The CFO: the Innovator’s Best Friend

The front end of innovation offers organizations engagement. Engaged people bring more of their gifts to the table. The back end of innovation offers organizations ideas that, when implemented, bring relative advantage. Each idea has its own story of relative advantage and risk. How do you tell the back end story in a valid, credible way? In this article innovation architect Doug Collins commends people who practice collaborative innovation to their organization’s chief financial officer. Having heard many, many tales of the back end, she can guide you. You can help her, too.

Earlier in my career I explored scenarios for new business ventures, mundane to exotic. What if we brought capability X to market? What if we partnered with company Y? What if we retired to the white-sand beaches of Aruba before things got worse?

The latter option retains its appeal.

At some point I would create pro forma financial statements that painted the glorious future—if only we would act now. The stakeholder reviews that delineate the back end of innovation taught me the following: (1) an optimist by nature, I tended to project positive outcomes, (2) a financial model that forecast a positive net present value, no matter how big, would not in and of itself motivate people to act, and (3) asking for more data, financial or otherwise, is a nicely benign way to defer deciding the critical question of whether to proceed. Inertia loiters by the gate that opens to each new stage.

What matters on the back end? Validity matters. Have I done my homework? Have I modeled reality accurately and precisely?

Creditability, which encompasses validity, matters more. Do I believe in the group presenting the concept? Do I believe they will succeed in realizing the value of the idea in question? Will this Moses take us to the Promised Land or leave us stranded, hot, dry, and dusty, in the desert?

Today’s Challenge

Today, I work with people who realize their potential for leadership through the practice of collaborative innovation. The front end challenges them. Can we develop a compelling question for the community which goes to the heart of our intent? What if we convene a community and nobody engages? What if we fail to make space for people to pursue their ideas?

At the same time, the front end lends itself to repeatability and, thus, mastery. The challenge process, once mastered, can be applied to all scenarios.

The back end, by contrast, is contextual. Each idea, ahead of concept and implementation, has its own potential, challenges, and resource profile. Pursuing one concept may require rapid prototypes. Pursuing another may involve immersing oneself in the end user’s experience in order to more fully understand whether the idea in question offers significant, relative advantage when compared with their current state of affairs. Costs rise on the back end, too. Prototypes and immersive studies take time and money.

Innovator, Meet CFO; CFO, Meet Innovator

If you lead the practice of collaborative innovation, then you owe it to yourself to introduce yourself to the organization’s chief financial officer: the person who watches hawk like the fiscal health of the organization. Invite her to lunch. Do not expense the check.

You, practitioner, want her perspective on the following three questions.

Question one: How does the organization decide to take an idea to concept?

The process by which organizations decide to invest in a concept remains a mystery to many people, including—surprisingly—the people one would suspect would know, given they ostensibly participate in deciding. Different people give you different answers. The politics that surround budgeting as a reflection of power creates ambiguity. Some organizations, having just committed to “fomenting a culture of innovation,” have yet to commit their practice to paper. Nobody knows.

To this end, the chief financial officer can offer useful insight for the practical reason that, whatever the process, the outcome appears in the financial statements that her group prepares.

Question two: What makes for a compelling narrative around a concept?

Developing a financial model to describe an idea’s potential often starts with projecting a series of discounted cash flows into the future. Tomorrow is promised to nobody. Every projection germinates within it the seed of risk. The chief financial officer, having reviewed many of these projections and having seen them realized or not, can offer invaluable guidance in terms of how to meet the organization’s expectations of validity.

How, for example, does the organization weigh opportunity cost—the cost of not pursuing the concept? How does the organization consider cannibalization risks—the risk that your concept, once successful, reduces the profitability of the core business? How does the organization view ideas, relative to the horizons of supporting the core business in the near term, emerging businesses in the midterm, and new ventures in the long term? How does the organization scope these horizons of growth?

Question three: How does the budgeting process work for new ideas and ventures?

Established businesses and functions within an organization have it easy—easier—when it comes to budgeting in the sense that, year over year, they can expect some level of on-going funding and, as important, they can expect to be included in the discussions by which the budget is created.

Not so, the individuals pursuing new ideas, concepts, and ventures. Few organizations have, for example, established new venture funds: pools of resource ready to distribute to people who have expressed leadership in contributing and evolving their ideas into compelling opportunities.

Established organizations suffering from extended bouts of lethargy serve as unwitting launch pads for new ventures led by frustrated, former employees.

I recall an incident in which a colleague, with the full support of the organization, developed a valid plan to enter a new market. In running the stage gate gauntlet he received nothing but encouragement, along with requests for yet more data. Bloodied but unbowed and seemingly credible, he expected with good reason to receive his reward: funding for his now well-scrubbed concept. Then, silence. Nothing. Ultimately, the organization, in deciding whether to take the default course of action and fully fund the core business or take the new course of action and fund his idea, made no decision, which, by the rules of this particular game, meant taking the default course of action. My friend left the organization shortly thereafter to launch the very venture he had proposed. He’s done well.

Established organizations suffering from extended bouts of lethargy serve as unwitting launch pads for new ventures led by frustrated, former employees.

In sum, you need to understand from the chief financial officer how your particular factory makes the sausage, down to the level of departmental allocation of funds. Otherwise, you risk sharing my friend’s near-term experience: maximum effort, zero results.

You Bring Something to the Table, Too

The Digital Age taxes the chief financial officer by making her unpredictable world less predictable. The Digital Age introduces new direct and substitutive competitors from new places in the world, all of which disrupt her growth and profitability projections. The Digital Age accelerates events, outdating the annual financial plan and supporting budgets before the first quarter of the new fiscal year ends.

What can you do to help? What can you offer her in return for her guidance in navigating the choppy waters of new concept approval and funding?

You can, through your practice of collaborative innovation, help her apply the wisdom of your crowd to the critical investment decisions facing her. Does the crowd believe in ever-increasing cash flows for project X? Does the crowd believe the budget for the new fiscal year reflects current reality?

You can, in other words, help her remain successful in her role in the Digital Age by embracing the same practice that you follow (figure 1). Bring something to the table when you have lunch with her. Create a new advocate for yourself.

Going to play the game? Make friends with the referee.

Figure 1: negotiating the quid pro quo between innovation practitioner and CFO

Click to enlarge

By Doug Collins

About the author

Doug Collins serves as an innovation architect. He helps organizations big and small navigate the fuzzy front end of innovation by developing approaches, creating forums, and structuring engagements whereby people can convene to explore the critical questions facing the enterprise. He helps people assign economic value to the process and ideas that result.As an author, Doug explores ways in which people can apply the practice of collaborative innovation in his series Innovation Architecture: A New Blueprint for Engaging People through Collaborative Innovation. His bi-weekly column appears in the publication Innovation Management. Doug serves on the board of advisors for Frost & Sullivan’s Global community of Growth, Innovation and Leadership (GIL).

Today, Doug works at social innovation leader Spigit, where he consults with clients such as BECU, Estee Lauder Companies, Johnson & Johnson, Ryder System and the U.S. Postal Service. Doug helps them to realize their potential for leadership by applying the practice of collaborative innovation.

Image: Businesswoman by graph from Shutterstock.com

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