Innovation is not often spoken of in relation to the finance function. Many still labor under the misconception that it is the preserve of bean-counting number droids. However, the strategic importance of innovation initiatives, and the potential for them to turn into financial black holes, mean that it is now something they have to be heavily involved in. Roughly 95% of innovation attempts fail to return their capital, according to research from Doblin, the innovation arm of Monitor Deloitte, and CFOs play a vital role in ensuring that their organization bucks the trend.
The CFO, and the finance function as a whole, has a number of responsibilities key to ensuring innovation is managed carefully and optimized for growth, particularly when it comes to early stage investment and acquiring funding. They must strike a careful balance between keeping the financial risks in check and and encouraging projects. One idea floated by John Levis, Senior Principal of Deloitte, is to take a portfolio approach to funding and investing innovation. He notes that this approach allows CFOs ‘to manage the overall level of risk in innovation projects while allowing the organization to pursue innovation initiatives that might have a higher level of risk than the standard risk threshold.’
CFOs must also stay up-to-date with consumer trends, as they could necessitate potentially costly infrastructure changes. They need to ensure the capital flexibility is in place so that this can be done without putting the bottom line at risk, while also maintaining a level of capital that allows for funding of innovation projects to exploit any changes in consumer behavior.
We spoke to three leading CFOs about how they were helping to drive innovations at their organizations.
Ian Swanson, CFO of Delicato Family Vineyards
The role of finance in innovation is in decision support, ensuring that the right information is available in the right format to inform the decision, and then pressure testing the idea and asking the right questions. To do this, however, the business has to view you as a partner and not the police, and you have to be able to work with the business through the process from beginning to end – offer to be the sounding board. In this way, the approach is not to be the gatekeeper, but the business partner whose role is to help the business make the idea better. Done the right way, the business will often kill bad ideas early on, and the best ideas just get better. At Delicato I don’t think we are any different. You have limited resources within the organization and you want to make sure those resources are applied against the best ideas.
James Butler, Financial Controller at Surf Air
This depends on the nature of the organization, but assuming you are working for an organisation that is innovative or coming up with new ideas, finance should be there as a sounding board. Key tasks are to ground innovations in reality or to help optimise a great product into a profitable one. Be the one to ask the obvious questions, check assumptions, and make sure innovations are deliverable. Don’t stifle innovation but remember your role in delivering value to shareholders and balance risk and reward.
Michael Kaplan, Former VP of Finance at Activision
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 skillset 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.