Can Innovation Speak the Language of Finance?

The ‘Us vs Them’ Mentality

Innovators and finance teams don’t tend to play nicely together. It’s not hard to understand why, when we consider the fundamental difference in their work.

For innovators, their goal is to come up with new ideas for products and solutions, which more often than not will fail. They typically operate within a very immediate time frame, concentrating day to day on the next steps of their project.

Finance professionals, on the other hand, need to secure the long term future of the company. They’re risk averse, and the prospect of funding projects with very little chance of success, and uncertain future financial outlooks understandably makes them uneasy.

More often than not, this leaves innovators and finance working at cross-purposes. For David Matheson, this is a huge frustration, as it prevents innovators and finance from having the right conversations with each other.

“The finance people are actually asking a critical question, which is: how do we grow? How do we make the business work?” he says.

“People in innovation need to answer that question, but the way the finance people ask it, where they ask for a promise, or some assumptions that they’ll hold innovators accountable for is actually very dysfunctional. Getting these folks talking effectively about uncertainty is therefore key.”

“I've never met a CFO not interested in growth,” Tristan Kromer adds, “but they're worried about investing a lot of money in speculative ideas. That's the point about uncertainty. They don't perceive the innovation team's actions as designed to eliminate risks, they perceive them as actually increasing risk.”

Responsible Innovators Take Accountability

To navigate this, innovators have their part to play in behaving responsibly - something that often isn’t helped by an image that depicts them as wanting to do new and exciting work, but not take accountability for the results...

According to Tristan Kromer, the immaturity sometimes shown by innovators in this respect is problematic. Their experimental, “fail-fast” way of operating can be perceived by finance as an attempt to circumvent the safeguards and bureaucratic procedures that have been put in place to protect the company, and is another contributor to the “Us vs Them” mentality.

However, when they behave responsibly, innovation teams can actually show they’re working to reduce the risk associated with their projects, by running experiments to gather information and adjust their course accordingly. This demonstrates they do care about business outcomes and is likely to help get finance on board.

Framing Risk Positively to Find Common Ground

Although innovators and finance ultimately want the same thing - the success of the company - they have very different approaches to uncertainty and risk.

For a CFO, risk is typically understood as the chance that different areas of the business won’t meet their financial commitments. Innovators, on the other hand, focus more on the positives - on what could be gained if they manage to make their ideas work. This difference in perspective puts the onus on innovators to describe the upside of their projects to finance, and ask for the resources they need to get them off the ground.

“If you communicate in a positive way, then your proposition to the CFO is, here's this crazy idea. I know it's pretty much wrong, but I want a little bit of money to see if it will work, or a part of it will work,” David says. “But typically, the innovators focus on the wrong questions.”

“They don't often answer the questions that the business folks want answered, they just go make the thing. So they induce this risk-framing, as opposed to an upside-framing. Then, in the absence of clear, big goals, with clear assumptions that need to be tested in the context of a supporting business case, the CFOs have no choice but to default to their risk logic.”

Dan Toma is sympathetic towards finance here.

“I will always 100% stand behind a CFO asking for a business case from day one,” he says. “I don’t think the problem is the question, it’s how the questions get answered and translated back. 

Because if the CFO asks for a business case, the innovation team often assumes they’re expected to create a spreadsheet with literally hundreds of columns. That’s going to create a stalemate - finance and innovation are going to end up hating each other.

But if that conversation is turned around, into ‘what assumptions do you have in your business model? And how will those assumptions impact future success?’ Then I think they will find common ground,” he adds.

Measuring in the Right Way to Communicate Progress

With miscommunication between finance and innovation a real challenge, it helps if innovation teams provide tangible metrics on their work. But what should they measure?

Dan questions the value of typical metrics used by innovators in recent years.

“We're just measuring anything,” he says. “And this is why so many labs are getting getting shut down nowadays.

For the past 10 years, we've been just measuring vanity metrics - things like the number of workshops we’ve done, the number of post-its we’ve used, the number of participants at our f*ckup night events…”

David is a little more charitable, referring to these things as “activity metrics” - which are easy things to measure and show that innovators are making some progress. The problem, however, is that they just haven’t held themselves accountable for business results when undertaking innovation activity, failing to think critically enough about the financial side of things.

“Reporting the number of meetings and things like that, is generally a way that people measure the culture change aspect of the innovation department. But when we want to measure the actual impact of projects it has to come back to a KPI the business is already measuring like growth, or ROI,” he says.

For Tristan, the first step towards having a coherent conversation is for innovators to start expressing these numbers as a range, to communicate the level of uncertainty associated with it.

“Instead of saying, ‘I'm going to increase growth by from 1% to 2%’, or ‘my growth target is going to be $10 million this quarter’, we need to say that this innovation project is going to result in somewhere between $10 million and 0. That's the level of uncertainty,” he states.

“Then we can start to talk about how the team ran an experiment, and narrowed the range. And now I'm pretty sure I'm not going to reach $10 million, but it might be 8, and it could be as low as 3.

If we can start talking about the range, then we're communicating that critical piece of uncertainty, which is never communicated by just arbitrarily saying, I'm going to have 25% growth this quarter. That just doesn't make sense.”

From Conflict With Finance, to a Business Win for Everyone

David Matheson shared an example of a company whose innovation team resolved a conflict with finance, and in the process uncovered a much greater business opportunity.

“I worked for a company that makes materials for cell phone antennas, and they were trying to get into frequency-hopping radios for the military. It’s a very hard materials problem for a lot of interesting reasons, but they wanted to take vehicle antennas from something that’s the size of a pizza box - which identifies them as targets - to something you can hold in your hand.

This was incredibly important and everybody agreed it was a top, strategic priority to focus on. But finance got hold of it, they figured out the different steps that would be involved, and decided there's no way the company was going to make any money on this because it would take too long. Everyone was deflated, there was a giant battle between strategy and financial returns, and a complete dysfunction in the organization of the kind we've been talking about.

To solve this problem, we decided to look at the ranges of uncertainty involved. The product was being field tested by customers through a pilot with the Army Rangers. Selling to customers like this over several years was the story the innovation team had given to finance - that’s the business case they analyzed and decided didn’t add up.

We realized that if we could somehow make the technology standardized in the industry, so that every vehicle bought has it, then it would become a completely different ball game. That's the dream the innovators actually had, for the technology to sweep across all Western military systems, but the technologists working on the problem had no ability to achieve this.

So the CEO of the company called the CEO of the vehicle manufacturer, who said they would love the product but they couldn’t standardize on it without real customer traction. At which point the CEO was able to show them their work with the Army Rangers. They changed the pilot from a technology-driven project to a technology-plus-vehicle-deployment project, and it went from a high-conflict, Us vs Them, customer value against finance issue, to managing to deliver a business outcome for everybody.

In other words, they changed the nature of the project by understanding what was driving the ranges of uncertainty. And all of this came about through an effective discussion and understanding of the uncertainty.”

Making Innovation Relevant to the Business

What this issue boils down to is making innovation relevant to finance, and vice versa. T

o bridge this gap, Dan Toma would like to see innovation departments start by asking themselves why their function was created. With a clear picture of why the organization has invested in innovation, and leadership’s expectations of this function, they can work out what they need to report on and what activities they need to prioritize.

“If you’re in the position of being in a new innovation function, or in a new lab, have that conversation with the board and ask them: “Why did you create this? What are your expectations from this function in three years from now, five years from now, 10 years from now? Because if you make their expectation your ‘why’, then you can trickle down to what activities you need to do today and tomorrow and next quarter, and what other parts of the organization need to do in order to contribute to that end goal.”

“You can either start from the position of asking: ‘how much are you going to give me Mr. CFO, and then I’ll tell you what to expect’. Or you can say to the business, ‘given what you want to get in five years, this is how much you will have to give me to even stand a chance of getting close to that,” he adds.

“The problem I see a lot, which is what drives a lot of frustrations, is that the CFOs come in and they say: ‘This is the budget you're going to have, and these are the results I'm expecting you to get. This is like having your cake and eating it at the same time. It doesn't make sense.”

Finally... what should you do if your CFO really isn't prepared to mobilize resources for success in innovation?

Our panel’s advice is to run for the exit.