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The chief financial officer’s role as an innovation leader

FRI0418

 

Published on April 19, 2018

When we think about the innovative leaders within an organization, the chief financial officer (CFO) is rarely the first to come to mind. As the steward of the organization’s resources, the finance department can often be seen as stifling innovation by expecting innovation teams to do things like control spending, hit revenue targets, etc.

But as a key leader in the organization, the CFO is critical to helping establish the “tone at the top” around innovation culture. In their role, the CFO can not only support but also actively encourage the innovation process as a catalyst for growth.

The desire to be innovative seems to be everywhere. It is now included in many mission statements and used to describe anything from a suggestion box to continuous improvement to transformative breakthroughs and new product launches.

While there have always been innovative companies, with the increasing speed of changes in technology that are continuously reducing the barriers to entry for new businesses, the pressure to innovate to remain competitive and to continue to achieve desired results has increased. The average lifespan of a company on the S&P 500 has decreased from 56 years in 1960 to nearly 15 years in 20141 and is expected to continue to decrease.

As Charles Darwin once said, “It is not the strongest of the species that survives but rather that which is most adaptable to change.”

The Organization for Economic Co-operation and Development (OECD) defines innovation as “…the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.”

Leonard Brody, a Canadian entrepreneur, venture capitalist and author describes it more simply as “innovation just means doing things better.”2

Doblin, the innovation strategy team within Deloitte, defines innovation as “the creation of a viable new offering”3. Doblin has broken innovation down into 10 different types based on its research. Further, its research shows that top innovators (using five or more types of innovation) outperform the S&P 500. A sustained focus on innovation does ultimately lead to superior financial performance, a compelling argument for the CFO.

While the leadership tries to encourage innovation throughout the organization, successful systematic innovation typically requires a separate team with a specific focus on tackling customer and/or organizational challenges. These teams are focused both on short-term improvements and long-term transformative innovations. Members of the finance function can help identify both challenges within the organization and, in some cases, may also have a perspective on customer or supplier complaints that could be addressed by this team.

For this team to be successful, it needs to understand the innovation ambition4 of the organization, which needs to be defined and supported by the leadership team. While transformative innovations in the form of new products and services like the iPod, GoPro, Netflix, Uber or Airbnb draw the most attention and excitement, the reality is that revenue growth or profitability improvements can be achieved through optimizing core delivery of services, including improving existing processes or through adjacent offerings and identifying new target markets for existing products. These innovations can often be developed and delivered more quickly.

A key ingredient to the innovation team is agility. Setting targets and being able to pivot quickly when something is not working is crucial. Piloting new potential solutions before they are 100% correct and possibly working with other parts of the business or with customers to collaboratively identify improvements may represent a significant change in corporate behaviour in many cases.

While the business case for innovation is strong, unfortunately innovation remains challenging for many organizations.

Particularly relevant to the finance function is that what gets measured gets done, and successful innovation is very hard to measure. Further, while innovation programs can achieve quick wins, truly transformative innovation may take several years to impact the bottom line and the finance function is typically focused on the next few reporting periods. The longer it takes to see tangible outcomes, the more pressure there will be to reduce innovative activities to preserve short-term profits. Innovation team members may get redeployed on other day-to-day activities or lose motivation and leave the organization.

Further, there are many failures on the road to success and this is a difficult change in culture for most organizations. How can the CFO help establish performance measures for those involved in innovation that are challenging but not discouraging?

Innovation is a process that requires discipline. Innovation team members from the finance function can help build that process and discipline. They can help establish measures for success—both financial measures, like return on investment and net new revenue growth, and non-financial measures—and determine how many ideas have been generated and what milestones need to be achieved within a project to obtain future funding. They can also help innovation leaders think through the potential risks of a project and help educate the business on the upside and downside throughout the innovation process.

What are finance functions doing to be innovative today?

Although there are increasing examples of innovation within the finance function, there are three key areas where we are seeing finance functions working to innovate themselves:

  1. Automation within the finance function. This can be a combination of technology and process improvement. Many organizations have implemented enterprise resource planning (ERP) solutions within their organizations but are not maximizing the use of the existing system functionality. Figuring out how to better leverage existing systems can increase efficiency without increasing costs.

    Robotic process automation (RPA) is another opportunity to increase efficiencies. RPA leverages software code to replicate any mouse or keyboard actions a human would do across any applications on their PC. It is particularly appropriate for many of the repetitive tasks within finance including recording journal entries, reconciling general ledger accounts and auditing expense reports. Again, this improves process efficiencies and allows finance staff to be able to focus on more complex transactions and supporting the business.
  2. The talent model within the finance function: Finance functions are struggling to be value-added business partners, and employee engagement is decreasing throughout organizations. There are many innovations within talent models that are applicable to the finance function including physical workspace, tools and technologies provided to employees, training opportunities, on-demand services and recognition programs. A favourite example of mine is Daimler-Chrysler5. The organization implemented an optional auto-delete policy for their employees’ emails when they are on vacation—a note is returned to the sender letting them know the email has been deleted and offering the contact information of an alternate employee or the option to resend once the employee has returned. This may not seem like much of an innovation but it allows employees the freedom to enjoy their vacations and not dread all the unanswered emails when they return. Small innovations within the talent model can increase levels of engagement and productivity for employees.
  3. Increased analytics provided by finance: Finance functions are increasingly being challenged not only to provide historical data but to leverage that data as well in order to increase both their level of insight into the current organization and to be able to predict future trends and events. To be able to achieve this, there are two key ingredients they need: the right tools to capture and analyze the data, including leveraging artificial intelligence to analyze an increasing volume and complexity of data, and the right people who understand the business well enough to ask the right questions, perform the analysis and effectively communicate the results. Better data can improve the entire innovation process, including helping the organization ask better questions.

Most critical of all to innovation success is the overall culture. According to Steve Jobs, “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” As a key leader within the organization, if the CFO “gets it,” they can be crucial to the organization’s innovative success.

So challenge yourself to figure out whether or not you “get it” with a few simple questions:

  • Do you understand the innovation ambition within your organization?
  • Have you established measures to track innovation activities?
  • Have you performed an assessment of your organization’s innovation maturity?
  • Do members of the finance team have the opportunity to participate on innovation teams throughout the innovation process?; and
  • Are you leading by example by considering opportunities to innovate within the finance function?

 

 

1Deloitte Future of Canada series: Age of disruption: Are Canadian firms prepared?

2Leonard Brody, The Great Rewrite, https://www.speakers.ca/2017/11/the-great-rewrite-a-framework-for-tackling-innovation/

3Ten Types: https://www.doblin.com/ten-types

4https://hbr.org/2012/05/a-simple-tool-you-need-to-mana

5http://time.com/3116424/daimler-vacation-email-out-of-office/

 

 

 

Contact

Kendra MacDonald Kendra MacDonald

Kendra is a partner in the Atlantic Risk Advisory practice based in St. John’s, NL, and the Chief Audit Executive of Deloitte Global. Kendra focuses on governance, security, internal audit and risk management. Kendra is a member of Deloitte’s National Innovation Council responsible for helping to promote innovation both within Deloitte and with her clients. In 2015-2016, Kendra helped establish Deloitte’s Montreal Greenhouse, an immersive and interactive meeting space and has facilitated a number of workshops on topics including: innovation, disruptive technology, strategy and culture.

 

 

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