The CFO’s Evolving Role: Steward of Innovation
Jim began by asking “What does innovation mean to your company and to how do you think about innovation in the CFO role?”
Jamie led the discussion explaining the large investment in innovation Elavon has made by hiring talent in the Atlanta area from Nokia and other mobile technology groups and the focus on innovating around the disintermediation of programs like ApplePay. Scott said ICE would not exist without innovation since it was started when the CEO & Founder was looking for a way to finance the building of his next power plant and found a better way to connect buyers and sellers of commodities by bringing them together on a single platform on the Internet. “We have 3,000 people who come to work every morning with a mission to innovate again…. Our best innovations frankly, come from our customers because ultimately they’re the ones who are defining what pain points they have and what problems they need solved.” Guyton echoed that by saying Southwire tries to solve customer problems – try to innovate around the problem and develop solutions.
Jim inquires, “How does finance avoid being seen as a place where innovation and speed are stifled by limited resources. As the controller of those resources, how do you avoid being seen as the bad guy who says no”?
Jamie said that CFOs have to gain the trust of their peers by having conversations with them and explain the P&L, the Board’s consideration, and really explain what is going on at a higher level and be transparent about what is going on across the organization. But you also have to invest in them and have some wins for them.
Guyton explained as a second generation privately owned company, Southwire approaches the use of resources with a focus on sustainability with the aim to be viable for several more generations. Sustainability is the buzzword,” said Guyton and Southwire has five platforms to leverage their sustainability:
- Build worth – have to make money to be sustainable
- Give back – they want the communities they operate in to be better off because they were there
- Growing green – they use a lot of resources, so they want to take care of the environment and don’t want the environment to be worse off because they exist
- Living well – take care of your employees
- Doing right
To be sustainable Southwire is heavy on the development side of R&D and follow six criteria to improve their sustainability: minimize the amount of materials and resources used in products, minimize and avoid hazardous materials in products, use more recycled materials in products, develop products for the renewable market, minimize their environmental impact, and develop products with smaller carbon footprints.
Jim continued the conversation by asking, “How does your company structure innovation and R&D?”
ICE does not have a department tasked with innovation R&D Scott said; rather they take a systemic approach with everyone across all departments looking for opportunities for improvements. ICE disrupted the market 15 years ago ahead of everyone else and continue to sense market opportunities and respond by developing products their customers need. A great example of this was ICE’s investment to build the world’s first Credit Default Swap (CDS) clearing house. Warren Buffet had described CDS as weapons of mass destruction; a pejorative over-statement, but it was true that counterparties and regulators simply didn’t know the extent of total exposures. ICE combined its product experience, its clearing capabilities and its regulatory functions across the Company to bring the transparency all participants needed to regain confidence in the market and to maintain the viability of this important risk management tool.
Jamie cautioned that before investing in the “shiny new tools”, there are other critical investments that need to be made first, like having the right people and the right processes in place to leverage the tools. “Make investments in the people, then get process in place, then make investments in tools. Sometimes there can be resistance to change which stagnates innovation, so he encourages changing up groups and being willing to “break some eggs” or you won’t get the changes.”
As a commodity, low margin business, Southwire does not have a lot of room for error, including in R&D. In the past, the R&D unit had been separated and isolated which caused a lot of issues, so they have changed strategies to align R&D within each business unit where they can drive choices, development and be responsible for the budget of projects in their business funnel.
Jim inquired “Was there a time when you may have gotten ahead of yourself and what lessons did you learn?
Be careful when thinking of innovation and avoid the shiny new tool cautioned Scott. “Innovation isn’t just change. There must be a return on the investment to make the change.” ICE has made eighteen acquisitions in the past eight years, some of which were buy versus build decisions because we could not develop the technology more cheaply ourselves. Others were justified based upon what will be gained from the investment in terms of customer satisfaction and product or market improvement.
With two “home run” projects and two that failed to produce revenues, Jamie encouraged those in the room to fail. “If you are in the innovation space, you have to be willing to fail once in a while. Otherwise, the team won’t try anymore. You have to let them fail and not beat them up if you want to succeed.”
A current example Scott mentioned that straddles the line of what might prove to be a disruptive innovation or simply another failed technology is Bitcoin. “While Bitcoin is the media focus, it is the underlying blockchain technology that could be a big disruption in financial services in the same way the Internet changed how business is done. Or maybe not. We don’t know.” ICE has to evaluate how blockchain could be a disrupter and how they might leverage it. Taking a different approach, Jamie views Bitcoin as one of those shiny objects that won’t disrupt the market because currency has been around a long time and is heavily regulated and governedWe will see!
The panel turned to the audience to answer the same question from their experience and new advisory board member Alan Sollenberger, CAO of HD Supply, responded.
Mr. Sollenberger explained how their customers are mainly contractors on the job site, so when they built an eCommerce website to leverage what their clients said they wanted, they learned they hadn’t asked the right questions to determine what their customers needed. The contractors preferred to call an account manager to order what they needed rather than clicking through a website to order it on the web. They now have an asset that most of their customers don’t value, so he urged others to really assess what it is that your clients want vs. really need.
Southwire has contractor forums and focus groups in place to get direct feedback from customers and let them dictate where development goes next. For them, a lot of innovation is involved in the installation of the product. There is real value in making the product easier to install. Jamie said that asking the right questions of customers, in the right way is a struggle that all companies face. “Ask Mr. Customer, ‘what problem are you trying to solve?’ vs. ‘What do you want? Based on your current problem, what is the next thing we can do?’ If you come back with a solution to their problem, they value that more,” Scott sharply stated.
Advisory Board Member Brad Goodson, CFO of SecurAmerica, asked how finance can assure to be involved early in the process of business development and M&A?
Jamie answered by saying that corporate development is often part of the finance organization and encourages partners to bring in product innovation and ideas to come from the business groups because they will better know the benefits of opportunities. Scott said ICE does have a group set up with a partnership between key members who meet every few weeks to talk about strategic fit, financial models, and discuss priorities. “Our finance team is there at the ground floor….and if the finance team is integrated in the early stages it makes it a lot easier to be a success.”
The panel concluded as each individual explained what they think are the most significant impediments to innovation. Scott started by saying there needs to be a forum inside the company to encourage teams to think about innovation and create a channel for the right ideas to move up the chain to the decision makers. The “we’ve always done it that way” attitude is a roadblock because it’s comfortable to keep doing it the way it’s been done. “Innovation if it’s going to be successful, should move you outside your comfort zone….it really starts at the leadership level.”
As an example of the necessity to create change by leading, Jamie cited how his team hired a disruptor, someone who is making people mad by challenging them to create change. “Embrace the disruptors….We have to be strong enough not to be scared of them. Because we can be scared that they aren’t doing the right thing and we will stamp them out. We can’t be scared of them – people stamp it out, but it’s key to find those people.”
Innovation can lead to great success but also great failure, and as Guyton summed, “You have to be willing to fail. How a company reacts to failure is important to a sense of innovation within the company. Embrace failure – don’t discourage it.”
From left to right: Jim Carty, Jamie Walker, Guyton Cochran, Scott Hill