How to account for innovation


By Andrew Kenney and Jack Hagel

Financial chiefs are more inclined to spend on research and development despite economic worries abroad.

Some 36% of businesses planned to invest in R&D, up from 27% year earlier, the Grant Thornton International Business Report found when it asked US business leaders about their third-quarter sentiments.

At the same time, North American CFOs are increasingly concerned about domestic impact from the slowing Chinese economy, which is affecting revenue growth expectations, according to Deloitte’s latest Global CFO Signals report, which was released Thursday.

Revenue growth expectations amongst North American CFOs were at 4.4%, among the lowest recorded by Deloitte.

The two indicators help illustrate the increasingly complex job of the finance chief: CFOs are expected to contribute to an environment that ensures great ideas are spotted, encouraged, financed, and delivered efficiently to the market. At the same time, they must manage risk and costs.

“The CFO, maybe in the old days, used to say ‘No, we can't do that because it's new and different.’ ” Jack McCullough, CPA, founder of the CFO Leadership Council, said Thursday during an interview at the MIT Sloan CFO Summit. “CFOs today are expected to really understand the business model, add some value to the process, and support it.”

So how do CFOs balance the demands that they lead and plan for change in the business, knowing that disruption comes with risk, while fulfilling the more traditional accounting roles of controlling cost and patrolling risk?

It can be a particular challenge for the accounting and finance people who constitute the profession, said McCullough, a co-chair of the CFO Summit. “People who are naturally risk-takers aren’t likely to major in that field of study.”

And some are still trying to shake the killjoy reputation of the “C-F-No.”

“The most successful CFOs are the ones who embrace innovation, lead innovation when appropriate,” McCullough said. “… You can’t just go in and sort of focus on lowering costs.”

McCullough offered advice on accounting for innovation:

  • Interview your business. Sources high and low on the organisational chart can help a CFO understand how the business is changing. “I certainly didn’t understand the coding that they were doing,” McCullough said of his software engineering colleagues. “But I was trying to understand what it was they were doing, what the product was they were creating – and really, the underlying business.”
  • Stand on your credibility. A deep understanding of the company can lend CFOs more authority, whether they’re vetoing a project or trying to get it approved. “A lot of CFOs are actually the best salespeople in their company, and the reason is we're highly credible, as a group,” McCullough said. “We’re expected to be the most honest people in the company.”
  • Prove positives. “Maybe one of your colleagues says we don't want to go to the Latin American market, for example. Ask ‘Why not?’ ” McCullough said. “… Do your homework and convince people that maybe there’s an opportunity there. Even if you lose the battle, it might change the perception people have of you.”
  • Consider moonlighting. There’s a strong market in tech towns for freelance CFOs, and it can be a promising mid-career move. The work requires fundamental accounting skills and strategic vision alike – along with the business development and salesmanship skills to find and keep clients. “Most fun I ever had in my career,” said McCullough, who served part time for 20-plus companies. “Despite having the same title, it's a very, very different job,” he said. But the best path in may be the same: Start with the basics, perhaps in public accounting, and learn good judgement.

Andrew Kenney is a CGMA Magazine contributing editor. Jack Hagel is a CGMA Magazine editorial director.