invest in our products,” says Dan Marchetti, CFO of Urschel Laboratories, a maker of industrial cutting equipment, primarily for the food industry. “We needed to innovate within our manufacturing processes.”
By the Numbers
What spurred Marchetti’s creative thinking was a plain number: In early 2013, when the company’s fiscal year ended, he discovered that gross margins had deteriorated by 2%. “An increase in costs was eating into our margins,” he says.
Historically, Urschel Laboratories could attribute such results to cost increases in raw materials, such as stainless steel, combined with a limited ability to pass on those additional costs to customers in the form of higher prices. But Marchetti knew raw-materials prices had barely budged. In addition, the company had exceeded its own expectations for production, which should have translated into improved productivity and lower costs.
He had to wonder whether the company was extracting maximum efficiency from its assets, both human and otherwise. “We hadn’t spent a significant amount of time looking at our utilization,” he says. Analysis showed that the 24 workers on the second shift (from 4:30 p.m. to 4:30 a.m.) were clocking in abundant overtime hours. The returns on such increases were diminishing, as exhausted workers became less productive and less attentive to quality issues.
Alerted to this fact, Marchetti increased the number of second shift workers by more than 30%. He also modified the product flow in the company’s factory, managing inventory more efficiently by increasing re-order points, and improving scheduling so the machines could be put to more economical use. Toward that end, he identified commodity parts, such as spindles, that could be outsourced to a third-party firm for manufacturing or machining. “It’s a shift in the way we’ve always done things,” he says, noting that Urschel Labs turned 100 in 2010.
A Company of Disrupters
It’s fashionable to refer to innovators as “disrupters,” but some successful creative ideas don’t turn the world upside down. Within the universe of their workplace, however, they do set off their own Small Bang. “I did get some pushback from members of the management team,” says Verbeck. “But I saw it as a management opportunity.”
The CFO of Coupa Systems is referring to a change he initiated in early 2012. In a bid to “compete more effectively” and “make better decisions, faster,” Verbeck stopped tracking employee vacation time. He told the company’s employees that they would now have unlimited time off. His reasoning — which he admits is “purely anecdotal” — was that the company would perform better if employees felt empowered and satisfied with the level of work-life balance that they could achieve.
“Some in the management team thought it would create a Wild West situation where people wouldn’t be accountable for their jobs and there were no rules that kept them in place,” says Verbeck. But the company’s internal surveys have subsequently shown that employees now enjoy a higher level of job satisfaction.
Innovation as a Service
Not every industry lends itself to the kind of innovation that is showy and path-breaking. But clarity and accountability aren’t necessarily incompatible with innovation. At Continental Paper Grading Co., which brokers wastepaper, CFO Tony Aukett can describe the business in a dozen words: “We buy rolls, cut them up, bale them and ship them out.” It’s a commodity business where customers are often looking for the lowest bidder.
About three years ago, in an attempt to cut costs, Continental shifted from paper invoices to an electronic system. “We radically changed the whole process, speeding it up,” says Aukett. Under the old system, a supplier who sold them 50 truckloads of wastepaper would receive 50 receipts, matching them against invoices one load at a time. Now they have one invoice, and the system automatically generates a wire check. “Our suppliers wanted to be paid on time to cut their own costs,” says Aukett, “so this kept them happy.” Continental has engendered enough loyalty that in 2012 it opened a $1 million facility near a major supplier in York, Penn. The operation turned a profit within its first four months. Management is now considering its options for opening other such operations.
“You can’t keep doing business the way everyone else does business, no matter what industry you’re in,” says Aukett. “You’ve got to show that you are a company that thinks differently.” Finance executives may appear to be focused on efficiency, at the expense of just about everything else. But what their perspective provides is a framework for their companies to innovate — not grandly, but effectively.