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A recent article on the Disciplinarians’ Dilemma in CFO Magazine noted that nearly all CFOs today have a mandate to conserve cash and that a recent McKinsey study found that 40% of companies surveyed are actively seeking to reduce research-and-development costs as well as the number of research-and-development projects they are funding. This is, of course, quite troubling because, as I have said over and over again (in my “dumb company” and “dead company” series), slashing research-and-development budgets in the near term will place companies in precarious competitive positions when the economy does turnaround. More specifically, they’ll struggle even more to maintain their existing client base while those companies that did innovate and develop more valuable solutions in the downturn will not only get most of the new customers, but lure some of their competition’s customers away.
However, as the article notes, instead of acting as the enemy of innovation, a CFO can play a critical role in fostering research-and-development. Given that the biggest weaknesses most companies have when it comes to innovation revolve around sticking to timelines, earmarking funds, and balancing the innovation portfolio, and that these are the strengths of the finance department, a CFO can play a critical role in the development of innovative new solutions by doing what she does best.
Furthermore, the same logic applies to procurement. While some less-than-visionary CFOs will look upon Procurement as a Cost Center, and try to freeze budgets, delay the acquisition of new technology, and freeze hiring even when you lose your staff due to attrition to more generous competitors, innovative CFOs will instead embrace the value, and substantial savings, Procurement can bring and help them balance their projects, funding, and available resources for maximum return to the company. And the best way to fall into the latter camp is to not only tell them what you can do, but let them know how they can help make your savings plans a reality and ask for their help. After all, which project are they likely to kill first — one they know nothing about or one in which they see, and are contributing to, the value?
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A recent article in Industry Week on portfolio management in a down economy did a great job of summarizing all the mistakes dumb companies make in a down economy in blind efforts to conserve cash. As I have said before, and as the author clearly notes, companies that cut research-and-development during a downturn “don’t have anything new in their product portfolio that is of interest to their customers” when better times eventually return. This means that if you think times are bad now, they’ll only get worse when the up-swing starts and your competitors, who didn’t cut R&D, are introducing new, in-demand, products while you’re trying to push the same old, same old from two, three, five years ago.
While it’s understandable that R&D funding might have to be (slightly) reduced, there are right ways and wrong ways to go about it. The right way is to key (in) on the projects that exhibit new technology, gain entry into new markets, or are of greater interest to your customers. Similarly, a great technology without a current market should also come under scrutiny. Maybe development should be delayed to when you have more spare dollars to throw at it (as all great technologies will eventually find a market). And avoid these common mistakes outlined in the article:
- Failure to reconcile the portfolio with resources.
Make sure you can support the key portfolio projects to the full extent they need to be supported.
- Failure to look outside the four walls.
There are broad external forces that will ultimately decide which products will sell when the market up-swings and which won’t.
- Failure to innovate.
Some companies get complacent with an existing portfolio and focus only on product extensions rather than disruptive innovations.
- Failure to understand the customer.
If you can’t satisfy your customer, someone else will.
- Failure to utilize common business sense.
Yesterday’s metrics and data don’t tell the whole story about today, and definitely don’t tell the whole story about tomorrow. Don’t overlook the knowledge and experience your sharp people will provide and blindly rely on an unproven tool. Tools optimize scenarios … they don’t create them.