• Innovation
  • CFO.com | US

Innovation: a Make-or-Buy Decision

To make the most of their investments, some companies set guidelines that help them decide when to innovate internally and when to acquire.

In good times and in bad, companies often struggle with whether or not to invest in innovation. In a recent Accenture survey, only 18 percent of chief executives at 519 companies across more than 12 industry sectors in France, Britain and the United States said their investments in innovation were giving them a competitive advantage. Forty-six percent said their companies had become more risk averse when considering new ideas. And CEOs are supposed to be the optimistic ones.

Finance chiefs hesitate to spend money on innovation too, says Edward Hess, professor at the University of Virginia Darden School of Business. “It’s hard to budget and plan for high failure rates, and CFOs tend to be uncomfortable with uncertainty,” says Hess. “If you’re playing the operational excellence game, you strive for 99 percent defect free,” he says. “If you’re playing the innovation game, 90 percent of your [projects] are going to fail. You’re going to be running a portfolio of initiatives. That’s much, much harder.”

“CFOs are kind of caught in a quandary,” says Mark Zawacki, founder of Milestone Group and 650 Labs, a consultancy that helps large multinationals understand how Silicon Valley companies are disrupting their industries. “When businesses are struggling, there isn’t money to innovate, and when they’re doing well, they don’t naturally think of putting more money into the innovation process.”

To make matters worse, many companies have cut costs so much during the recession that they don’t have the infrastructure to grow through internal innovation, Hess says. “Many companies are about as lean as they can get. They’re getting down to muscle, and they’re asking themselves, ‘how do I grow the top line?’” Hess says. “They say, ‘I don’t have processes to do learning launches, I don’t have excess people, and I’ve gotten so lean that my culture inhibits innovation.’” Lacking in internal research and development, many companies grow by making acquisitions, which research shows often destroy value.

But some CFOs say there’s a places for both ways of generating growth. To make the most of their investments (and to make the case for investing at all), their companies set guidelines that help them decide when to innovate internally and when to acquire.

A Focus on R&D
Kevin Entricken, CFO and executive board member at the multi-billion dollar global information services and publishing corporation, Wolters Kluwer, says the company has set such guidelines, noting that it invests 8 percent to 10 percent of its revenues in innovation. Further, it prefers to grow through organic investment, rather than mergers and acquisitions, Entricken says. For instance, the company might add new functions to an existing product or take a product into a new geographic market.

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