VideoA New Point of View
There can be a learning curve for finance chiefs who want to become innovation advocates. "You need to spend time learning about the market environment and the political and regulatory environment, so that you can better understand what is driving the marketing team and the tech team," says Jenkins-Stark. "My comments in a management meeting are more likely to make the right impact when people realize that I've taken the time to understand the issues they're dealing with."
Developing that credibility as a CFO "comes from years of working together," says Jim Frates, finance chief at Alkermes, a biotech firm. Frates regularly has informal lunches with Alkermes's scientists. "It helps me get a better sense of their challenges and it helps them get a better sense of how their project fits into a portfolio of things we're working on across the company," he says.
An understanding of their companies' innovation goals and efforts can also help finance executives find creative solutions to funding challenges. "Sometimes you run the numbers and it may not make sense to do the full-blown initiative, but it does make sense to do a piece of it. Maybe you undertake a smaller effort or something geographically specific," Jenkins-Stark says. These smaller-scale projects may be able to sustain the research or idea until more funds become available. They can also serve as valuable test runs for a technology or product.
Although Alkermes has been able to maintain its research budget despite the recession, Frates says many biotech firms have shelved second- and third-priority research streams recently and are focusing all their resources on the projects that are most likely to reach their next development milestone. "As the CFO, you say, 'I don't really want to cut this. How can we approach this in a different way? What's the most critical thing we can do so that we can keep moving and hit the next milestone?'" he says.
Finance chiefs may also need to adjust their thinking about what a project's outcome, budget, and timeline should be. "Many finance folks understandably prefer quantification," says the University of Minnesota's Chandy. "But the impact of products that will help you in the future cannot be easily quantified. The whole point of innovation is that sometimes it's unpredictable." In Chandy's study, innovative companies tended to have greater tolerance for this unpredictability.
"If you really are going into a new market space or doing something that's never been done before, you really can't have numbers in which you have any degree of confidence," agrees Anthony. "It does require that CFOs look beyond the numbers in a spreadsheet."
Jenkins-Stark says sometimes he has to do just that. While he creates models to test different possible outcomes for new efforts and strives to come as close as he can to a real price tag and timeline, he is willing to consider projects that don't add up on paper. "Ask yourself whether an initiative might be worth it if it might open up avenues that you don't anticipate and can't quantify," he says.
Ultimately, a healthy dose of the CFO's trademark pragmatism can also help companies protect their innovation goals without exceeding their resources. Jenkins-Stark recalls one session at a former employer in which the management team was unable to winnow the list of worthy projects down to the budgeted amount for the year. "I said, 'Let's just do them all,'" he says. "I knew there was no way the organization had the time and resources to do all the projects we were talking about." His gamble paid off: the company completed only about half the projects that were approved and came in under budget, without Jenkins-Stark's needing to veto anything.
By showing respect for the company's innovation efforts and sharing his perspective on the business's resource needs and limitations, the CFO can shed his stereotypical role as the enemy of innovation and instead become an invaluable guide in the company's quest for growth. Says Jenkins-Stark: "The CFO needs to help shape the discussion, rather than stifle it."
Kate O'Sullivan is a senior writer at CFO.
Managing an Innovation Portfolio
How do CFOs decide when to make a big bet?
Just as they strive to find the right balance of risk and return in day-to-day operations, CFOs must also bring their knowledge of portfolio strategy to their companies' innovation efforts. Innovative projects span a spectrum of risk, with updates and new features for existing products and services on one end (some reward, low risk) and groundbreaking new inventions on the other (high reward potential, high risk). In the past year, according to a recent McKinsey study, more companies have focused on the former. But Mike Smiley, finance chief at Zebra Technologies, a maker of bar-code, RFID, and other identification technologies, says CFOs need to help their businesses think long-term, too — and not just to keep the R&D department happy. "Investors don't want to hear only about short-term profitability," he says. "They want to hear about long-term growth."
The challenge is that long-range projects are hard to value. Instead of trying to find data that may not exist to build a traditional discounted cash-flow model for such a project, "sometimes you need to go out and create data to find out if something's worth doing," says Scott Anthony, president of Innosight, a consulting firm that focuses on innovation. "This is where the instinct of the CFO, the need to have a little bit of proof, is a good one."
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