New and Improving

Finance executives rethink their role in cultivating innovation.
Josh HyattNovember 15, 2016
New and Improving

Having already reinvented their corporate roles, CFOs are prepared to take on a much broader challenge: spreading the impulse to innovate throughout the business.

In a fiercely competitive atmosphere, driven by increasing globalization and unceasing technological change, companies need to find ways to foster creative thinking throughout their organizations, balancing the requirement for structure with the imperative to experiment. In a recent survey conducted by CFO Research, in collaboration with CPA firm Cherry Bekaert, finance executives expressed a keen awareness of both the central role that innovation will play in fueling company growth and how
far short of that goal their companies remain.

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The survey explores the views of finance executives at middle-market companies—90% of them posted annual sales of between $10 million and $500 million—regarding the role of innovation. Among the 161 survey-takers, only 16% classify their companies as “highly successful” at innovation, while 3 out of 10 don’t regard themselves as successful at it. A plurality of middle-market finance chiefs rank their companies as no better than middling when it comes to innovation, labeling them as “somewhat successful” (see Figure 1).

16Nov_FieldNotes_Fig1A Necessity for Growth
Survey respondents have become acutely aware of the critical role innovation will play in creating value. Assessing the past 12 months, about a third of respondents attribute at least half of their revenues to innovation. In their written comments, survey-takers indicate that their businesses need to push harder to, as one puts it, “look beyond traditional boundaries.” Another respondent cites the necessity of “being bold, [and] taking a large financial risk.”

Staying competitive means embracing risk-taking on an entirely new level. It’s no longer enough for companies to rely on incremental innovation—a new feature here or there—to hold on to customers. Middle-market companies need to build a culture of innovation, treating it like a tool to meet changing customer needs and outpace rivals.

In the survey, respondents convey a sense of urgency about nurturing breakthroughs. Nearly 9 out of 10 (88%) say that innovation is more important to their companies now than it was 5 years ago. Roughly the same percentage expects that successful innovation will be more important for their companies in 5 years’ time. Even 9 out of 10 companies which attribute less than half of their revenues to innovation expect the ability to transform ideas into sellable products or processes to become more important in the next 5 years.

But respondents are not naïve about the scale of the organizational change required, and are realistic regarding the obstacles they face. One respondent wrote that his company must “acknowledge that innovation is a requirement to remain competitive and that expected returns won’t always be sustained as competitors match our effort.”

In addition to re-aligning their expectations, companies may have to overhaul their organizational structures, especially if they are hindered by overly dense and slow-moving systems for decision-making. To support innovation-driven risks, finance executives at middle-market companies will need to allocate resources to capabilities that boost flexibility, such as technology for fast prototyping. While enthusiasm and energy may abound, companies will need processes for refining and exploring new ideas to efficiently assess whether they deserve further development.

Sir Isaac Newton notwithstanding, most bright ideas do not materialize in a flash of insight. The path to game-changing breakthroughs can meander through a series of inconspicuous advances. And it’s unlikely to emerge from a marathon brainstorming session conducted in a stuffy conference room. Nor are employees, despite being directed by their superiors to do so, likely to emerge from their cubicles with fully formed blockbuster ideas in tow.

Innovation, to filch a phrase, takes a village. In the corporate context, that may mean starting by assigning cross-functional groups of employees to come up with solutions to specific problems. Yes, there will inevitably be failures, but from a cultural point of view what’s crucial is that management communicates its earnestness about identifying and supporting promising ideas. Even if such ideas never make it to market, they are useful vehicles for reinforcing the company’s thirst for creative thinking.


Driven by Customer Needs
As enigmatic as the entire innovation process may seem, middle-market finance executives have clear ideas about where such efforts should start. Among survey-takers, half of respondents say that future innovation will largely be driven by customers’ evolving needs (see Figure 2, above). Similarly, answering a different survey question, 47% of respondents rank customer need as the biggest impetus for becoming more innovative, far more than those who chose advances in production technology, equipment, or materials (38%); advances in information technology and data analysis (38%); or even the fact that markets are maturing or saturated (31%).

At a time when big data analytics is often touted as the salvation for companies in search of a sustainable competitive edge, survey-takers still perceive customer behavior as central when it comes to successful innovation. As valuable as following streams of data may be in finding hidden patterns and helpful correlations, such discoveries will not automatically capture value in the real world. One respondent writes of the “need to sometimes look beyond traditional boundaries for different perspectives on how customers interact with your products.”

Such customer-centric thinking has not typically been the domain of finance executives, who tend to be more comfortable with spreadsheets. But to evaluate the investment allocations that underlie the transformation into an innovation-driven enterprise, finance leaders need to understand how customers are changing.

Successful finance executives understand innovation from the inside out. They’ve had to reinvent themselves in recent years, emerging as strategic decision-makers, rather than keepers of the quarterly reports. A host of organizational shifts, ranging from the elimination of the chief operating officer title to the availability of advanced analytics tools, has required finance leaders to take on some of the responsibility for helping the business transform.

The increasing responsibility finance executives now accept for helping shape an innovative organization is documented in the survey, where just over half say that their corporate leadership (such as the CEO or owner) is the driving force behind innovation. Finance executives primarily view themselves as an equal partner with others (24%) or as an adviser to others (28%).

By demonstrating their own creative thinking, finance executives can become the embodiment of what needs to happen—namely that innovative ideas expand beyond any single function, such as product development, and permeate the entire business. It’s now part of the finance function’s mission to monitor the organization’s innovation efforts, making sure that the company has access to the resources it needs. At a time when innovative ideas—almost as much as capital—serve as the fuel that energizes corporate expansion, it falls to finance executives to make sure those resources are managed effectively.