The strategy of innovation

To most people, the mention of “accountancy” and “innovation” in the same sentence conjures up an incongruity at best. It doesn’t add-up, if you’ll forgive the pun! Accountants, however, are key business leaders and have long played an important role in driving the growth agenda in most companies.

As we all know, business growth is increasingly predicated on innovation and, as a result, the equation is changing for accountants.

The role of accountants needs to extend beyond the core business and into new business areas,
and they need to become more attuned to the principles that drive innovation. The good news is that this does not require as big a leap as you might expect. With the right mindset and armed with the leading tools of innovation, accountants can maintain and enhance their leadership positions in modern business.

To start our discussion, we need to debunk one or two perceptions about innovation.

The paradox of innovation and risk

Innovation is risky. This fact may lead some accountants to have a natural conservative bias towards innovation, so that they can honour their key role in flagging significant risks. However, most accept that, in modern business, it is unwise to rest on the laurels of the current core business. It is rational and prudent, therefore, to search for new ways to protect the current business from threats and to explore new growth opportunities outside the core. But this is innovation, so innovating is risky but not innovating is even riskier. In protecting the long-term sustainability of a business, accountants must view innovation as a key tool in managing risk and not as taking in new risk per se.

The “genius myth” of innovation

There is a common perception that innovation comes from a spark of genius, a creative leap, a lightbulb moment in the head of a solitary and visionary leader. This does happen from time to time in some high- profile examples, but it is far from the norm.

It is now well understood in the rapidly emerging management science of innovation, that creativity in business is a skill that can be taught and therefore acquired. There are now many tools that allow companies to follow a systematic and structured approach to innovation with great success. Armed with these approaches, innovative companies have demonstrated that the truism of “the harder I practise, the luckier I get” can also be applied to innovation.

The two key lessons – that we should view innovation as part of risk mitigation and that we
can and should follow disciplined and structured approaches to innovation – are both well within the accountant’s comfort zone.

Here are a number of ways in which accountants can apply these lessons and play a fundamental role in fostering and driving innovation.

Portfolio mindset

Portfolio management is nothing new in finance. Accountants are in pole position to apply a portfolio approach to managing the risks associated with innovation. To stay relevant and continue to grow, companies must look for innovation opportunities in three areas: incremental improvements in the core business, natural extensions of current activities (adjacencies), and transformational changes to the business or sector. Like any good portfolio, you don’t want to be too reliant on any single area and, to de-risk your future, you need to pursue opportunities in all three dimensions. 

A vital element of corporate strategy is making deliberate choices about balancing your innovation portfolio based on the value-creating potential of each dimension. The more certain you are that your business is not under threat, the more you can rely on the core business.

If your industry is undergoing substantial change, however, the more you need to seek out and develop transformative opportunities. If the management team is not making clear choices between these three sources of growth, you are putting your company’s future at greater risk.

In that context, accountants can be champions of the innovation portfolio. They can promote the mindset and provide the right tools and analysis to manage the portfolio effectively.

The business model

Very often, the most outwardly visible signs of a successful innovation are centred around a new product or service, or on targeting a new customer segment. This tends to hide the full innovation picture – even within the companies that developed them. These two crucial areas are all about creating new value for customers but to be ultimately successful, the entire business model must capture that value for the company. Otherwise, we have a great product but we don’t have a viable business.

This perception of innovation as being solely about creating new value, allied to the “genius myth” described above, can alienate accountants. They may excuse themselves from the noise of this hyper-creative process to focus on other things, but the reality is that the best innovations don’t stop at creating value – they innovate around how they capture value.

This can be a happy stomping ground for accountants. They can play a vitally important role in ensuring that the company seeks to maximise the value created and captured from new growth opportunities by taking a holistic view and actively exploring innovative business models.

Greater value can be captured by looking at the four components of a business model simultaneously, These are:

• Who you are selling to;
• What you sell;
• How you create and deliver it; and
• Why it is commercially viable. 

Innovating in and around these four components will determine the level of success. Business model innovation isn’t confined to radical new ideas – transformative growth can be created by reconfiguring existing ideas that may be new to a company or industry. The business doesn’t have to be at the leading edge of technology or the first to identify an emerging trend to benefit from this approach.

Get involved earlier

Accountants are probably the most numerate members of the management team and their skills can be deployed to great effect within a structured approach to innovation. However, some accountants have tended to stay away from actively participating in innovation, perhaps waiting to the very end to sit in judgement when presented with new proposals. This shouldn’t be the case, as accountants can bring their numeracy skills to bear much earlier in the process.

Modern innovation processes for existing companies are typically built around the following three or four phases:

• Search for opportunities, identify threats – generate insights;

• Generate a lot of new ideas and concepts – ideation;

• Build, test and learn – build prototypes, surface assumptions, test and learn; and

• Refine the strongest concepts and build the business case.

Up and down this process there is a role for accountants to use their skills.

In the initial search for new opportunities or identifying threats, the starting point should be an accurate assessment of the current environment. The keen eye of the accountant can help enormously in producing the facts to call it as it is, to develop new analysis that will offer up surprising insights, to audit existing strategic resources to identify strengths and weaknesses, to reveal the industry norms and orthodoxies – the “dominant logic” of the industry that are ripe
to be challenged. Furthermore, accountants should be the go-to person in defining and documenting the reality of the current business model (this is often ill-defined and weakly understood).

After generating a multitude of new ideas through ideation, the next step is an adaption of the
“build, test, learn” loop behind the lean start-up movement. Existing companies should undertake a “rapid prototyping” cycle of increasing detail and sophistication to test their business concepts. This should be rough and cheap to start with, only progressing to more polished and expensive prototypes when initial results merit. This cycle quickly and cheaply identifies fundamental flaws before they go too far. One of the most difficult things to do in this phase is to design practical and executable tests that can generate meaningful results in the validation process. Accountants have strong skills in this area – rigor, discipline, analytics. A useful approach is to use “reverse financials” to identify the biggest financial challenges that need to be addressed for the concept to have a chance of becoming viable. But a word of caution – we are not yet trying to “prove” anything. Our focus is to identify and learn about the most important issues that need to be addressed. We then iterate back and forth into the ideation phase to generate creative new solutions. So accountants need to resist judgment for now, as they need to trust in the structured process.

By now, we have tested quickly and cheaply and only the strongest concepts have survived. We are now in the next phase of refining and working towards a full-blown business case. We are still not ready for launch into the market and we are still in learning mode, but we must now commit serious time and resources. This needs finance to be heavily involved in justifying the expenditure but because accountants have been part of the innovation journey from the start, they intimately understand what is involved. They are familiar with the risks and understand them better. We follow a similar ‘build, test, learn’ cycle as before, but now with substantially more resources at stake. Accountants are now in more familiar territory and ultimately start building the financial models to make the investment case. It is structured better because we’ve learned from previous tests about the most important causal relationships and how they interact. With the valuable input of accountants, we have maintained a holistic view of innovation and sought to innovate across the business model to capture more value from the opportunity.

Managing innovation

Innovation is very different to business as usual. To manage it effectively requires a different set of processes, skills, talent and resources and, above all, a different mindset. This is especially true from the accountant’s perspective.

The level of knowledge and certainty in the core business is, by definition, not available in innovative opportunities. This doesn’t mean that we should accept any less rigour in the analysis, but we must recognise that we will not be able to answer all the questions. We must address these ambiguities through a culture of experimentation and learning, and be much more open to external input and collaboration. It should be noted that, if all the answers are available, then we are not really dealing with an innovation.

Accountants in the senior management team need to buy into the fact that they must set different expectations. To support this shift, separate governance structures need to be established for innovation activities. Teams need less of a ‘steering’ and more of a ‘feedback’ input as they progress through the governance of an innovation project. Accountants need to ensure that the all-too-common “we’ll find it when we need it” approach to resourcing innovation is replaced with appropriate and dedicated commitments so teams are resourced to win. One of the best ways for an accountant to ensure that we get value for this money is to become
an active member of the innovation team.

Conclusion

In DeBono’s famous ‘Six Thinking Hats’ methodology for problem solving, two hats are ideally suited to accountants – the white hat of facts (information and data) and the black hat of caution (identifying weaknesses, risks, logic). Why only don these hats at the end of the process, when significant resources have already been expended?

In the past, accountants may have made modest contributions to innovation and probably only
at a later stage in the process – sometimes to pour cold water on, or kill, the initiatives. This doesn’t have to be the case. Accountants can make vital contributions to a structured, rigorous and evidence- driven approach to innovation and proactively promote innovation as an essential part of risk management.

(This article appears in Accountancy Ireland, the official magazine of the Chartered Accountants Ireland distributed to more than 25,000 subscribers.)