So much has been written about how to innovate, and we have all probably seen many sources to help us think about how to innovate. And many of us might consider ourselves “innovators.” But I dare say that many of us in the executive finance office have become unwitting obstacles to innovation, merely by doing what we were trained to do every day. There is great value in some of the tools we use to evaluate new business ideas, but finance leaders should consider innovation when they think about how they apply capital investment tools.
Every time we look at a new business opportunity, those of us in finance immediately look to evaluating the net present value of a project and focus on earnings. Those evaluations are critical but should be looked at a little differently when we consider innovation.
An article from the Harvard Business Review offers one eye-opening innovation killer.aWhen we use net present value, we normally compare the new project with the status quo, assuming that if we do nothing, the future cash flows will remain unchanged. That is simple and easy to do. But when we do that we ignore the fact that the market is changing and that the status quo more likely leads us to a decline in future cash flows. By taking this approach, we might miss the opportunity a new innovation presents merely because it is not as much of a cash generator as existing strategies have been—or, more likely, because the innovation gains momentum more slowly than did our status quo.
In many respects we are paving new pathways in our business, and future cash flows may be best estimated conservatively, but the finance leader’s strategist mind must also consider the opportunity for a potential upside that could make the organization a market leader.
Similarly, a focus on earnings can stifle innovation, but the finance leader cannot ignore margins. Balancing those realities can be difficult. Many of us live with month-to-month or quarterly earnings targets that are tied to our compensation (and perhaps our employment). That is a pretty strong motivator to focus only on projects that deliver earnings, but a long-term view is critical. New ideas sometimes take awhile to gain traction and generate earnings. But can we afford a potential short-term loss in earnings to develop a new idea? That’s the challenge with innovation—that “ramp up” from the initial idea to it being a going concern. Often the potential loss of short-term earnings ends up having a chilling effect on our willingness to innovate. We need to see if it is possible in our organization to pursue innovation and perhaps risk a short-term decline to see a long-term gain. This analysis requires regular, meaningful communication among our governing boards, executive teams, and stakeholders— along with a lot of trust. Innovation is not for the faint of heart or the poor communicator.
So it is not just the capital investment paradigm that hinders innovation. Decision-making structures can obstruct innovation just as much as discounted cash flows. Many organizations have multiple layers of decision-makers, most of whom are motivated in their own self interest. There is a place for layers of management—we can only manage so wide a span of control—but when it comes to innovation, organizations should consider making the decision process leaner. Today’s most successful businesses have the common denominator of a lean decision-making process that gathers input from only directly impacted parties and then moves on. The term “nimble” comes to mind here. Organizations can innovate if your decision-making is nimble. The alternative is to find benefits to an innovation to answer the question,“What’s in it for me? For many parts of the organization that task alone can be laborious enough to discourage innovation. Sometimes, we have to think about changes that benefit the overall organization and our patients, even if it does not support the needs of a small part of the organization. If you want to see innovation through the decision-making process, sometimes leaner is better.
Some tend to see general organizational politics as a hindrance to innovation, saying that managing to meet the needs of all persons is tiring and adds no value to the innovative process. This issue is not always something we can address from our positions in financial management; however, innovation must find its way through those political roadblocks. Some of it can be finesse and communication, and showing the big picture. The global benefit can be the strongest influence in that political arena–leaders are pushing innovation for the benefit of the organization and not for the benefit of their office.
Yes, I have killed many an innovation by all these ways. Our focus on capital investment analysis and earnings can distort the bigger picture of what we are trying to do. Working with multiple layers of decision-making or political structures can also impede innovation. As you seek out positive change in our organizations and in our industry, be on the lookout for these obstructions, as they can be the killers of great innovation. Let’s use our perspective on the overall benefit to the entire organization, and an eye toward the long term, to keep these innovation killers in check.