For a while I have been wondering about the role of the chief financial officer in the innovation initiatives of a business. The text below summarizes my thoughts on that issue. It it is based on an interview of me by Curt Olsen and published in the Armanino Mckenna CFO Evolution Newsletter in September 2012.

( Armanino Mckenna is a leading San Francisco Bay Area accounting firm).

 

 

CFOs can and should lead innovation revolution

Do CFOs see themselves as innovators? They should according to Tapan Munroe, a veteran economist, prolific author and thought leader on innovation. Munroe, who served as chief economist at Pacific Gas & Electric Company, has written more than 100 articles and four books on the topics of innovation, research and development, business process improvement, the Silicon Valley phenomenon and American competitiveness.

 “The CFO is uniquely positioned to lead the change to an innovation culture in their company,” Munroe says. “Who understands risk better than a CFO?  And who better than the top financial expert in a company canunderstand where investment will have the most positive impact? The skill set and the power to lead innovation come together in the CFO position.”

His latest book, “Innovation: Key to America’s Prosperity and Job Growth,” promotes innovation as the core activity that distinguishes the United States as the world’s leading economic power. Munroe believes that if the U.S. is to maintain its position of economic and competitive leadership, it must emphasize innovation in both the private and public sectors. He also says that CFOs are a crucial professional community for promoting innovation and that they can and in many cases should lead the innovation revolution in their companies.

 

With American companies like Google, Apple and many others sitting on hundreds of billions of retained earnings, Munroe says that CFOs could play a key role in advocating for investment of that stockpile in research and development activities which would make their own companies and the U.S. economy, much more productive and competitive.

 

But not just any type of innovation will do, says Munroe. In fact, CFOs need to embrace what is known as “frugal innovation,” which is, at its heart, about being resourceful. “Frugal innovation is also smart innovation,” he says. “Throwing money at a project is not being smart. Resources must be applied very strategically and with surgical precision.”

 

Elaborating further on the term, Munroe says it essentially means “clever improvisation.” It could entail bringing a product to market despite limited resources of producers as well as of consumers. “Resource scarcity and the desire to save money drive frugal innovation,” Munroe writes in his book, citing cloud computing as a good example of frugal innovation. “(Cloud computing) does not need expensive local storage on computers (because it) leverages and optimizes the use of remote data servers” which deliver “economy of scale benefits.”

 

The days of expensive, proprietary or on-premises IT systems are numbered, Munroe says. “There’s concern that the effectiveness of cloud technology and its extreme affordability will have a negative impact on the expensive technology market in the U.S. as well as Europe and Asia, and the truth is, it might,” he says. “But I suggest we accept the inevitable, embrace frugal innovation and the cloud and use them to increase U.S. productivity.”

 

Munroe concedes that because of the perceived and actual risks of innovation, integrating CFOs into the “innovation ecology” of a company might be challenging. But times are changing fast and so for him, it’s not a question of whether a CFO should lead innovation, but of how. “The influence of CFOs continues to grow and that would include profound influence on how funding is applied to innovation and R&D,” he says.

 

Here are some guidelines that Munroe suggests for CFOs who want to foster innovation:

 

Use numbers – You speak the language of numbers. Focus strongly on the use of numbers as you develop metrics for innovative projects or ideas.

 

Learn about innovation – Increase your knowledge of innovation techniques to build innovation capabilities. Tap into the knowledge and experience of your Chief Technology Officer or top research executive.

 

Link innovation to corporate strategy – If an innovative idea is closely linked to company strategy and objectives, it has a better chance of acceptance.

 

Keep an open mind – As CFO you may not always be the idea generator but you are the “venture capitalist” of your company and the gatekeeper of the budget and of investment. So when requests for funding new ideas come to you, don’t dismiss them because they refer to a future beyond the next quarter. Reasonable investments that are aligned with future strategy should be given a serious hearing. Remember: the future is not vague; it will be here before you know it.

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March 29, 2013 · 9:55 pm

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