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Balancing Risk and Innovation: The Challenge for the Finance Professional

12/06/2013 12:15 BST | Updated 10/08/2013 10:12 BST

Innovation is the key to long-term business success in today's fast-paced, volatile and uncertain world. As Thomas Edison said: "There's a way to do it better - find it."

Companies that have the creativity necessary for innovation, and then finance and implement their ideas efficiently, are the ones that succeed. Innovation is vital, but isn't easy. It can be disruptive, uncertain in its outcomes, and requires a strong appetite for risk.

The challenge lies in running a business profitably while promoting the culture of renewal that will create a sustainable business for tomorrow. Organisations must become deft at balancing tensions and culture clashes - between the desire for creativity and flexibility on one hand, and the need for discipline and controls on the other.

CFOs are traditionally seen as the people who put the brakes on. But that is simply not the case. With organisations now managing a large portfolio of innovation projects, and needing to ensure the right ideas are funded and properly executed, finance professionals have an important role to play.

They must contribute to an environment that sees innovation encouraged, financed and delivered efficiently to market. They should ensure that ideas are challenged and refined and make certain that the trade-offs and risks associated with betting finite resources on unproven ideas are properly considered.

The question is how to establish good financial management that manages risk without stifling innovation. In a new Chartered Global Management Accountant (CGMA) report, Managing Innovation: Harnessing the power of finance,we have highlighted how finance leaders must pave the way for successful commercial innovation.

Some roles are obvious, such as ensuring sufficient funding is available for innovation projects and helping to build a strong business case. But there are other areas businesses are missing out on, and must be aware of.

These include putting in place a distinct financial approach to judging and measuring innovation - one that is more flexible and tolerant of failure. Financial metrics must be adapted to align with the various stages of the innovation life-cycle, with early-stage projects governed by a more relaxed approach to financials.

As Doug Bonthrone, recently retired director of global services strategy at Coca-Cola, comments in the report: "There's an art to innovation but there needs to be some science that goes with that - understanding the forward-looking side of strategy, being able to scope the opportunity. In all these areas, the management accountant is critical. Whether it's a new product, process or business model, the management accountant can help assess the results, evaluate how things have gone and learn lessons."

Companies need to deploy a range of different strategies to help ideas flourish and innovation projects succeed. And the finance function can help create a framework that promotes clarity, transparency and financial discipline across that portfolio.

CFOs must ensure that an organisation's appetite to risk is well-defined and understood, and set within the context of the company's strategic plans. They should use risk management as a strategic tool for managing risk-reward trade offs on a case by case basis. They need to build both tangible (hard) and intangible (soft) risks into their strategies.

Innovation is at the heart of an organisation's capacity for renewal. The goal for finance must be to create a supportive culture that fosters creativity and ideas, and underpins them with checks and controls, so that the organisation can successfully turn ideas into commercial success.

Balancing innovation and risk is a challenging concept - but the biggest risks arise from a failure to innovate.