Orlando — Allocating funds for research and development comes naturally to biotech or technology firms. But managing that innovation along with what a firm’s budget can tolerate is a skill that requires constant sharpening, according to CFOs speaking at the CFO Rising East Conference earlier this week.

As firms face slower growth and the need to remain competitive, innovation can help all kinds of companies. But the most successful innovators, CFOs at the conference said, need to have good communication throughout the firm.

Having open discussions among researchers, general staff, upper management, and certainly with the chief executive is half the battle for finance chiefs, noted Wendy DiCicco, CFO of Nuron Biotech, a vaccine producer based in Exton, Pennsylvania. And it can also help quash employee resentment if management lowers the priority of a favorite project, she said.

Often it falls to the CFO to move some of the innovators onto the next project if one they feel strongly about has stalled or been cancelled. If relationships are set up with key groups in the organization beforehand, DiCicco said, there tends to be “mutual respect when you say ‘it’s not going to happen right now,’ and there isn’t much resentment.”

Having informal dialogs with a company’s internal business partners is a key ingredient to successfully getting new products into development, added Steffan Tomlinson, finance chief of Palo Alto Networks, a Santa Clara, California, maker of network security firewalls. “The way the CFO position has evolved over the years, I think we are all more operationally focused than we’ve ever been,” he said. “But it’s not just the operational part of it, it is building the key relationships (with internal business partners) that counts.”

Innovation is a central part of Palo Alto Networks’s operations in creating software and other products. The legacy firewall market was created in the 1990s, but hadn’t been developed enough to handle the broad applications that have sprung up in today’s “consumerization of IT,” Tomlinson said. So in 2005, the company began creating next-generation firewalls. It has since grown into a $10 billion market, he noted.

How does he balance the demands of financing and those of innovation? “We have an innovative product-development road map, and that road map spans out about five years,” he explained. At the same time, Tomlinson has an annual operating plan he refreshes every 90 days.

As the budget process unfolds, Tomlinson and other executives construct a master wish list of everything that needs to be funded. As a team, they decide what goes on that list, including just those items that are financially feasible. “Anything above the line will get funded and anything below the line won’t get funded. If we are running more profitabl[y] than we thought, we go back to that master list and refresh [it] pretty regularly,” he said.

Drawing the line between when to fund something and when not to can be challenging. “We outline our revenue growth and our market expectations. That helps us where we draw the line,” said Tomlinson. But without having the working list of projects at his fingertips, he would not be able to make that trade-off so easily. And, he noted, “there are going to be some quarters where we make more investments than our plan calls for.”

In a similar way, DiCicco acts as a key liaison between business-unit heads and the CEO in trying to figure out how products can best move along in the development cycle. With six products in the development phase and in December having acquired a commercial product (a meningitis vaccine from Pfizer), her challenge has been how to manage, and eventually reverse, the pool of capital that originally went to fund that development. The dollars coming into the firm from sales of the newly acquired product must balance out the cost so the company is cash-flow positive on the project.

Her daily analysis consists of “which products can we move forward in the near term and which should we wait on? Which can bring short-term revenue?”

Preparing a budget can be particularly challenging when scientists and engineers are involved. “They’ve never done a budget. If we had $400 million, this budget would really work. But we don’t, so what can we do?” she said, describing the process. Her job thus becomes not only one of reining in scientists but also giving them enough leeway to develop the products successfully.

When push comes to shove, she may simply have to assert the financial needs of the company. From a revenue perspective, for instance, Nuron Biotech may need to delay development of products slated for 2020 until it gets the 2015 and 2016 products to market — something the scientists will have to come to terms with, according to DiCicco.

To combat such business-unit differences, both firms maintain a formal process to move a product along from the innovation phase to the final development phase. “For us to be successful in hitting our quarterly milestones and also our annual milestones, we put a structure in place which has a very robust review process that starts with interviewing engineering product-management teams,” Tomlinson explained. He has a finance, planning, and analysis (FP&A) team that’s linked with each of the business owners. The FP&A unit is the “eyes and ears” of the business, he said.

“We really try to separate the R from the D,” Tomlinson noted, a process that helps keep the development cycle running smoothly. Those on the research side know exactly where their value is to the company and what’s expected of them, just as those who are closer to moving a product to fruition.

Overall, those companies considered the most successful innovators of today have developed a variety of consistent approaches for ideas to flow and move in a disciplined way into the development stage, notes a Booz & Co. Global Innovation 1000 study released in late 2012. “Few companies succeed at innovation without ensuring that adequate processes are in place to generate new ideas, and that those processes are followed in a disciplined fashion,” the study said.

And even if some innovation doesn’t get off the ground, Tomlinson said, such failures are healthy. “You want to have failures. That may sound odd, but if you are not having failures. you are actually not innovating as much as you should be,” he said.

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