One of the biggest challenges CFOs face is forging the right financial strategies to support innovation that fuels growth. A groundbreaking PwC study shows a deep correlation between innovation and growth for all businesses, and given today’s corporate growth imperative, and the leverage gained through innovation, it’s important for organizations to make savvy investments.
Healthy R&D spend is often a good indicator that a company is dedicated to innovation and willing to do what it takes to stay out in front of the competition. This often leads to increases in revenue and earnings, and rising stock prices for publicly traded companies. With too little investment, organizations can fall behind on the innovation power curve. But too much investment can actually be far worse as it turns out—undermining growth and profitability.
A study from Bernstein Research found that tech companies spending more than 18% of revenue on R&D tend to underperform the market, while those that spend less outperform.
Which begs the question: How do companies know how much to invest in innovation?
The short answer is: It’s complicated.
The old adage about how companies don’t plan to fail, they fail to plan holds especially true when it comes to setting the foundation for solid financial strategies. You must have a clear case of what you want to achieve with your investments and establish the time horizon for return on those investments to ascertain when that investment should begin to break-even and contribute to growth.
However, while many organizations have great aspiration and vision when it comes to what they want to achieve from their investments, they are not actively monitoring the returns. This may sound surprising—after all, as keepers of the corporate purse-strings, CFOs have an obligation to have an understanding of the financial health of the organization at all times.
However, they are hindered in this respect by a lack of proper insight. This is especially challenging in today’s era of digital disruption; the pace of business and technology is moving so fast—the world as we know it five years from now will be completely different. I would argue that anything with a potential payoff that involves anything longer than a 24-month time horizon is not worth the investment.
As well, CFOs must now grapple with more data sources, more channels, more numerous and complex business models, a more global nature of business, and more reliance on external partners. All of this is necessitating greater information accessibility and responsiveness to have an understanding of how those investments are performing in moving the organization toward growth and performance goals.
The Data Deficit in the CFO Suite
New survey research reveals many CFOs are dealing with a “data deficit” that threatens decision making and fiscal management, as well as the ability for financial operations and organizations to navigate digital disruption. In a recent global survey of over 1,500 financial decision makers conducted for Epicor Software Corporation, over 46% of CFOs said they rely on “gut-feel” and instinct to make business decisions in lieu of fast access to accurate internal data.
The research reveals that this inability to access the right financial information is having a direct impact on business performance. Of those polled, 45% say poor data hampers timely decision making, and inaccurate information is the main cause of organizational mistakes.
CFOs must constantly review their ecosystem of investment to ensure they are not over or under investing in critical areas such as security, marketing, product development and customer support. It’s a balance—protecting the assets of the company and innovation are both vital. At the end of the day, innovation doesn’t matter if a company’s assets aren’t protected.
Data-driven insights offer organizations the opportunity to gauge how they are meeting milestones on the investment time horizon, and course-correct as needed."
Data-driven insights offer organizations the opportunity to gauge how they are meeting milestones on the investment time horizon, and course-correct as needed. Without these “check points” along the road, organizations may “stay the course,” when in reality they need to alter the direction, stop or even backtrack. There’s a big cost associated with this lack of guidance.
In the survey results previously mentioned, it was found that a lack of financial information was shown to negatively affect corporate profitability, and that the more CFOs rely on empirical data for decision making, the greater the chances of higher profitability. Within the survey sample, CFOs that rely on empirical data for decision-making, as opposed to instinct, had greater profits, with 72% experiencing a profit increase.
And while a lack of operational insights is pilfering profits today, the real losses may be yet to come. There’s a link between opportunism, innovation and growth, and without the right data, organizations can’t be opportunistic and exacting in making the right smart investments to fuel innovation.
Opportunity Cost of Inadequate Financial Data
Considering that the survey shows nearly one in two CFOs rely on “gut-feel” and instinct to make business decisions in lieu of fast access to accurate internal data, we can ascertain that many are making educated guesses. This reliance on gut-feel versus empirical data can work out for many; however, the decision-making process becomes less data-driven and more of a judgment call. It’s only by luck or chance that an organization will arrive at the exact right figure as to how much investment they should put forward in various scenarios, and it’s likely they will arrive at a figure that’s either under or over par.
This creates two scenarios: Erring on the side of financial conservatism may put organizations at a competitive disadvantage if CFOs don’t have the confidence to maximize their innovation investments. On the flip side, being over-zealous with innovation investments can cause organizations to miss market expectations, or even outspend revenues.
Considering innovation is key to growth, organizations need a process that enables them to be more exact when planning and monitoring these investments. Designing innovative financial strategies can’t be like horseshoes and hand grenades—“almost” doesn’t count when a company’s future success is on the line. Financial executives must be confident when allocating resources to grow the business in areas such as customer service, sales, and marketing, and in critical innovation investment areas such as new product development and partnerships.
Financial System Reboot
While there have been significant changes in business models, financial governance requirements, and the velocity and volume of data over the years, many organizations’ business systems have stayed the same. To forge smart financial strategies that support innovation and growth, organizations must be able to access information and analyze it quickly to aid smart, agile decision making. The solution is to have a modern financial IT infrastructure in place that delivers the right data to the right people at the right time in the right way—providing a solid data decision framework.
To be fully prepared for the future, organizations must invest in the right technology tools, so they can make the right decisions, foster organizational responsiveness, and confidently take advantage of windows of opportunity—to propel growth and profitability.
Kathy Crusco brings more than 20 years of experience to her role as executive vice president and CFO of Epicor, having held a variety of financial roles at Polycom Inc., Documentum Inc., Adaptec and Price Waterhouse LLP. She is a huge advocate of innovation in both her professional and personal life, which extends to her choice of automobile; when she’s not in the office, you can see Kathy cruising the streets of Austin, Texas, in her Tesla.