VideoIn a 2000 interview with CFO, business guru Gary Hamel claimed that finance executives are the enemy of innovation. And that was when times were good. Today nearly all CFOs have a mandate to conserve cash, and that intensifies the pressure to put a cap on corporate creativity. Indeed, a new McKinsey study finds 40% of companies surveyed are actively seeking to reduce research-and-development costs and reducing the number of R&D projects they are funding.
Yet slashing R&D budgets for the near term will place companies in precarious competitive positions when the economy does turn around. The challenge for CFOs is to figure out how to fund the innovation that will drive future growth while ensuring that the company actually makes it to the future. Those who can strike this balance will not only help their companies but also themselves: far from being regarded as numbers people with myopic vision, they will earn reputations as strategic thinkers focused on growth.
Instead of acting as the enemies of innovation, CFOs can play a critical role in fostering the development of new products, ideas, and processes. And they can do it while staying true to their natures: by applying the finance department's hallmark fiscal hawkishness to innovative initiatives. A recent study by Boston Consulting Group, in fact, finds that some companies' biggest weaknesses in innovation center on the very processes where CFOs can add value — things like sticking to a timeline, earmarking funds, and balancing a portfolio of innovations. (See "Room for Improvement" at the end of this article.)
"People think that discipline and innovation are foes," says Scott Anthony, president of Innosight, the strategy consulting firm founded by Clayton Christensen, author of The Innovator's Dilemma. "But in fact they're very good friends. By using discipline, helping people take the right risks, and applying what they know about managing portfolios, CFOs can be huge enablers of innovation."
Jack Jenkins-Stark, finance chief at BrightSource Energy, a developer of large-scale solar-energy projects, recalls that at a former employer, a software company, the management team would meet to consider as many as 120 new projects competing for funding in a given year. "Almost inevitably, the first question asked was, 'How much can we spend?'" says Jenkins-Stark. "One of the most important things the CFO can do is set that bar." Once his fellow executives understood the rationale for the budget range he was suggesting, "the dialogues about what to fund and what not to fund were much more focused," he says.
Instead of trying to weigh in on which is the most deserving or worthwhile technology to pursue, a role he cedes to the company's technical experts, Jenkins-Stark brings his knowledge of the business's financial resources to help shape the conversation. "I can provide an overall guideline around corporate demands for capital and indicate an acceptable range of spending," he says. "I can provide information about how much each initiative will cost, and I can ask really hard questions about time-to-market or time-to-economic-results." Such data helps the full management team make faster, more-informed decisions, he says.
At a prerevenue company such as BrightSource, resources are clearly finite. But even at large, cash-rich companies, "one of the CFO's jobs is to help people realize that there are constraints on both time and money," says Jenkins-Stark.
Such limitations can actually improve companies' ability to develop breakthrough ideas, says Anthony. "One reason why large companies have historically struggled to innovate is that they often have too much time, too much money, and too much patience. They can follow a fatally flawed strategy for too long," he says.
The finance chief's analytical approach to innovation can keep companies from making the classic mistake of throwing good money after bad, says Rajesh Chandy, a professor of marketing at the University of Minnesota's Carlson School of Management who recently completed a study of innovative practices at 759 firms around the world. "One advantage to being quantitatively focused is that you can look at things in a dispassionate manner," he says. Since the finance chief is unlikely to be personally involved with the development of new products, he can look at the economics of continued investment in a struggling project from a reasoned distance and might have an easier time deciding to halt any further spending than would members of the business unit or project team.
By applying a portfolio management approach to innovation, the CFO can also help a company strike the right balance of long-term, higher-risk efforts versus less-adventurous projects with a higher probability of a near-term payoff. "Just like an individual portfolio has stocks and bonds, some of which are riskier than others, a corporate innovation portfolio needs some balance as well," says Anthony.
One possibly damaging consequence of many companies' recent shift to lower-risk innovations — like making modifications to an existing product rather than launching a whole new product category — is that it may leave them without the "next big thing" that could kick-start significant growth as the economy recovers. Safer bets, while helpful in the short-term, are not typically game-changers. (See "Managing an Innovation Portfolio" at the end of this article.)
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