Enabling innovation through R&D
Believe it or not, the capacity for Research and Development (R&D) is present in every sector from banking to biochemistry and it’s the CFO who has the power to not only enable innovation, but drive innovation management within an organisation.
The benefits of innovation are widely known. For an organisation, it creates customer value and drives growth; at a national level, it strengthens the economy and globally it improves overall quality of life.
However, it’s the ability to bridge the gap between the STEM roles (Science, Technology, Engineering, and Math) and the CFO’s foresight of fiscal opportunities and legislation, that is one of the biggest difficulties arising from implementing and optimising a R&D program.
As both a Chemist and a Research and Development Incentive expert, I am afforded with the ability to understand both perspectives. In this article, I aim to encourage all CFO’s to pioneer R&D within their organisation, or if there is already an established program, gain further insight into how a CFO’s role could reshape their innovation strategy.
Here’s my five steps to becoming an innovative CFO.
Step One | Move beyond budgets
The first step is to take a leap of faith, which requires moving beyond budgets. Many wonder why a CFO must also take on the role of R&D. My reply is they are in the best position to do so; research and development is linked to the economic objectives and potentially benefits of a company and should be part of long-term planning.
For a CFO, it’s finding the balance between risk aversion and risk decisiveness. Many times, the careful CFO will hesitate to do R&D or slow it down because of the short-term impact to the bottom dollar.
A study released this year found that an ‘over confident’ manager will invest more in R&D. However, they do not invest efficiently, resulting in negative outcomes for the firm. The CFO has the ability to invest efficiently into R&D because they can more accurately assess the financial and legislative determinants while monitoring trends, forecasting their implications and then making suitable recommendations.
As a CFO moves beyond budgets, they must not only allocate funds across projects, but also shape business models that are conducive to innovation; look beyond tax minimisation to boost R&D; maximise tax credits and implement growth planning, which puts all focus towards innovation.
Step two | Choose a country
For a CFO, growth planning begins with choosing the right country to set up R&D operations. The country that you choose will determine the degree to which innovation and entrepreneurship can prosper.
CFO’s should not only consider locations with a competitive corporate tax rate, but also those that support innovation through good social, legal, economic, political and geographical conditions.
For Australians, they don’t have to look any further than their own back yard, ranking 19th in the IMD World Competitiveness Yearbook. Notably, Australia’s Research and Development Tax Incentive supports innovation throughout the entire R&D process and this is complemented by other factors such as an excellent education system which produces a viable workforce and a reputation for quality. Furthermore, for foreign companies wishing to do R&D in Australia the conditions are also favourable. This is predominately due to the R&D scheme which allows a global entity to hold its Intellectual Property offshore. Other factors such as a weaker Australian dollar, being relatively cheaper than other OECD countries and being English speaking make it a great place for foreign countries to look to set up.
Size of company may also be a factor for the country of setup. For example, recent proposed changes to the Australian scheme will drive larger companies with low R&D intensities to favour setting up and conducting R&D in New Zealand once they reintroduce their regime next year. This is because the New Zealand R&D system will be simpler than Australia’s. However, in Australia, the benefit of the incentive being refundable is more beneficial for smaller companies in tax losses.
Step Three | Start an innovation culture
Building innovation capabilities means attracting the right human capital that accepts change and setting up the right infrastructure to promote an innovative culture.
Culture through convergence
A large part of creating an innovative culture means making tech decisions, particularly with the view of converging technologies. We live in the era of converged technologies, which creates efficiencies, and allows for cross-functional collaboration. Technological convergence not only changes the way a business operates through generating synergies but also in the way an organisation communicates together. Communication is the key to driving successful change and R&D programmes. The more fluid communication, the more change an organisation can handle.
Culture through human Capital
A CFO can also drive culture through human capital in two ways. Firstly, by attracting the best staff with a varied skillset and secondly by removing fear of change. When it comes to innovation, staff on the ground don’t need to know the ins and outs of R&D activities, but they do need to understand why it’s important, so they can be part of the business focus. To do this, the CFO has the ability to bring the commercial case forward by providing rationale through explaining their statistics and trends.
Step Four | Collaborate
Innovation cannot take place by working in silos. Gone are the days when organisations worked independently to achieve their goals. Today’s innovative CFO knows the importance of creating alliances at all parts of the supply chain with numerous stakeholders. Whether it be a large scale alliance, merger or acquisition; or smaller collaborative ties such as with a supplier or an organisation with a similar goal. Knowledge Sharing can greatly impact your innovative returns because collaboration brings experience and fills in gaps of knowledge and resources.
In the same way, seeking advice from professionals is paramount. Professionals can aide you in ensuring you meet legal and ethical requirements that arise from innovation, as well as act as a guide through to further contacts.
Step Five | Fail Fast
Be prepared for failure. I know failure is not what you want to see on the balance sheets, however having what is known as a ‘fail fast mentality’ is considered the best way to navigate change and be innovative.
The premise behind the ‘fail-fast’ philosophy is to value research and development and to keep testing to see what works and what doesn’t. When something doesn’t work, cut your losses and keep going by trying something new. This mentality should not only be part of the core activities of the organisation to produce new and better outcomes, but right down to the business systems and processes.
Starting the process means gathering the facts, analysing them, considering risks and alternatives, and then deciding on the best course of action – If it doesn’t work, pick yourself up quickly and start again.
Overall, becoming an innovative CFO does not mean taking on more work, it means changing the business models to foster innovation and putting in place efficiencies, attractive conditions and driving decisions that encourage R&D by utilising the powers you already have – fiscal responsibility.
*A. Zavertiaeva, Marina & Lopez-Iturriaga, Felix & V. Kuminova, Evgeniia. (2018). Better innovators or more innovators? Managerial overconfidence and corporate R&D. Managerial and Decision Economics. 10.1002/mde.2917.