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How To Drive Innovation From The Finance Function

Aligning finance and innovation is vital

10Nov

We live in an age of disruption and rapid technological advancement. Any organizations unable to adapt rapidly to changing market conditions are doomed to failure, and innovation is a must in the constant battle to stay ahead. However, it is something very few companies do well. According to research from Doblin, the innovation arm of Monitor Deloitte, roughly 95% of innovation attempts fail to return their capital.

There has been a wealth of theory published around why the rate of failure is so high and how it can be corrected, but the fundamental issue for many is extremely simple - it needs to be a team effort. Innovation initiatives need to include departments you perhaps wouldn't normally associate with innovation, and the finance function, in particular, has a vital role to play.

Finance has a number of responsibilities key to developing and maintaining a successful innovation strategy. Firstly, they determine early-stage investment and funding for any projects. Finance needs to evaluate the likely returns, what will be required to get things off the ground, and designate financial resources accordingly if the numbers make sense. This means looking at every potential cost. Any change requires careful strategic thought, as they could result in infrastructure changes that can be costly, and finance leaders need to be aware ahead of time. Furthermore, innovation projects are always likely to fail a number of times before it succeeds. Finance professionals must determine at what point to stop funding the project because it simply isn't going to work. This is not just their decision, though, they need to provide visibility into the cost-benefit and associated trade-offs so decision makers are empowered to make the right choices about a project. As Michael Kaplan, Former VP of Finance at Activision, notes, 'There are several ways that the finance function contributes to the innovation of new products. In forward-thinking organizations, finance helps to determine how resources are allocated and to create a product strategy by being embedded directly in the product development team. The key to this type of effective partnering is to use our analytical skill set to bring a level of rigor to the decision making. One that focuses on not just creativity or market size, but one that balances those with the understanding of the costs associated with driving profitability.'

Central to determining whether a project is viable is risk management. An overly risk-averse finance department can kill innovation, so they need to tred a fine line, being realistic about where obstacles could arise so they can be mitigated against. Indeed, if the risks are too great, the project can be killed. Equally, they need to be flexible. A CFO must monitor and stay current on trends around consumer behavior, looking at what factors are driving demand for new and different products.

Finance professionals are also integral to establishing relationships with strategic partners, both internal and external, that are necessary for a project to work. Internally, they have to work closely with marketing, sales, and supply chain departments, collaborating to create new business models that will drive forward innovation initiatives. When it comes to external partners, they must make sure that from a financial perspective, relationships create value, and that risk and reward is evenly shared through the collaboration.

Ultimately though, the finance team will have to be the bad guy, so this is something they need to be prepared for. The way the function is evolving though means that they can be far more involved in strategy and accounting creatively to put an initiative in the best position to succeed. In a recent survey by global staffing firm Robert Half, CFOs cited too much bureaucracy (30%) and being bogged down by daily tasks and putting out fires (27%) as the biggest barriers to innovation. The CFO must work closely alongside the CEO to ensure bureaucracy is kept to a minimum, identifying when it is unnecessary and particularly harmful. They must also ensure and budget for the technology and staffing to take care of the daily tasks that prevent them being involved in higher level strategy setting and the innovation process.

The television industry is a prime example of incumbents having to react quickly to new developments or risk failing. It has been dramatically disrupted over the course of the past decade or so, with the rise of YouTube, Netflix, Amazon Prime causing a seismic shift in how audiences consume content. Traditional broadcasters have had to rapidly adjust to this. Channel 4, for example, introduced an On Demand platform in 2006 and later a YouTube channel that saw them become the first major broadcaster to embrace the viewing revolution. You can now watch Channel 4 programming on 25 devices and platforms, and its ability to lead on new technology has seen them remain relevant even as many in the industry has floundered.

Matt Hann, Head of Commercial Finance at Channel 4, recently sat down with us to discuss the role of finance within such a challenging environment. He emphasized the importance of flexibility in planning, arguing that members of the finance function need a dynamic mindset above all else. In the early 2010s, the online streaming market was flooded with new platforms and channels. Channel 4’s finance department built a model to prioritize the 30 or 40 platforms out there, working closely with their strategy team to ensure that the company could focus on the channels that would the most value to help them reach their growth targets.

It is from this position that finance can have the most impact on innovation and growth - overlooking the entire organization and providing decision-makers with the necessary information around risks, where investment is needed, and guiding partnerships both internal and external that will help an innovation initiative reach its full potential.

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