Why CPAs focused on the ‘core’ shouldn’t forget about exploring the ‘edge’

Pascal Finette, an entrepreneur, consultant, and keynote speaker, shares innovation lessons from interviews with other leaders, a story about how Pepsi set up a direct-to-consumer business, and why those fortunate enough to work remotely can develop a routine that leads to better quality of life. Learn more about the concepts of “core” and “edge” in this report from CPA.com that features Finette.

Editor’s note: This conversation was taped in December at the Digital CPA Conference, and it was initially published in January.

What you’ll learn from this episode:

• An explanation of why disruption can be compared to water and its “state changes.”
• Five keys for leading innovation efforts.
• An explanation of “core vs. edge” when it comes to business opportunities.
• Innovation lessons from interviews with some of the world’s top leaders.
• Finette’s retelling of the new Pepsi CEO’s focus on CFOs.
• Why Finette believes it is possible to have better quality of life when working from home.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript:                                                            

Neil Amato: Welcome to the Journal of Accountancy podcast. This is your host, Neil Amato. It’s early August, and this episode is an encore presentation of a conversation I had several months back with a Digital CPA keynote speaker, Pascal Finette.

He’s the founder of the advisory firm Be Radical, focused on learning and development, consulting for big-name companies, and many other things. We spoke in December in Nashville, and the concepts and lessons remain relevant. You’ll hear that talk right after this word from our sponsor.

Amato: To many people, the word innovation itself can be intimidating. You make the case that it can be an uncomplicated thing — that’s different than an easy thing — but an uncomplicated thing. Tell me more about that.

Pascal Finette: Sure. I think first of all, we need to distinguish a little bit between innovation and disruption, because the words are being used interchangeably, but they’re actually different things. The easiest way to think about innovation is you make something better. An existing thing, just make it better. A disruptive thing tends to replace or displace the existing way of doing things. The way we like to think about this is, and I think it’s an important distinction here, is to think about a model where we describe disruption as a state change.

The idea behind that is, if you think about a simple example of water. Water when it’s frozen, it’s solid, it’s rock ice. When you warm it, it becomes water. You warm it further, and eventually it becomes gas. The in-between is what’s called a state change. Why this analog work so well, the important thing to know here is that the underlying molecule, H2O didn’t change. In our world that’s the underlying consumer need.

There’s a deeper consumer need to every product or service we have and use, which is say for example, horses and buggies. We wanted to go from A to B. When you look at the disruptive power of the car towards horses and buggies, really what it was is a state change. A different way to fulfill that underlying need to go from A to B in the most efficient way, most comfortable way, cheapest way, etc.

I think that’s important to understand because what we see in the world today is there’s a lot of state changes happening, mostly driven by technology or through technology. Topics like automation, artificial intelligence, machine learning, the blockchain, yada yada yada — they all allow us to fulfill our customer needs in a different way.

We clearly see that in the profession. If you look at accountants, you look at the finance profession, there’s still fulfilling a very specific underlying need. We just do it differently. I think it’s important to understand that because it allows you to see the future a little bit different and prepare yourself for the future.

Amato: In your presentation to the Future of Finance Summit, you listed five keys for teams to lead innovation. The one that I think seemed to capture your audience the most was the one that’s the concept of core and edge. Explain that a little bit.

Finette: This has been around for a while, and we didn’t invent the term, we didn’t invent the concept. We leaned into it and I think we have some interesting perspectives on it. But the basic idea is very simple. You have a core of your business. This is the existing incumbent part of your business. This is where you make all your money.

This is where you have planning and future capabilities. You understand what the business looks like. That’s one side of the business. Then some businesses — most businesses should, some do — engage in what is called the edge. The edge is essentially the new thing. Where we try something new out, where I give it a try. You explore what’s possible.

The problem with the edge is that the edge typically doesn’t generate any revenue. It’s tiny. It doesn’t have an influence on your bottom line, etc. That creates this interesting dichotomy between the core and the edge for a manager, which is on one hand or one foot — more than one foot, most likely — you have to stand in your core business because it generates the cash flow.

The core, it’s your business today. At the same time, you need to prepare yourself for the future. To do so, you actually need to lean into a world where you don’t make any money, where the new thing is unproven, where your failure rate is way higher than what you probably experience in your core business.

There’s a whole bunch of challenges which come with that. It creates an interesting conundrum for leaders, managers, business owners. We have developed a view on this based on countless interviews we’ve done with people who have done it successfully on how you actually manage the tension between the two sides.

Amato: I will get to some of those interviews you’ve done. I think it’s more than 200 people who have led innovation. But first I’m going to ask this specifically related to finance. I would maintain finance is pretty good at the core concepts, but how can they help organizations run their core but also explore or do more on their edge?

Finette: I think it’s really interesting if you think about finance. Yes, you’re absolutely right. I think the finance function traditionally is extremely good at managing the core. This is really about, we like to talk about the core as it is all about efficiency, effectiveness, optimization. The metrics you look at are ultimately productivity metrics: return on investment, return on capital, margins, yada yada yada.

Finance has been doing this for eons and have been doing this really, really well. Now, at the edge, when you try new things, most of those metrics don’t matter, they don’t work. They might be even misleading. At the edge, you actually want to look at the polar opposite. You want to maximize your variation. You want to try things out, you want to increase your rate of learning. I do believe that there is an incredible opportunity for the finance function of the future to lean into this. Because I believe and I see it, organizations currently do this edge work rather haphazardly. There are no good metrical systems in place. They’re basically just to say like, “Oh, I’m not making money, let’s just try stuff.”

There’s a bit of throwing spaghetti at the wall and seeing what sticks. To a certain extent, that’s fine. But I do think that there is more positive process we can bring into this and more insight. The finance function, for me, is one of those critical pieces here, a partner who can actually lean into this and help organizations do this more effectively.

Amato: I mentioned the 200-plus innovation practitioners. I believe you or your group has interviewed them. Do you have one or two key lessons from them? I’m sure there’s a million stories, but can you give me a few?

Finette: Yeah, there’s definitely a million stories. Essentially what we’ve done is we started out with a key question. We asked ourselves, what is it that the successful companies are actually doing? Then we had this hypothesis that if you ask enough people, you will actually discover patterns. Lo and behold, of course, you had discovered patterns.

We also started out with an interesting interview with a gentleman who goes by the name Andy Billings. Andy is over at Electronic Arts. He’s their head of creative profitability. He bridges the creative side of the house and the moneymaking side of the house, the finance side of the house. He’s the ideal candidate for us to have this conversation with.

I asked Andy, “How did you stay relevant at Electronic Arts?” Super fast-moving industry, computer games. Electronic Arts has maintained their market-leading position for what, 40-plus years? Andy gave us a couple of points, but then ended with a really interesting thing. He said two things.

He said, “I question if you can even be thoughtful and planful about innovation and disruption.” I believe he’s right because there’s an element of you need to try things out and you need to walk into the unknown. The second part he said was even more important. He said when you talk to the people on the frontlines of innovation and disruption, the people who are actually doing it, you will realize very quickly that they will all tell you it doesn’t look like anything they write about in the books.

I think that’s right. I read most of the books and talking to the practitioners, there’s a huge gap between what’s in the books and what they are doing. We set out to interview these people, understand what they’re doing. Yes, the stories are fascinating and interesting and very colorful, to say the least for some of them. It was a really interesting process.

Amato: You’ve had some of those people, I believe, correct me if I’m wrong, on your podcast. I guess one thing I’d ask is, what is it about that method of delivery that works better than a blog post of, “Five Tips From My Conversation With Andy Billings”?

Finette: Yes. Somewhere in the middle of the process was I found myself, Neil, very similar to you and as now talking. I was talking to these absolutely amazing, fascinating people. I’m not saying this about myself, by the way.

Amato: I’ll say it.

Finette: You speak to them. What you realize is, man, this is a really fascinating conversation and I wish people would not just get the nuggets out of it, as in here’s the headlines or the insights. But I wish people could actually listen in on this. Midway through the process we were saying, “You know what? We record them anyway, let’s record them in a little bit better quality and just put them out there.”

We started publishing many of these conversations on the Disrupt Disruption podcast. You’ll find it at disruptdisruption.org. You’ll find it on Spotify and wherever you listen to your podcasts. They’re delightful. It’s an incredible gift for me to get to hear from these people and ask them somewhat stupid questions and gets super smart answers back. It is delightful, and I highly recommend if you’re into this stuff, check them out.

Then we’ve got people like Maurice Conti, who used to be the head of Moonshots for Telefonica Alpha, which was the European version of Google X. We have Gisbert Ruhl, who’s the former CEO of the largest steel company in Europe, which by now 50% of their revenue is digital, which is crazy. It’s a steel company. Incredible stories. Lots to be learned from them, but also just really entertaining.

Amato: Would you tell the story of the new Pepsi CEO and his interests in the CFOs within his company?

Finette: Yeah. Absolutely happy to. PepsiCo, large publicly traded company, of course, beverage and snack company, for a long time was led by a CEO, Indra [Nooyi], very operationally focused. Indra left the company.

They got a new CEO, Ramon [Laguarta]. Ramon is a homegrown PepsiCo plant. I’m pretty sure he’s got PepsiCo, or maybe Mountain Dew, running through his blood veins. Incredible human being, very entrepreneurial. We’ve been doing work with PepsiCo for a couple of years now. He asked us to come to an event and have us speak there.

It turned out the event was, and this was briefly after he took the reins, the event was all the CFOs of the PepsiCo’s subsidiaries. The country organizations, the business units, etc. We did our session, and I sat down with Ramon afterwards and said, why the CFOs, not the CEOs or the whatever head of innovation or whatever. He said something really interesting. He said it’s incredibly important that the CFOs become a vital part of the business in helping us shape the business for the future. He clearly had his priorities set on this core audience. I thought it was amazing.

I think you can see it in the PepsiCo story. You might recall, I mentioned a very crazy story, if you give me a second, I’ll tell that story. PepsiCo owns a subsidiary called Sodastream. They basically make homemade carbonated water so you can take water and carbonate it, turn it into sparkling water. One of the biggest pain points about this product is that it uses CO2 canisters, which you need to replace. If you own one of those, you go to Target, Bed Bath and Beyond, a couple other retail locations, where you swap them out, you give them your empty one, you get a fresh one back. It’s a pain in the neck because you need to sit in a car, drive somewhere, etc.

The team came up with this great idea, said, we want to do a direct-to-consumer business, makes a lot of sense. PepsiCo has never done direct to consumer, they have no idea how to do that. Pretty much any other company I could think about would do the typical thing. They go to their consultancy of choice, pay them a lot of money, get a 400-slide PowerPoint deck back on how do you run a direct-to-consumer business. Then you pay your consultancy of choice another large sum of money to get your website and store and ordering systems set up, and it takes you two years. It might or might not be successful. This team empowered by Ramon decides to do something different. They say, wait a second. There’s a lot of other direct-to-consumer companies out there. Think Casper mattresses, Warby Parker glasses, and so on. What are they doing? What can we learn from them? They studied them for just two weeks.

Just looked at how do they actually run the operations? Because it’s pretty public, you see it on the website. They realized most of them use a e-commerce store system called Shopify, it’s a Canadian company, it’s pretty big. Best of class. Then they decided we’ll also use Shopify. They took their credit card and bought a $299 a month e-commerce store from Shopify, set it up, took them two weeks, launched the business — super successful.

PepsiCo’s bill is $299 for all of the e-commerce activities, which is the empowerment of the team, and the financial services team was part of that decision-making process. I think it’s a beautiful story. Also want to just point out that I sat down with the chief strategy officer of PepsiCo the other day. I told him that I think they overpay by about two-thirds because they could get away with a $75 per month subscription, but I guess PepsiCo can afford it.

Amato: Exactly. The time savings, clearly, that’s a huge part of it. One other thing I wanted to ask you about, in your speaker bio for Digital CPA, it says that you are “a uniquely perceptive communicator of hard truths and creative provocations.” I’m wondering what are some hard, potentially provocative truths about accounting after attending Digital CPA and the Future of Finance Summit?

Finette: Oh, that’s amazing. This is the part where I get to be super unpopular now, we will see. Thinking about the profession, I want to take a step back because we had this incredibly lucky coincidence at about 3½ years ago. We got introduced to the AICPA, the leadership team over there. They started communicating with us. They gave us a chance to lean in to the profession and really learn a lot about the profession, learn a lot about how the AICPA works, etc.

I’m very grateful for that. I’m also very enamored with what the profession does and what the profession does for small and medium-size businesses in the United States and the world, etc. All that being said, I do think that there’s a couple, and I’m not telling you anything new here, I’m pretty sure that’s very much common knowledge in the industry. But I think there’s a couple of things we see.

I believe that there is a certain group of folks in the profession who are somewhat resistant to change. That’s very normal across industries, across sectors, but I think that this profession and the CPA profession is at this really interesting inflection point where I believe and we see it already we will see massive amounts of automation coming. A lot of the basic parts are on the bookkeeping, even the tax returns, etc., are already automated or will become even more automated.

I think that’s just a given that we need to just accept it and think about how can we create more value on top of that? The second point which I find fascinating, and this quite frankly is a pain point for me as well, is that to this day I don’t understand why I need to pay someone hourly rates.

It just makes no sense. I’m like, give me a value-based pricing. Barry [Melancon] from the AICPA talks a lot about this. It’s absolutely right. As a business owner myself, I’m always really annoyed when I get an invoice, which said like, “and we spoke to you for 35 minutes on the telephone and like that’s X amount of dollars.” I am like, “Come on, you know what my business cases is. You know what I want.”

This goes back to this idea of, remember, state changes are based in the fundamental need of the consumer. My need as the consumer is not, I want to speak to my accountant for three hours and want to be billed by the hour. My need as a consumer is I want to have my books in order, I want to do my tax returns, I want to find tax savings opportunities, etc.

If you start there, I think you can come up with a very different business model around this. Because then you can start doing value-based pricing. We say, let me take care of it. I think by the way there’s a huge business opportunity in this, and we see it to certain extent already. But I think there’s a really interesting business opportunity in there for the profession.

Amato: A recent podcast episode of yours had the title, “Sometimes You Just Need To Be OK With Yourself and the World.” I took that to mean that it’s acceptable to not always be all things to all people all the time. Is that where you’re going with that?

Finette: Yeah. It’s kind of funny because the impetus for me was I’m typically on a biweekly release schedule. I want to write two articles for my blog every week. Then I got busy. I got really busy with first Thanksgiving week here in the United States, then we’ve got busy with year-end stuff. Then I was here at the Digital CPA Conference and realized I don’t have the energy. I might even have the time. Because I found myself quite often in the evening sitting in my hotel room just watching a movie.

I have the time, but I don’t have the energy for it. I started telling myself these stories of, man, you need to post and you should really do this. It’s all the “shoulds” in your head, of course. I took this as a good reminder for myself and the readers of my blog to just say, “Hey, listen like it’s OK, like take your time we’ll wait for you, it’s fine.”

Sometimes it’s not, I get it. Sometimes you have deadlines and stuff needs to be done clearly, tax deadline, for example. Like I don’t want to have my CPA not do my tax return because they’re probably too tired. That would not be good. But in most other cases, quite frankly like it’s totally fine. Yes, you’re right. There’s a component in there which in our society, we have become so obsessed with productivity. It’s not helpful. I really don’t think it’s helpful. I felt it was a good time to remind people of that.

Amato: Do you think it became harder to be productive since March 2020? Is burnout more of a thing now?

Finette: I mean, clearly we see it in the data. Clearly mental health issues have been rising, burnout has been rising, etc. I think that clearly is a direct consequence of the pandemic. I also think that people stress out about getting sick with good reasons, etc.

Effectively, if you think about the surrounding factors as in, we don’t need to commute anymore because we work from home, if you can work from home. Let’s start here. That’s a very privileged position of someone who’s a knowledge worker who can do their work over the internet. That is not every American by far.

But if you can, the circumstances actually should be such that you can be productive while actually having a better life or quality of life. It does require us, and probably my recent blog posts got a little bit into this as well. Because it does require you to actually make that active choice. As in you do need to say, “You know what I’ll go and walk my dog.”

I go and step away from my desk and I’m going to do lunch and not wolf some food down while I’m in between Zoom calls or Microsoft Teams or whatever you’re using. It does require more of an active participation on our end.

I believe that if we do it and we’re privileged enough to do it, clearly if you have got little kids running around in the background, it only gets harder. We can actually live theoretically at least a better life.

Neil Amato: Pascal, thank you very much. I could ask you questions all day. But in the interest of all our time, I’ll stop right now. Appreciate it.

Finette: Well, thank you for having me.

Amato: Again, that was Pascal Finette. We appreciate him being on the podcast. I’m your host, Neil Amato. If you like what you’re hearing, a request to subscribe to the podcast wherever you listen. We’d love for you to give us a rating, leave us a review, and to share the show with others. Thanks for listening to the Journal of Accountancy podcast.