As disruptive technologies upend operating models, displace existing products and services and unlock new opportunities, a company’s growth and earnings have never been more uncertain. Business leaders are now under pressure to make bigger bets on innovation and execute against them.
However, while almost all organizations are in some phase of transformation, about a third of executives say they have failed to achieve value from their initiatives, due to a lack of effective processes for managing innovation.1
Most chief financial officers (CFOs) are facing an overarching tension: How can their companies make money today while still investing appropriately in the future? How can they ensure the right investments at the right time and in the right sequence?
As the stewards of past and future earnings, CFOs will play a critical role in answering these questions. They will wear two hats: one for ensuring stability and control of the finance function and another for enabling agility and profitability in enterprise innovation.
Wearing this second hat, the CFO must think like a venture capitalist (VC), building a strategic investment portfolio that can be continually adapted to changing needs. This mind-set requires new approaches to budgeting, measurement, and governance of innovation investments.
In a 2018 study of more than 270 global companies, conducted by Innovation Leader—an information firm that serves executives in large organizations—and sponsored by KPMG LLP, nearly 70 percent of respondents said innovation efforts are funded through an annual budgeting process.2 However, innovation leaders in the business units are often frustrated by this approach, because by the time the annual cycle rolls around, the window for competitive differentiation has closed. Moreover, the traditional annual budgeting process often favors legacy initiatives, building on the previous year’s plan, versus new investments that may be seen as risky or unproven.
A more agile way to invest in enterprise innovation is through a dynamic funding process that’s governed separately from annual budgeting, and the CFO—who holds the keys to the funding—is in prime position to lead it. In such a process, innovation investments are “lifted out” of annual budgeting and funded with a separate pool of resources. This kind of approach allows for small, quick, ongoing decisions that can be frequently revised—instead of large, static ones.
A VC approach to innovation strategy means enabling investment in the right project at the right time. Accordingly, savvy CFOs can advise business leaders on agile ways to deliver projects—by developing hypotheses, testing in sprints, and monitoring results. There are ways to invest a little and learn a lot.
Too often, innovation investments are killed prematurely because CFOs attempt to apply traditional financial metrics such as revenue or return on investment. These kinds of lagging indicators may not be relevant because innovation investments don’t necessarily generate revenue or return right away. A better approach is to measure leading indicators—or “learning milestones” —that confirm whether an investment is on the right track.
Read this whitepaper to learn more about the CFO’s role in business strategy and innovation management.