CIMA knowledge fast forward
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Innovating for change and profit: the role of finance in innovation
Change is the world’s only constant. Ages come and pass, empires rule and fall, and businesses operate now in an environment – a volatile, uncertain, complex and ambiguous environment – that offers opportunity for those who open their eyes to the possibilities, but spells death for the unwary business that refuses or is unable to embrace change. Kodak is an oft-quoted example of this phenomenon, but many companies have fallen by the wayside without ever reaching the heights that Kodak did.
Innovation is the holy grail of today’s successful company, whether it takes the form simply of product innovation or the reshaping of process, technology or entire business models to fit the changing needs of the market in which it operates.
While there is a general perception of finance being the naysayer in an organization that drags itself forward despite it, there are few innovations, or innovation-led organisations, that are truly successful without the input and influence of management accountants and the finance team. This input may result in guiding new ideas through the process of product development, assisting a realistic output from concept to commercialization, or an assessment of the risks and opportunities associated with choices ahead, and gives the finance function an opening to play a vital enabling role, reinforcing its evolution toward a more strategic focus. The CGMA report, ‘Managing innovation: harnessing the power of finance’, evaluates crucial ways in which management accountants can support a more innovative business.
The role of finance throughout the innovation lifecycle (CGMA, May 2013)
Create an innovation mindset
‘Finance needs to transform itself into a business partner that can help innovation teams succeed. Change starts at the top: a CEO must set the vision, but a CFO has a vital role in setting the framework in which innovation can thrive.’ (Managing innovation, CGMA, 2013) CFOs however, are not traditionally known for their role in creating or introducing breakthrough products and technology, tending to be more ‘delivery-oriented’ than possessing the ‘discovery’ skills of strong innovators, as pointed out by INSEAD professor of leadership, Hal Gregersen in his book ‘The Innovator’s DNA’.
Striking the balance between an enabling culture and laying down a process to realise the potential of new ideas is a challenge, but Gregersen claims that using the ‘discovery’ skills such as observing, networking and experimenting to improve processes and solve problems within finance itself can foster innovative thinking.
With support from the top, the innovative culture should be spread throughout the company. Examples include Whirlpool, where every employee is put through a business innovation course and ‘I-m’entors’ facilitate innovative projects, as well as Google and 3M, where employees are encouraged to tackle problems that fall outside their core role.
Nurture creativity and match metrics to the stage of development
The finance function can be seen as a barrier to innovation especially when nascent or developing ideas are tested against demanding traditional metrics, inhibiting the uptake of ideas which could be viable at later stages but need encouragement to grow.
The creation of ring-fenced budgets with more relaxed criteria for early-stage innovations are among more sympathetic approaches that can help. It is also critical for finance to overcome its aversion to uncertainty , understanding that ‘the goal of promoting innovation requires a high tolerance of uncertainty, ambiguity and constant change’.
The path to profit
Finance can be a valuable partner of innovation teams as innovation is not an end in itself and it is necessary to commercialise ideas in order to make them viable in the long run. The skills of the management accountant can be employed in helping to build a business case that credibly takes into account the challenges, and gains further patronage.
‘At Coca-Cola, Doug Bonthrone ACMA, CGMA, Director for Global Services Strategy, sees finance’s role in innovation as “scoping the opportunity”, “challenging a few of the thoughts” and “putting some science behind the opportunity”.’ (CGMA, May 2013)
Take a balanced view on risk
“The perception that risk management is there to apply the brakes is a misconception by many. The risk function is there to encourage the business to understand that they need balanced strategies or actions in order to grow the company. Consequently it is now increasingly involved in making sound business decisions and is seen as a business advisor. Understanding of risk is a genuine value driver and companies who weigh their risk appetite appropriately are able to make informed decisions that support innovation.” Anita Menon, Chief Risk Officer, Prudential BSN Takaful
Next steps
As revealed by the report, ‘It is clear that with the right attitude, finance can become an effective co-pilot on innovation, helping guide the rest of the business towards its goals’. The CIMA Management Accounting Conference 2013, themed ‘Business as Unusual: the innovator’s agenda’ aims to further this process by examining the ways in which innovation can be encouraged in an organisation, and in what way people, processes and information can be optimally used to drive sustainable success through innovation. Featuring a panel of highly respected business leaders from companies known for their innovative approaches to business, the conference will be held on 8 October 2013.
For more information about CIMA’s thought leadership activities such as the report on ‘Managing innovation’ or the Management Accounting Conference, please contact Dinasha Stephen on 0112503880.