Counter arguments to the three biggest risks faced by CFOs today
Why aren’t companies amping up their innovation investments in 2016?
This past week, I spent time with a number of CFOs of American-based companies on the topic of innovation – and the overall mood was “we’re holding steady on spend and are cautious about growth.”
When you go to build your business case for bigger innovation budgets, it’s helpful to know the objections, in order:
1./ Unknown US Political Outcomes
After the returns in Florida last night, we’re nearing towards more political complexity, not less. Company executives rarely speak publicly about the financial value of lobbying, and which assets, tax strategies, and cash flows benefit from what has been a fairly steady state system. While political allegiances need to be reformed and renegotiated for each election cycle, a Trump Presidency promises to cause disruption on not just on K Street (the famed headquarters of most lobbying firms) but geopolitically as well.
The usual political consultants and prognosticators aren’t able to deliver reliable scenarios of the future, and financial types don’t know what kind of confidence to give their own predictions. Not knowing how to evaluate the outcomes causes execs to hold back on any big bold spending and to hang on to their cash reserves.
2/ Uncertain Prospects and Value of the Chinese Economy
Most US-based companies were betting heavily on expansion in China in the coming years, and in so were Chinese leaders. It’s the first major effort for a planned economy to deliberately transition to consumption-led growth. But instead, the Chinese economy is in turmoil, and Chinese leaders are struggling to reassure the public and global markets about their ability to steer the ship.
For global businesses, that means taking your financial plan and cutting back your bet on Chinese expansion – and walking back the your scenario for market expansion.
3/ Fickle Stock Market Valuations
Markets have been down since the beginning of the year – gyrations in the Chinese economy, plummeting oil prices – all signal a decline in potential revenues and profits to investors. The new companies with low profits, but high growth – Tesla, Chipotle, Shake Shack, LinkedIn, and Twitter – are all down from their highs last year.
The CFO suite is expecting even more of a “haircut” on tech company valuations, so any tech-related investment in a radical digital innovation is at risk. After all, one of those high flying tech IPOs could become an acquisition target if the value falls low enough.
In sum, CFOs and financial steering committees are taking a wait and see attitude, and some are downright pessimistic. Global CFOs expect there is a one third chance of major recession by year-end, according the Duke University/CFO Global Business Outlook.
Meanwhile, these same companies are piling more and more cash on the books. American companies have become the biggest savers in the history of business – with more than $1.9 trillion in cash and equivalents, both here and in repatriated (overseas) accounts. The leading theory for these ever increasing stockpiles of cash: uncertainty requires a very big rainy day fund.
So if you’re in the business of creating new value – what’s your counter argument to all of this fear and stalling?
- Visualize the entire innovation spend. The innovation bet is not just R&D and capital expenditures. Often the company is putting big investments into incremental and adjacent information in their IT and marketing budgets. If you’re a C-level innovator, invest the time to show the entire innovation system.
- Take responsibility for return on innovation through a portfolio approach. Once you have the holistic view, you can assess which investments are focused on the core, which are designed for market or new product adjacencies, and which are aimed at radical, breakthrough innovation. As recommended by Bansi Nagji and George Tuff’s HBR piece Managing Your Innovation Portfolio, a better approach is have a sense of the overall portfolio risk and ratio of spend against risk, and upside.
- Create value through quick builds, deep insights, and quick wins. While “Lean Startup” is now seen as a buzzword in many corporate circles, the principle of deep customer understanding, and insight generated through direct experimentation (build, measure, learn) has tremendous application throughout the enterprise. Value is created through new ideas, new interactions, and new behaviors with a much higher return on innovation for the whole portfolio.
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