Three financial aspects of innovation

Innovation and financial management tend to be uneasy partners. Financial people (now I am generalizing!!) like predictability and hate surprises. Innovators (generalizing again) hate being squeezed into the corset of detailed deadlines and budgets.

From a financial perspective, innovation should be treated as ‘portfolio management’, i.e. depending on your risk appetite and expected returns, a mix of investments in different categories should be maintained. That will provide the highest returns, given an acceptable risk. Expecting that each asset provides a high return is nonsense. The mix of assets will provide a return. Individual assets will provide individual returns that could be very high or very low. But never focus on just one asset.

The expertise of the financial function can help to ensure a healthy portfolio and pick out ‘bubbles’ and financially unhealthy ideas, or faulty execution of good ideas. Without delving into the content of innovation, financial management can do a lot to support and improve the financial success of innovation.

In three brief articles, I would like to highlight three financial perspectives that the CFO can use to support the business aspects of innovation. These three are:

Given the forecasted business case of 1 innovation, what R&D budget is still worthwhile?
The link between the size of the future business and the current R&D effort is seldom made. Given the business model of an organization and assuming a business case for an innovation, how much money should we be willing to spend on that innovation? A proactive match between R&D spend and expected business case can provide excellent early warning signals.
Awareness of financial impact slow project execution, NPV impact
Unscheduled project delays happen only too often. Often due to technical, partnering and other ‘external’ reasons. However, perhaps 50% of delays is caused by internal slowness in decision making. The CFO should make other directors very aware of the financial (NPV) implications of (unnecessarily) slow decision making.
Monitoring an innovation portfolio from a financial perspective
Are enough projects being started, is the right amount of money being spent at the right moment in the innovation funnel? Not from innovation content perspective, but purely from a financial portfolio perspective, the best management of investments and risk.

I hope these articles will help the financial people claim their important role in innovation process management. And help innovators asking for the proper support from the financial function. And push towards the realization that a financially well-managed innovation process, is a much, much better investment than growth through M&A. Next week the perspective of ‘size of R&D budget for 1 innovation project’.

Three financial aspects of innovation

Jeroen de Kempenaer
Value propositions, business modeling, business cases, road mapping, portfolio management

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This article was originally published on LinkedIn.