How Chief Financial Officers Can Drive Financial Innovation
Innovation can propel a business into the future, but it must be rooted in a strong foundation of operational efficiency and long-term value creation. CFOs can play a critical role in this process, but it takes a bold change agenda to transform the finance function into a true innovation enabler.
The CFO’s Role in Fostering Innovation
The CFO role is a unique position within the finance department to help foster innovation. This is because of the CFO’s ability to provide financial ownership, accountability, and oversight.
The innovation aims to create products or services that increase value while decreasing the cost of delivering that value. This can be achieved through improving business strategies or operations and leveraging advanced technologies.
In many cases, these goals conflict with each other. For example, a CFO in the supervisor role may feel that a high-risk/high-reward incentive system would encourage innovation. In contrast, a CFO in the supporter role might prefer an incremental approach that provides better financial checkpoints and a higher tolerance for early failure.
The traditional view of the CFO’s role is that it’s a gatekeeper who says “no” more than it says “yes.” But if businesses are to become more adaptable and flexible in fast-changing markets, it makes sense for them to embrace more significant risks and uncertainty. The best way to do that is by encouraging idea exploration and experimentation in the finance department.
CFOs and Financial Technology
CFOs must lead the digital finance organization by establishing a culture of agility and innovation with data-enabled decision-making. They must also invest in technology that streamlines and automates core finance processes (such as data-to-report, purchase-to-pay, and order-to-cash) and enables the company to develop new business models.
The first outcome of innovation translates into increased value for your products and services, which leads to more significant revenue and returns on investment. The second outcome comes from improved business strategies and operations that decrease the cost of delivering a product or service. Truly beneficial innovation often has both results at the same time.
The financial technology market is growing rapidly, driven mainly by enterprises moving to the cloud, implementing automation tools, and adopting other digital devices. The CFO must collaborate with the chief information officer and other IT leaders to integrate these tools with the finance department’s existing systems. Moreover, they must provide the CEO and other finance leaders with an end-to-end picture of the company’s financial health, requiring robust analytical and strategic planning skills.
The CFO’s Role in Resource Allocation for Innova
CFOs who can see risks and opportunities behind financial data serve as strategic business partners for their CEOs. They can help to formulate and execute finance transformation initiatives that improve operational efficiency. They can also help to identify and capture new growth opportunities. For example, a CFO can establish innovation-centered objectives for the commercial and operations teams – objectives focused on closing the gap between current performance and capabilities and the company’s overarching growth aspirations.
As such, they can facilitate innovative strategies that increase value while decreasing costs. True innovation constantly evaluates and adjusts projects and operations’ value-to-cost ratio.
As a result, CFOS needs to ensure that the resources required for innovation projects are allocated continually rather than cyclically. This requires a timely reporting and forecasting system, which can be enabled by technology that offers integrated business intelligence. Additionally, CFOS needs to be able to take stock of the success and failure of innovation projects frequently to shift resources to promising initiatives and terminate unsuccessful ones quickly.
CFOs and Innovation Strategies
The best way to understand innovation is to look at it from two angles. The first involves increasing the value of the business. This can be accomplished in various ways, from innovative products and services to improved processes that decrease costs. Successful innovation should combine both outcomes, creating a virtuous circle of increased value and lower prices.
The second outcome involves reducing the time to market for an innovative product or service. This can be accomplished through innovative supply chains, logistics, and distribution. Likewise, it can be achieved by developing creative processes for funding projects, accelerating the pace of execution.
CFOs can flip the script on this problem by formally building innovation goals into the company’s plans for growth, discovery, and validation of untested assumptions about an innovation project, speeding up standard budgeting cycles, setting metrics specific to innovation projects, and upskilling finance teams to help lead changes in the company’s culture. These are not easy tasks, but they can dramatically improve how CFOs support innovation within their organizations.
The CFO’s Role in Encouraging Creativity in Fina
CFOs may have a reputation for being cautious and risk-averse, but they can play an essential role in enabling innovation. By encouraging idea exploration and experimentation, finance chiefs can help organizations find the right balance between innovation and making “safe” financial decisions.
To do this, finance leaders should take a more expansive view of the role of the CFO. They should stop thinking of themselves as the final purse-holder and instead position themselves as critical enablers, ensuring that processes, management information, incentives, and other operational aspects align with the strategic vision.
They should also help their organization develop a culture that supports the creative process. They should encourage the participation of diverse groups and reframe questions that could be seen as limiting creativity, such as “This sounds too risky.”
For example, instead of saying, “This will never work,” a CFO might ask, “How do we get the data to prove this?” By fostering collaboration, finance chiefs can make their organizations more resilient to future disruptions. This, in turn, can support innovation and sustainable growth.
CFOs and Technological Innovation
CFOs are responsible for ensuring that capital is allocated in ways that maximize enterprise value. This can involve developing a compressive strategy prioritizing long-term business value with short and medium-term objectives. It can also include evaluating the technology infrastructure needed to enable that strategy. In addition, the role of a finance leader often includes driving workforce evolution, which may involve breaking down silos, building trusted relationships, and revising hiring, training, and upskilling strategies.
The ability to discover and test untested assumptions is another crucial element of innovation. For example, a CFO can help business unit leaders uncover data that suggests how big a project might need to be to justify a particular investment.
Many businesses are turning to finance leaders for guidance in navigating technological disruptions. However, all companies need a solid financial leadership team regardless of industry. By fostering an environment that leverages strengths, organizes desired behaviors, and rewards intelligent risk-taking, finance leaders can create the proper framework to support their organizations’ growth.
The CFO’s Role in Innovation Partnerships
The CFO’s role is to help C-suite colleagues discover and validate the untested assumptions associated with innovative ideas. This requires rigor appropriate to the business environment, risk, and investment involved. For example, a stage-gate process that works well for a scale operation may be overkill for a developing concept.
CFOs can help their organizations innovate by guiding resource allocation for projects strategically aligned with the enterprise’s long-term value strategy. They can also foster a collaborative culture within their finance teams by introducing new mindsets and behaviors to their workforce, revamping leadership and management approaches, and incorporating cultural goals into employee rewards and recognition programs.
CFOs can also guide their organizations in assessing the risks and return on investments in innovative projects by applying data science capabilities that support rapid, iterative evaluation of return-to-cost ratios. This is especially important in today’s rapidly evolving financial and economic landscape, where a single disruption can dramatically change an organization’s competitive position. Moreover, the best innovators deliver more than just increased value; they often also decrease costs to achieve that outcome.
CFOs and Disruptive Financial Innovation
Finance leaders must be empowered with new technology to drive breakthrough insights, enable more innovative financial operations, and support agility matching interest volatility. Cloud-based financial management systems with prebuilt analytics that leverage machine learning and other next-generation technologies empower CFOs to uncover underlying profitability drivers, improve working capital use, and control business costs.
CFOs should also be able to deploy finance-specific metrics, dashboards, and reports that allow business units to track progress in real-time. This way, they can quickly identify opportunities and take action.
Finally, the most successful CFOs will think like venture capitalists regarding innovation investments. They will establish an objective framework for assessing the potential of each project, ensure resources are allocated to the most promising projects, and help business units overcome challenges when necessary.
CFOs can also encourage innovation by providing a measured level of freedom from business-as-usual constraints, such as reporting deadlines and budgets. This will foster a culture of risk-taking and accelerate the learning curve. This will lead to a more resilient and agile business model that can withstand interest rate volatility, talent shortages, and competitive threats.