Increased Innovation Spending By Companies Creates Challenges For CFOs

Companies are adapting to tech-driven disruption and that is changing how CFOs approach their jobs.

Executives at Fortune 1000 companies are investing in new ideas to continue to grow amid economic uncertainties and business disruption, a new report shows.

More than four in 10 executives interviewed in the “Benchmark Innovation Impact 2020” study by media company Innovation Leader said they feel more confident than last year that their company’s innovation strategy will help them stay competitive.

More than one-half of the over 200 managers surveyed said they expect their company’s overall investment in innovation to increase from 2019 to 2020.

“Confidence is building because companies are seeing their historical success rate increase,” said Ron Walker, U.S. Financial Management Service Network Lead at KPMG, which sponsored the study.

New technological tools such as artificial intelligence are providing C-suites with better tools to understand what their customers wantand when they wantit.

“Organizations and executives are getting better at understanding how to promote innovation. And they are seeing some actual benefits,” Walker told Global Finance. “They also know that if they don’t do this, they are in trouble,” he said.

Executives are putting in place innovation initiatives to better respond to disruption driven by new technologies. Preparing for the next economic downturn is also a reason to innovate, Walker said.

“We did some empirical studies and we identified organizations that invested going into the downturn and came out much stronger,” Walker said.

Confidence in the benefits of innovation rises to nearly 50% of executives polled at companies with more mature innovation processesincluding Google, Intel, ESPN, Fordand Nasdaq, the report said.

A Balancing Act For CFOs

Change is challenging, however. The most significant difficulty concerns the role of chief financial officers (CFOs), according to the report. Economic uncertainty has made it more difficult for CFOs to balance competing priorities: investing for future growth and meeting short-term revenue goals.

Over one-half of the executives polled reported that short-term financial results have a “high or extremely high” impact on their company’s ability to invest.

“The CFO has the hardest balancing job to do, delivering short-term and long-term objectives,” Walker said. “It is changing the CFO’s mindset.”

CFOs have been challenged to measure the success of their strategy by using financial and non-financial metrics. Fifty-eight percent of respondents said they are tracking revenue to assess the progress of their innovation programs.

Seventy-one percent of respondents said that innovation efforts are funded as part of the annual budget process and 40% cite the absence of a budget as an obstacle to the success of their innovation programs.

The report suggests CFOs should think of their role like venture capitalists, building a flexible investment strategy that can be adapted to future needs. Such a balancing act requires a new approach to budgeting, risk assessment and metrics. The road to this is still long.

Financial metrics remain the only measuring tool for nearly 60% of respondents. One-quarter of executives said they do not track any financial metrics at all. However, larger companies with more innovative processes are more likely to use both financial and non-financial metrics.

Speed and Failure to Measure Success

Linda Tong, Vice President of Innovation Labs at AppDynamics, believes failure can be an indicator of the performance of innovation divisions. “I would look at the percentage rate of failure as a metric. It should be much higher than any other part of the business,” she wrote in the report.

Non-financial indicators include stakeholder satisfaction, time to launch, qualitative feedback and strategic competitive advantage.

Ford X, a new Silicon Valley-based accelerator focused on new “smart mobility” ventures within carmaker Ford, tries to keep up with the pace of change while staying within budget.

“The best chance of creating something successful is getting off the bad ideas quickly,” Sunny Madra, Vice President of Ford X, writes in the report.