“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.
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Written by Daniel Vargas Gómez
