Corporate Finance: An Innovation Killer?
Innovators and their finance departments are generally at odds. Innovators view the finance team as a bunch of suits with no understanding of what it takes to create great products. The finance team sees the innovators in product development as freewheeling spenders who eschew financial constraints. Having worked in both camps, we do not believe this tale of mistrust has to be the norm.
Charged with the role of maximizing shareholder returns, Finance is responsible for prudent use of company funds. Accordingly, finance requires objective, quantifiable measures to ensure that only accretive investments are made. This leads to Finance being stereotypically viewed as generals of “no.” Product developers, on the other hand, are creative agents. They are charged with coming up with great products for customers, a process fraught with risks. Successful products, however, will ultimately result in sales, leading to shareholder returns.
So, how can finance and the product group cooperate for the greater good of the company? Here are four ways to create a partnership.
Create an innovation budget with some flexibility
This budget should be prudent but large enough to get meaningful innovation done. It makes sense for a significant amount of the bets to be made on positive return on investment (ROI) projects. However, there will be great ideas that may never meet strict discounted cash flow requirements. For this reason, you need some funds within your innovation budget dedicated to these projects. If most of the projects require multi-disciplinary approval, this flexible pool should have an express lane with, perhaps, approval by a three-member team or even solo approval by the senior product development executive. Judging all products by the strictest guidelines will result in you losing creative stars to competitors.
Executives are confident. Armed with numbers, CFOs and finance executives are even more confident. While this confidence is usually valid, the boldest innovations in history often have had elements contrary to finance ideals. From a finance perspective, there were strong reasons to doubt or even kill the iPod. We forget there were examples of failed MP3 players and the music industry was not greeting digital music with open arms.
Luckily there are two sides to this coin. For every finance executive who might have disapproved a great product, there are many innovators wishing finance had stopped them before they released poor products. In product development, it is best to be less judgmental. This brings us to the next point.
Forget the past
Jack Welch said yesterday’s headlines are used to wrap today’s fresh fish. No one should gloat about being right or feel despondent for being wrong. What is done is done. Yesterday’s news is irrelevant to today.
Ideally, both departments cooperate and compromise. Unfortunately, in most organizations the tension between finance and the innovators become toxic and one group wins. Unless your industry or company’s situation dictates one side’s dominance—you need to find a new product to save the world or you are headed for bankruptcy—compromise is the best approach.
We are concerned when either becomes too dominant. The idea of finance driving innovation is as bad as putting engineers in charge of financial reporting. Being more risk-averse, Finance may unintentionally stymy innovation. Risk is at the heart of all great innovation. In many cases irrational passion is required to create great products. The Model-T was not Henry Ford’s first attempt. He just irrationally kept at it until he got a model that became the right one. That would not be acceptable to most finance executives. Nor, should it be. We all bring different perspectives that make us successful. With that in mind both sides should accept the skills the other brings. And, we should all (finance and product folks) be thankful that Edison, Ford, and Jobs were not finance gurus.