In the first post on this topic I cited a recent article in Strategic Finance titled, Innovation is for CFOs, Too, and I’ll use that article to highlight what I believe to be some very relevant points to the operational aspects of financial reporting. The article begins with the comment that financial reporting is grounded in a 500 year-old system, and that is remarkable. It actually gives pause to the effectiveness of such a system. After all, how many of us could codify a system that would remain a functional model for centuries? I don’t know if introductory accounting texts still include this history but I was fascinated with it when I first read it twenty years ago. But the trade-off for a system that works well in times of stability is its inverse relationship to innovation and forward movement. This is a well-known topic of strategic planning. That is, a highly systematized organizational model that follows a highly structured hierarchy worked well in a marketplace where change was gradual, incremental and even somewhat predictable at times. But in a global market with an avalanche of information available to many, the model simply does not facilitate the rapid response that is needed in a post-industrial era. So while many of the processes involved in financial reporting have been accelerated and automated as a result of technology, this is really is only part of the solution. The goal, as outlined as a major premise of the article is for senior finance executives to “drive improved results by making significant innovations in the finance function.” The challenge for leadership is that most financial staff do not think in these terms. This is likely due to the detail oriented nature of the average functional operational area within finance. So how can details translate into value?

Although geared toward a for-profit model, the authors cite principles than are applicable to any organization, with their first suggestion under the broad heading of change to the business model. That seems simple enough, and it is with the right mindset. It is suggested that leadership should consider what is being currently offered to customers, yet emphasize those things that are “critical in the value they currently offer customers and consider how they can enhance that value by offering it in a different or a better manner.” This may take the form of expanding product or service offerings, or as is the case with  many successful models, reducing them in order to deliver exceptional performance. I recently spoke with a software provider who was recounting the history of their success as a firm, and what I was struck by was how many things they decided against pursuing, in order to produce an exceptional core business that is unique to their industry. Another interesting modification is to the target customer. Specificity in customer base has been a topic for decades, but from the perspective of innovation, this may be a moving or changing target. This is frequently seen in the re-branding of products that historically appeal to one gender over another, but are then flipped with little more than a change in emphasis. But integral to the previous two are changes in technology. Breakthrough or significant changes in technology can offer the benefit of an immediate pop that can be leveraged, but many other times, existing technology available to an organization can be used by simply changing the approach, mindset and culture of an organization. I have experienced this firsthand with the conversion to paperless reporting using technology that was already in place.

But most significantly for financial leadership are changes that are often the least noticeable to those outside the organization, “enabling technologies, such as information technologies, can be very important because such changes help ensure better decision making and financial management.” I have frequently cited the tension between time that is chewed up looking for the right data, rather than its ready access resulting in thinking and influence for the organization and its strategy. I think this is the most significant contribution of technology and innovation for financial managers as their roles interface with the operational leaders. This changes the financial reporting functions from an inherently backward looking exercise, to energy that is spent engaging in the ongoing process of innovation.

Reference:

Davila, T., Epstein, M. & Shelton, R. (2013). Innovation is for CFOs, Too. Strategic Finance. http://www.imanet.org/PDFs/Public/SF/2013_07/07_2013_davila.pdf