The Finance Factor in Innovation

A Catalyst for Growth

The chief financial officer is often seen as merely controlling spending and hitting revenue targets. “But as a key leader in the organization, the CFO is critical to helping establish the “tone at the top” around innovation culture. In their role, the CFO can not only support but also actively encourage the innovation process as a catalyst for growth,” argues Kendra MacDonald, Chief Audit Executive of Deloitte Global, in an article entitled, “The chief financial officer’s role as an innovation leader.” With more pressure to innovate, and technology constantly changing, companies are increasingly faced with the mandate to innovate. “A sustained focus on innovation does ultimately lead to superior financial performance, a compelling argument for the CFO.”

Whether you are working in a silo or moving beyond the silo mentality, successful innovation teams need champions in the organization that can help identify customer challenges and opportunities, and develop short- and long-term goals, with the aim of creating both incremental and transformative innovations. The finance team could be in a prime position to give that support. MacDonald notes, “For this team to be successful, it needs to understand the innovation ambition of the organization, which needs to be defined and supported by the leadership team.”

Both innovation and finance teams need to be agile in this new reality. For innovation, it is often difficult to measure success. Success may take many small steps in the years that follow before fully developing into a profitable venture. In addition to success, there can be many failures along the road as well, and it’s difficult to change the culture of both the innovation team and the finance team.

So how can the CFO help establish performance measures for those involved in innovation that are challenging but not discouraging? MacDonald makes the case that, “Innovation is a process that requires discipline. Innovation team members from the finance function can help build that process and discipline. They can help establish measures for success—both financial measures, like return on investment and net new revenue growth, and non-financial measures—and determine how many ideas have been generated and what milestones need to be achieved within a project to obtain future funding. They can also help innovation leaders think through the potential risks of a project and help educate the business on the upside and downside throughout the innovation process.”

Embracing the Culture

All Things Innovation recently looked at “Growing A Culture for Business Innovation,” and whether it entails a large jump or a small step, the innovation pipeline for a business keeps it moving forward through a competitive landscape. Business innovation is an organization’s process for introducing new ideas, workflows, methodologies, services or products. This can create long-term brand loyalty and brand differentiation.

A key to the process is fostering a culture of innovation, throughout the company and its teams, from innovation to finance. In fostering a culture of innovation, there must be a balance between the small steps and large leaps that encourage the sustaining and disruptive innovations that encompass business growth. Not to be discounted, it’s important that executives have an open door policy, encouraging their employees in a communicative environment. Adaptability in a safe environment, an openness to new ways of thinking, and embracing change can all take the business of innovation to new heights.

The Finance Factor

Finance plays a significant role in driving and supporting innovation within an organization. Here are several ways in which finance can contribute to innovation, courtesy of ChatGPT:

1. Funding innovation initiatives: Finance provides the necessary capital to fund innovation projects. Whether it’s developing new products, exploring new markets, or investing in research and development, innovation often requires financial resources. Finance teams evaluate the feasibility and potential returns of innovation initiatives, allocate budgets, and secure funding to support these projects. By providing the necessary financial backing, finance enables organizations to pursue innovative ideas and turn them into reality.
2. Risk assessment and management: Innovation inherently involves risks, and finance plays a vital role in assessing and managing those risks. Finance teams conduct thorough financial analyses, including cost projections, revenue forecasts, and return on investment (ROI) assessments. They evaluate the financial viability of innovation projects and assess potential risks and rewards. By conducting risk assessments, finance helps organizations make informed decisions about resource allocation and investment in innovation initiatives.
3. Performance measurement and evaluation: Finance provides key performance indicators (KPIs) and metrics to measure the success and impact of innovation efforts. Financial metrics, such as revenue growth, profitability, and return on innovation investment, help assess the effectiveness of innovation initiatives. By tracking financial performance, finance teams provide insights into the financial outcomes of innovation, allowing organizations to refine strategies, optimize resource allocation, and make data-driven decisions to drive innovation forward.
4. Budgeting and resource allocation: Finance plays a critical role in budgeting and allocating resources for innovation activities. By working closely with other departments and stakeholders, finance teams determine the allocation of funds, personnel, and other resources to support innovation projects. They help prioritize initiatives based on their potential impact and financial viability. Effective budgeting and resource allocation ensure that innovation initiatives receive the necessary support to succeed.
5. Identifying investment opportunities: Finance teams can actively identify and evaluate investment opportunities that support innovation. They analyze market trends, conduct financial due diligence, and assess the potential returns of investments in innovative startups, technologies, or partnerships. By actively seeking investment opportunities, finance contributes to the organization’s innovation ecosystem and helps foster a culture of innovation through strategic investments.
6. Cost optimization and efficiency: Finance plays a role in driving cost optimization and efficiency, which can free up resources for innovation. By assessing existing processes, workflows, and cost structures, finance teams identify areas for improvement and streamline operations. This allows organizations to redirect resources to innovation initiatives, maximizing the impact of their investments in innovation.

Sustaining Innovation

Finance plays a multifaceted role in innovation. From funding innovation projects and managing risks to measuring performance and optimizing costs, finance provides the financial foundation and strategic guidance that enables organizations to pursue and sustain innovation. By aligning financial strategies with innovation goals, finance contributes to the success and growth of innovative initiatives.

So does it all come down to the culture of the company? If the CFO “gets it,” they can be crucial to the innovation team’s success. Deloitte’s MacDonald closes her article with a few pertinent questions the CFO could ask of themselves and their finance team:

• Do you understand the innovation ambition within your organization?
• Have you established measures to track innovation activities?
• Have you performed an assessment of your organization’s innovation maturity?
• Do members of the finance team have the opportunity to participate on innovation teams throughout the innovation process?
• Are you leading by example by considering opportunities to innovate within the finance function?

Video courtesy of Strategyzer