Business

The imperative for innovation

Nigel Chambers

Wednesday, September 05, 2018

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In business, as in societies generally, we have entered what Klaus Schwab calls “the fourth industrial revolution”. This period is characterised by digital communication, computer process automation (bots) and use of consumer data in highly sophisticated and even sinister ways.

You need only search for the iPod you got as the hottest new gadget a few years ago or even consider the rapid spread of the campaign against sugary drinks to understand the pace of change, the most rapid the world has ever seen.

This means that every business, as a matter of its very survival, needs a process that watches for disruption, and that changes its processes, products and structures to deliver what its customers and stakeholders expect now, not five years ago.

This could mean changing the way that products are delivered (online vs in-store), how and which customers are targeted (through analysis of customer behaviour) brands that reflect trending global and/or local sentiment and even the very business that an entity engages in.

These disruptions and the required innovation affect both revenue and cost, therefore profitability.

Then there are different extents of innovation. Initiatives that feature few innovations and are close to what the business is currently doing are generally seen as core or adjacent innovation, of an evolutionary nature, offering lower risk and lower return.

Initiatives that stretch a business further away from its core capabilities typically feature multiple types of innovation. These are disruptive or revolutionary and can transform industries, but are harder to execute.

THE CHALLENGE FOR FINANCE PROFESSIONALS

Innovation is often viewed as being disruptive and transformational, a high-reward activity that is typically high risk. There is a role for the CFO to ensure the risk and rewards are balanced.

As the primary stewards of profitable long-term growth, CFOs and their teams should be the first to understand key financial risks and opportunities. They are often closest to the market and the first to grasp the financial trends and implications across the enterprise.

Further, they are often highly involved in corporate strategy and/or IT, both core drivers of innovation. They hold the purse strings for investment that could combat disruption and provide new opportunities, and are therefore best equipped to understand market expectations and the boundaries that will guide trade-offs.

In a stable environment, companies can afford to adopt a relaxed approach to innovation. However, the pace of change and uncertainty of the current environment do not allow for that luxury. Stakeholders are expecting leadership and businesses must respond accordingly.

Driving innovation, as opposed to merely enabling or supporting it, means that CFOs, for instance, must take an activist role, even though someone else in the business may have ultimate accountability or indeed the specialised skills for each innovation project. Boards and shareholders should judge their executive teams on their contribution to corporate innovation as well as their respective department innovation outcomes.

Leadership should ensure that the balance of innovation reflects the circumstances of the company, with appropriate focus on the areas of need, such as new customer engagement models or process efficiency to make use of new technologies. While the corporate strategy typically serves as a framework, CFOs often need to set targets at a more discrete level to ensure that the most important types of innovation are pursued.

Funding is normally problematic for innovators because benefits are often uncertain and the cost budget not easily estimated. CFOs need to ensure that funding processes are in sync with contemporary approaches to innovation and development. This means setting funding parameters that match the agile methods being used, and leaving sufficient funding for some refinement and rework once the minimum viable output is produced.

Innovation is expected to create real value and the project champions should be challenged to demonstrate that value for the investment in clear and specific terms.

THE CHARGE

In Jamaica, as in the wider Caribbean, we can find the best and the worst examples of innovation approaches across enterprises in the public and private sectors. There are business that continue to invest in being the best at the services they provide in financial services, materials or sourcing, customer engagement and even business model change.

However, for us to move our economies forward and make better lives for our people, we need more of this kind of possibility thinking and investment. We need state and private organisations that do not assume that its customers must simply wait whatever time it takes to deliver service or products that may or may not satisfy their needs.

While state enterprises may survive for lack of competition, they hold the country back. Private entities can expect someone else to step in and do the job they do not do so well, so they must constantly re-examine what they do and how they do it in order to deliver value for those who use their services and those who provide them with capital.

In this rapidly changing landscape of new business models and new-use cases for maturing technology, CFOs and the team of finance professionals that support them can add the most value by being hyper-aware of external environments and trends. This will allow them to move beyond just asking tough financial questions; it will enable them to seek more holistic innovations and test whether the best innovation approaches are being deployed.

With innovation so vital to future success, CFOs have been evolving from being “bean counters” to being trusted finance partners to the CEO and Board. Now there is more required and CFO's need to be catalysts, then, for some, there will be more beans to count.

Nigel Chambers, FCCA, FCA, MBA, is an audit partner at KPMG, Jamaica.

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