Innovation is rising up the corporate agenda. Companies wedged in a low growth economy with little or no pricing power and having already cut costs to the bone have nowhere else to turn but to innovation as the main driver of growth and competitiveness.
But innovation means wildly different things to different people and transitioning to a culture that recognises, nurtures and rewards creativity can be profoundly challenging. It also begs the question, what is the role of the modern finance function in business innovation and why is innovation so slow to trickle down to the core financial processes?
An FSN networking dinner held last week with senior finance professionals confirmed the view that most CFOs regard innovation as the latest product and customer-facing ideas in their industry. One CFO from the textile industry talked about Hi-Tec threads made from optical fibre while a finance professional from the pharmaceutical sector talked about medicines that fluoresced and could be traced around the body.
These patentable inventions are of course one important source of innovation but not all innovation is entirely new. Even subtle changes to existing business models can be regarded as innovative. Take for example the insurer Tokyo Marine that was one of the first to recognise the need for “one-day” insurance to cover, say, the loan of a car to a friend or relative.
But can innovation be inward-facing? Is innovation just about external customer-facing developments or is re-inventing, say, a budgeting process, a valid expression of innovation?
Surprisingly few CFOs think about internal process change as innovation and yet automating, streamlining and standardising internal processes can be just as inventive and rewarding. In fact there is a body of evidence which suggests that innovation on the ‘inside’ can have more impact on the bottom line over five years than some of the apparently more glamorous and headline-grabbing customer Apps. (I recommend reading McKinsey’s “Finding your digital sweet spot”)
Nevertheless, as one savvy CFO from the telecoms industry explains, it is important to distinguish between just “fixing the plumbing” and doing something more profound. But most agree that taking a process such as budgeting into new realms, (eliminating spreadsheets, automating data capture etc.) is innovation in its own right.
So if internal process change is valuable why do so many finance functions suffer from lack of investment?
The answer appears to rest with attitudes and culture. Put straightforwardly, the rest of the C-suite doesn’t always see the value of investing in back office systems and to make matters worse, CFOs are doing a poor job of making the business case. Without a more compelling proposition many finance functions seem destined to ‘burn the midnight oil’ for the foreseeable future. So what can CFOs do to redress the balance?
Demonstrate the gap
CFOs operating in sectors especially vulnerable to digital disruption e.g. retail, Hi-Tec, retail banking, insurance and travel may not have to do too much to make the case for change. Legacy ERP systems simply will not be able to cope with the volume and variety of transactions generated by digital business on the front-end of the business.
Put simply, what is the point of creating the most remarkable “customer experience” (pricing, specification, product choice, style, colour etc) and then getting the invoice wrong, delivering the wrong goods and being unable to deal efficiently with returns?
The truth is that customer-facing developments on the outside have to be matched by financial process innovation on the inside to sustain a healthy business.
Innovation by stealth
Many CFO are using a limited Best-of-Breed application in the cloud to demonstrate the value of digital technologies to sceptical colleagues. It’s a low cost way of introducing change and, if successful, can act as bridgehead to further investment in transforming ageing financial processes.
Actively engaging in innovation
The modern finance function needs to reach out beyond the confines of its normal operations to partner with other functions on innovation. That’s not just about the ‘normal’ governance role, for example to ensure that innovation is cost-justified or that there are performance measures in place but to genuinely contribute to the innovation itself, bringing ideas to the table that are based on a deep-seated understanding of the business. If CFOs can demonstrate their support for innovation in other functions then they are much more likely to receive support for innovation in the finance function.
When it comes to funding financial process innovation CFOs have to adopt a more positive and confident tone. Finance functions have always been good at “making-do” and working around the clock, but if finance professionals are truly going to help their businesses confront the challenges of the digital economy and compete effectively then they cannot sit of the side-lines.