Wednesday, 9 October 2013

“It’s not me it’s you”: a breakup story between Innovators and CFOs

“The forecast is clear; the numbers don’t add up, we need to do something about these red figures”.

“What do you suggest to get rid of these red figures, if increasing the value of our products is completely off the table?”

“You know that our clients won’t like an increase in price. We need to put an end to our soaring costs. Let’s get rid of all these useless expenses and focus on being back in black by the end of the year…we may need to let some of your people go...”

“Why my people?”

“Well, they are expensive. What we need now are people that can take care of our clients, you know. We need the indispensable ones. We can think about innovation when things are back on track”

There is an essential aspect behind all innovations: they make sense only under the light of a long term perspective. There is an equally essential aspect to financial forecasting: it is mainly about the short term, which is also the time frame in which it can be truly accurate. In addition, predicting the financial outlook of a company’s incursion within a blue ocean (a new market) is practically an impossible feat—or at least one for which you will need an econometrician coming from a place like the World Bank to get you somewhere.

This is why it shouldn't be surprising that CFO’s love, both, the short term and the fierce battling for market share by means of cost-cutting savagery. They are not evil for wanting these, but they do have different motivations in their work.

Innovating is a losing battle, if the only markers of success within a company are provided by stringent, short-term focused financial figures. Yet, this is perhaps the difficult part of the process conducive to innovation that is better understood: you need to invest in R&D and product development, in order to have a viable offering in the long run. CFO’s will agree with the innovators on this, even enthusiastically, because deep down they know that one never reaches the long run if the short run must always come first.

This much is clear: if you believe in the need for innovation, even if only as a matter of faith, you are still on the right track—it’s a bit like choosing for healthy diet: you don’t know exactly what the benefits will be, but you still do it, and you do it knowing that it is something for the long run; the benefits of a single salad are negligible, it is at 10,000 salads where the real goal lies. The financial enthusiasts are those who keep on reminding you at this point about the ‘Light’ labels in your favorite junk food: there is no need for a salad if you can eat ‘light’. ‘Sure!’, you respond sarcastically to such naïve retort, yet only few would respond in the same way when asked to delay key investments or replace high-skilled (and expensive) employees with replaceable (and cheap) ones.

In the long run the ‘light’ foods enthusiast will wash his hands, wisely reminding you that ‘Light’ meant that you needed some moderation. In other words, that it was your fault for listening to them too closely. Not surprisingly, it also rarely the case that a bad forecast is the CFO’s fault: ‘the competition has squeezed our profit margins’.
However, I said that the long term aspect was the less contentious point. The true trouble comes when creating a business model that encourages innovation and creative thought. Seth Godin, for instance, discusses the importance of the ‘linchpin’ employee: someone driven by a need to create, to stand out, and to lead, hence, someone that will never fit in a model where rules, the chain of command, and ‘easily measured goals’ are expected to drive the competitive advantage of business. In equal fashion, Malcolm Gladwell’s “Outliers” seem—all of them—to challenge any such rule-following and standardized approach to their work. And outliers are exceptionally hardworking individuals. They are not the type of employee who is interested in fitting inside the demeanor behind heavy hierarchies: CEO, CFO, the rest of the executive team followed by country or regional managers, so on and so forth. 

They are especially not the types who are willing to set a limit to their learning (because work ends at 6), or to assess the value of their work by the amount of commands they were able to get through in an email thread. If as a manager or executive you need to set specific tasks to your employees, because you mistrust their autonomy, then you will get what you asked for and nothing more: not a single new idea, not one hour extra of work or any improvement on the way to fulfill the tasks given. You won’t, because people who feel they are being measured in dimes and nickels will conclude that their rewards are equal to their expected results—if you want them to work more, then that will cost you. This is what a business model built upon a structure of minimal costs creates: mediocre workers, average products and zero innovation.

The lesson is simple: If you are in a company where there is a clear need in disaggregating their offering into small and repeatable processes, in order to render employees accountable, then those in charge have missed the last 200 years of history and you are in the face of a dead end job—and most probably a failed company. 

The problem, when it comes to innovation, comes with the limited ability of the financial experts to render something accountable. Why limited? Because it depends on creating  production processes dependant on excessive simplicity.

The fear of complexity. This is the main issue against which innovators must focus their energies. This is the core and essence of the problem at hand. Most MBA’s, Financiers, and Economists have been educated to fear complexity and to show blind respect for the simple. The simple is better than the complex. Why? Well because it’s simpler to manage (Duh!).

Saying that the simpler is simple is a truism, like saying that the sky is blue. Saying that the simple is better is a fallacy—it has no truth to it, no evidence to back it up as some kind of universal truth. The problem for companies, furthermore, is that without complexity you cannot deliver anything truly valuable, only commodities. If you want product differentiation simplicity (namely the CFO) will only put pressure on price, and such pressure can be equally and easily replicated by your competitors. If you rather want a blue ocean where you can grow without limits, that is, if you rather want your company to innovate, then you need complexity, you actually should crave it.
Complexity does not mean incoherence or lack of structure. Complexity means that you need smart, ambitious, people, who are not afraid to prove their skills. That’s all. You don’t need rocket scientists, as the saying goes, but you need people capable of thinking at different levels. As a business owner or CEO you need, for example, people in marketing that can understand not only their role as marketers, but also their relationship to sales managers and product developers, as well as to the copywriters and designers who make of their marketing plans a reality.

There is still much more to say about the value of complex thought. A smooth running complex is better than a smooth running simplex; it is better because it is much harder to replicate and hence more valuable, if only because of its scarcity—replicating something complex is hard, you only have to take a look at the public struggle of Apple’s competitors to know why. The begging question is how should we understand complexity and make it work? That is the topic of the second part of this post. Don’t miss it! Subscribe and keep up to date with the factish.

Written by Daniel Vargas Gómez

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