From CGMA Magazine: Finance’s role in fostering innovation

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.

“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,” Royal Dutch Shell CFO Simon Henry, CGMA, explains in the CGMA report Managing Innovation: Harnessing the Power of Finance. “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. Here are a few ways finance teams can be successful innovation partners:

Create an innovation mindset. Successful companies put innovation at the heart of their business, fostering a culture in which ideas are allowed to flourish. The CEO must set the vision, and the CFO has a vital role in setting the framework through which innovation can thrive. The innovation culture must then permeate every layer of the organization. It can be promoted through employee incentive schemes, for example. Senior managers also 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.

Nurture creativity. There can be a clash of cultures between those responsible for coming up with ideas and those who are the guardians of financial integrity and rigor. After all, operational excellence is usually driven by predictability, reliability, and standardization. But promoting innovation requires a high tolerance for uncertainty, ambiguity, and 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.

Prepare the path to profit. 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 ways management accountants can bring rigor to the process of commercializing ideas. Finance can also be a valuable partner of innovation teams—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, for example.

Match metrics to the stage of development. Companies must beware of the dangers of trying to apply the firm metrics used in business operations to early-stage innovation. A phased, or staged, process gives an innovative idea room to breathe and limits downside financial risk while also providing organizations with a structured approach to evaluating innovations. Finance can add value by creating the “stage gates” for innovation, through which each idea can be challenged and refined to prepare it for the next stage of investment.

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 can stifle rather than encourage innovation. Companies therefore may need to recalibrate their attitudes toward risk. Three factors are key to this. The first is defining an organization’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. To support this, management accountants should seek to create a framework that promotes clarity, transparency, and discipline across the total portfolio of innovation projects.

For a full version of this article and a link to the report, read “Five Ways for Finance to Become an Innovation Partner.”

—Jack Hagel, editorial director
CGMA Magazine

Also on cgmamagazine.org

Hidden Supply Chain Opportunities

Companies can find ways to create competitive advantages in their supply chains but need better real-time information about what’s going on with their partners, according to KPMG’s fourth annual global manufacturing outlook survey. Companies can find competitive advantages by:

• Gaining real-time, end-to-end visibility in their supply chains.
• Deepening collaborations with partners in the supply chain to create efficiencies and flexible, demand-driven operations.
• Placing their partner network at the center of their strategies to generate fresh ideas and innovation.

Brenda Morris, CPA, CGMA, the CFO of 5.11 Tactical, which makes clothing and tactical gear for military, law enforcement, and firefighting personnel, offers insight on how companies can innovate along the supply chain.

Read the full article, “What Opportunities Are Hidden in Your Supply Chain?” at tinyurl.com/oscdh3v.

Who Needs Budgets, Anyway?

Steve Player, CPA, CGMA, founder of management consulting company The Player Group, says traditional budgeting processes don’t work and that organizations must adapt by going to a model of continuous planning and rolling forecasts.

“The biggest problem with most traditional budgets is that they’re based on a bunch of assumptions,” he says. “… And when those assumptions turn out to be wrong, the plans based on them pretty much are wrong, too.”

Yet finance professionals rigidly want to adhere to those plans and do monthly variance explanations when they’re not inside the line, he explains.

“In that respect, finance becomes part of the problem, not part of the solution,” Player says.

Read the full article, “Boot the Budget? Why Rolling Forecasts Might Make More Sense,” at tinyurl.com/p2vuyw7.

Ensuring Engagement

Employees who care about their work are consistently more productive and less likely to switch jobs. They’re natural innovators and brand ambassadors for their organization.

Companies know this well. But they also know employee engagement can be hard to come by. More than one-third of the global workforce lacks motivation about the job and is potentially looking to change employers, according to a study by management consultancy The Hay Group.

So what can managers, executives, and HR leaders do to create a company culture that fosters employee engagement? David Wu, CPA, CGMA, general manager and managing partner at Shanghai management consultancy GMP Talent International, offers some pointers.

Read the full article, “How Three Companies Get Their Employees to Care About Their Work,” at tinyurl.com/owmsd27.

Dress for Success

Whether you’re joining a new organization or moving up in your current one, what you wear matters.

That’s underscored in an OfficeTeam survey, in which 80% of executives said clothing choices affect an employee’s chances of earning a promotion, even though the importance of proper attire has waned slightly over the years.

Richard Wolf, CPA, CGMA, the president of Wolf Advisory Services LLC in Baltimore, shares some cautionary tales and a few tips for doing the right thing when it comes to workplace appearance.

Read the full article, “How Work Attire Influences Your Next Promotion,” at tinyurl.com/p7mme9t.

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CGMA Magazine is published in conjunction with the Chartered Global Management Accountant designation, which was created through a partnership between the AICPA and CIMA. The magazine offers news and feature articles focused on elevating and emphasizing management accounting issues.