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

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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.

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