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Ep. 189: Bruno Pešec - Management Accountants as Partners (Not Roadblocks) to Innovation
July 04, 2022 | 27 Minutes
Bruno Pešec helps businesses build systems to drive profitable innovation. He joins Adam Larson to discuss the critical role management accountants must play in supporting innovation across the enterprise. His recommendations dismantle common misconceptions of management accountants as roadblocks to innovation, providing a nuanced approach to investment and performance metrics to stimulate, rather than stifle, new ideas.
Connect with Bruno: https://www.pesec.no/
Full Episode Transcript:
Full Episode Transcript:
Welcome back to Count Me In, the podcast that explores the world of business from the management accounting perspective. I'm Adam Larson, and our guest today is Bruno Pešec. As you've probably noticed, we talk quite a bit about innovation here at Count Me In. After all, it's the mechanism for how companies create new products and services to drive profitable growth. Bruno is an engineer by training and an expert in helping companies think systematically about where continuous improvement ends and how robust innovation begins. His insight about how management accountants fit into the picture can often upend conventional wisdom, which makes this a discussion you do not want to miss. Let's get started.
Bruno, thank you so much for coming on the podcast today. Really appreciate having you on as we discuss innovation within the corporate sector. And one thing I wanted to kind of start with is, you know, we've gone through almost two, three years of a global pandemic and organizations are really struggling to keep afloat, whether keep afloat, figuring how to use hybrid work from home, not work from home. Where does innovation sit in the midst of all this, as we're trying to restructure what the world looks like as we go forward?
So Adam first happy to be here. And second, great opening question. If I might add what I really well, I want to say what I really love about the last three years, but that's a wrong choice of words. So I will rather say what has became obvious in the last three years are good and bad habits in handling disruption and not just innovation, those companies and business leaders that were innovative before all these big changes happened, fared better, not because they had the best ideas or they had the coolest products, but because the process of innovation is the process of handling uncertainty. So they developed a skillset and capabilities that allowed them to handle this uncertainty. And innovation is one of those words. You know, you ask 10 people what it means you're gonna get 20 definitions. So I'm not here to tell you or your audience, what is the definition of innovation, but I want to share what is my take on innovation?
So whomever is listening that they know what am, what am I actually thinking when I use those words. So in the broadest terms, I consider innovation to be something new that creates value. Something new, not to the history of mankind, but new to your customers and to your organization. That's enough to qualify as new and value must be two by directional. So it needs to create value for the customers. Something that we have gradually gotten better at, but it also must create value for the organization. What sense does it make to create new product services and business models? If they drive you out of business? And this is where our accounting friends are very, very useful, sometimes maybe underappreciated, but back to your question. So the companies that were already innovative before they coped much, much easier in this disruptive periods, why? Because they were able to actually go back to their customers and learn how did their reality change, how people were buying and using your product could have changed overnight, just look at hospitality industry.
So everything dramatically changed. Incumbents, like big hotel chains or even smaller motel chains. They were just adjusting to what happened with Airbnb, booking, hotels.com and all these disruptors and bomb. Then COVID came and suddenly the whole industry was flipped upside down. And those that actually managed to stay afloat, they used a lot of different tactics, basically repurposing the whole venues for something else. So that, that was a good example of how did they handle disruption? What I've especially seen the companies that didn't handle it well, did all the same things. One, they tried to weather the storm. They said, okay, this is going to blow away in three months, six months, nine months, two years, three years, who knows how long, but they basically said we have our fat, we have our supplies. We have our business, let's just try to weather the storm.
Basically put our hand heads into the sand. That did not work. The only thing that we have seen is that all our projections were pretty much wrong. What we expected to be weeks than months turned into, well, we are in the third year, but we have a war that kind of is even more disruptive. So people are looking more to that. Another thing is besides trying to weather the storm was ignoring the changes in reality. So kind of just assuming that the strategy you had before the business model you had before the product portfolio you had before that it's still valid and kind of trying to keep optimizing that, you know, sending people home, working from home, hoping that will be lower operational expenses, but still keep the same revenue that did not work out so well.
And the third one was a failing to adjust the leadership mode. So what was really and remains very important in this period are leaders that are also able to provide this emotional and psychological safety. So kind of the leader doesn't need to have all the answers that's sometimes not even desirable, but the leader should always be able to say, I'm here for you. We gonna figure it out together. And those that were not able to kind of maintain that, that were not able to direct their crew in the right direction. No, the people suffered a lot emotionally, then that spills over into family spills over then back to the company on the performance. So these are kind of the things that I will highlight just at the top of the pile.
For sure. Yeah. There's a lot, that's at the top of the pile and I'm sure more trickles down as we get into the conversation. So you start with what you kind of talked about, you know, where you kind of have to adapt leaders have to adapt. People have to adapt. The company needs to adapt companies that were innovating before have to continue innovating. They're probably a better set. So what about, you know, when you look at innovation like some, and you said something new that creates value is your definition of innovation, which I think is a great definition, but those outcomes, they can't be guaranteed. So how do you measure it? How do you measure that within an organization, especially when you have all these new factors, there's a lot of new things, a lot of new things that could create value are happening right now. So how do you measure all of those elements?
Yeah. Yeah. So Adam, I mean, I could probably be talking about this question for days, but we don't have days. So I'm going to focus on a couple of things. You nail the problem straight on the head. So what is specific for innovation is that no one can guarantee outcomes. Like it doesn't matter if you do everything by the book, if you follow the best innovation processes, you can still end up with a product service or even the whole failed project that there was no return on investment. But what we do have in control is the expense side, the organization side, the work side, what ideas do we select? What ideas do we prioritize over others? How do we fund these ideas? How do we control these ideas? What people do we put on them, et cetera, et cetera, et cetera.
So I gonna focus on three specific practices and this come out of my experience, working in different industries, both large and SMEs. And I gonna focus specifically on the work I did with CFOs and the financial functions in larger organization. So unfortunately I say, unfortunately, internal accounting, business controlling and CFO are often seen as kind of gatekeeper to innovation, but people don't understand or they misunderstand their role. Their role is to protect the assets of the organization. Of course, they will say no to your silly idea. You you're just coming to them with something that's unproven, no evidence, nothing. And you're asking them to unlock the coffer in this difficult times and invest in something that's completely uncertain. Of course, then they will react by saying no in most cases. What's better for both sides and I gonna start from the financial side is that there is a specific system.
They can set up to protect the organization without stifling the innovation. First thing, think about any innovation project innovative idea, anything in your organization. Think about it as an option. Don't think about it as a big bang investment, but you are buying an option in this innovation project. Combine that with funding in trunches, what it means is there must be an innovation budget, whatever let's say for the sake of conversation, let's say it's a hundred million, but that does not mean that you assign a hundred million to a single idea, but rather that you drip feed it. You drip feed from that big budget, a lot of small ideas numbers tell us that we need to invest into a hundred, to 150 ideas to get that golden idea that will return significant investments, return on investments, significant meaning 10X, not just recovering the cost of the investment to get more practical or more specific.
So one organization, they set up their innovation strategy. They prepared innovation budget, and then they set out call for ideas. And there were hundreds of ideas. What they were funding was they did not release big money to go and develop a prototype. That's even too big. What they were funding is two weeks for employees to explore the idea further. That's the level of granularity we are talking about. So CFO doesn't need to be on those teams. That would be waste of their time. Not even accountants are needed on those teams, accountants, business controllers, etcetera. They should be invited once the investment breaches specific threshold. But in the beginning, what we want to do is a lot of small, small, small investments, just to check if these ideas are worth of anyone's time. That is, that is how CFO can set up a system that actually doesn't prohibit or retard innovation while still protecting the assets.
Combining that with options theory, and options thinking what they have at all the time is option to basically stop the project before it gets too big. I would rather spend 10,000 euros to determine 10 ideas should not be invested in than spend 10 million euros in one idea that doesn't work out after five years. And, you know, once you stop thinking just about the money, but the whole opportunity cost, I mean, wasting two weeks of your five employees is much better than wasting five years of hundred employees. Just putting money aside. I mean, the talents I it's painful and people will probably leave your company. If after five years, their project has been stopped or it has failed or something else. So we have from the CFO office to the middle management, basically define the budget, release it in trunches, think about options. And then something you mentioned at the beginning of our conversation monitor specific measures.
And this is where it gets really difficult. It doesn't matter if it's an SME or a large corporate, we still haven't completely cracked the code of what are good innovation measures. And there isn't a silver bullet. Unfortunately I'm not bringing that silver bullet, but what has been working so far as a really good solution is taking a systems approach to measuring innovation. What I mean by that is CFO and top management. They should measure the performance of their innovation portfolio. So looking at portfolio metrics, that's looking at basically an aggregated measures showing, okay, out of all the investments in innovative ideas, we have made what's the average time of return. What's the profit margin compared to other products. In my opinion, innovative projects should have above average profit margins. Otherwise you could just do continuous improvement. That doesn't make sense. So if you are making a risk investment, there should be a significant return.
So that's what we're talking at top measures, moving into the middle layer, let's call middle management. If you want. This is where especially controllers and company accountants get useful. It is measuring basically what we call innovation funnel. So in your company, there might be different maturity levels. You might have product live cycle or something of a kind where you basically say, you know, step number one is exploring the idea. Step number two is validating the idea. Step number three is taking it to market step number four, scaling. So kind of every company I worked with, they do have some sort of a model like that. So measuring that funnel then becomes important for one simple reason what we said in the beginning, there is no guarantee of outcome, but the quality of work, the quality of innovation process and how costly it is, that's something you can control.
And that is what accounting is golden for. It's the mindset here that becomes difficult because you business controllers have unfortunate title like this controlling. It sounds like they're there to be police officers to punish if you're out of boundaries, but that's not really their role. Their role is to help the innovation teams or any other team to control the expense, not to control the people. Together, they try to figure out ways to reduce the cost while keeping the operations flowing measures in this level are things like how many ideas have we invested in? How long does it take to get idea from stage A to stage B, how many hours does it take or raw goods, whatever additional services, et cetera. You're not trying to go into too fine details, but you need this granularity of different type of activities, because that feeds both into the top level and the bottom level of innovation matrices, because this in between, you are really looking at two things, how much does it cost us to develop an innovative idea?
And how long does it take us to develop that idea? That's the middle level? What's it all about? If you can master measuring these two then later on when returns come, because for in really innovative idea, returns are five plus years. You, you're not really looking some, getting something back in two years, but if you spend this five years to actually get the really, really good overview and control of, you know, cost of innovating and speed of innovating, oof, you are already ahead of the pack and now trickling down all the way to actual innovation teams. This is where metrics really explode. And unfortunately, people don't like hearing that, but I must say it because it's reality, every innovative team has to have their own set of metrics. It's their responsibility to actually identify those metrics, but it is CFO and the top management that has to approve them.
And I'll give you a few practical examples. Let's say that you are in financial services, kind of you're providing all the financial services in your country. And let's say that you set up three teams. That's quite not enough, but just, just for the sake of conversation. So let's say that you have a team that is trying to come up with a new consumer loan. You have another team that's trying to come up with a specific security product for business customers, and you have a third team that's trying to come up with a specific product for very, very wealthy citizens. Those three have nothing in common. How could we possibly have the same measures of success for each of these three teams? That's why I say, when you actually come to the specific teams, they need to identify what are the relevant measures of success for their specific idea.
I'm here not talking about MVPs, discounted cash flows, return on investments, return on equity. Those are all premature. You cannot use that set of metrics to evaluate any of these ideas. What the team needs to come up with in terms of generic language is they need to come up with what is specific signal that the customer is interested in this, and what is the best proxy we can measure for market size and market response. And yes, this is the most generic we can make it, but that will differentiate between district teams. So for consumer loans, they might say, okay, we are actually in B2C market. Therefore we are actually looking at quite significant market share. Therefore, we are looking at a turnaround of an average citizen that's interested in getting a consumer loan. What type of specific consumer loan, what type of behaviors lead to loan?
What are the characteristics of citizens that may get a loan and still paid back on time? They would look at completely different set from the team that's trying to innovate a new security product for a corporate customer. They would then go need to look okay. We're now talking about a corporate product. We are in B2B. We need to understand how are decisions made. Do we need to reach out to CFOs of businesses? Do we need to reach out for different roles? What do they react to completely different set of innovation metrics and the same would go for the third team? The good news I have for you is what I said just few minutes ago. That's the job of actually innovation team. Don't, don't try to use your business, controller's accountants or somebody else to go and tell the team. This is what you should measure. Put the ball in their court. Ask them, Hey, what is the signal that this is worth doing? Go and measure it, and then bring me back the measure. You know, you make it so much easier for you at the same time. You are empowering people and developing their skill as innovator, which is important for your long term success as an organization.
So kind of, as you're talking through that, I like circling back to the accountant and the accounting team when it comes to innovation, it seems like what you've been saying is that the controller shouldn't be the controller, as you said, but they almost need to come in as what we've been saying a lot in the industry is the business partner that the controller of the CFO needs to be the business partner with, you know, with the rest of the C team. But also if there's an innovation team that's happening, some subset of the accounting team needs to be a part of some of those meetings to be that business partner, to be the, the reality check at times, and also to sit there and say, oh, let's see what we can do. Am I, am I hearing you right when you're saying that?
Absolutely. I have few things that I would suggest based on my experience. This is mostly your European businesses, but I think, practices are similar across the Western business area, your comparison to having a controller or accountant as a sort of a business partner is a good one. What I've noticed, some of the habits that they shouldn't use with innovation teams that are good with mature teams. First forget spreadsheets. Don't try to build a business case. This isn't a mature project that you are trying to build the business case that you need to use sophisticated spreadsheet. There is too much uncertainty. The only thing I can say you for certainty is that any hour you spend on that is going to be a wasted one. That doesn't mean that your spreadsheets are bad. It just means that now is not the right time.
If you are meeting with a team to help them in their first three months of an innovation project, forget about using spreadsheets like that. What they need is just your help in understanding how to do quick market sizing, quick and dirty, not specific conversion rates. They might need your help in terms of understanding, because people forget that regular employees in a lack of better word, regular don't really have complete financial picture of the organization. They understand their part of the organization, but not necessarily how the whole organization actually makes money or spends money. This is again where you are very helpful where business controller is an accountant. Basically forget that they have much, much bigger picture of the organization's business. This is very, very useful information for any innovator. Why? Because it helps them basically tweak the idea. So it's even more useful for the organization.
So a business controller can be a business partner in a lot of stuff that isn't, let's say hard numbers, or immediately going to financial modeling, financial modeling should come much, much later. Second thing I would suggest any business controller or accountant helping an innovation team is forget about spot estimates. If you're helping a team, do estimates, make sure use range estimates. So if the team is asking, you know, what kind of pricing should we have or kinda what's what's the break even point or something similar first it's okay to say it's too early to discuss that. And second, if it's not start looking at ranges, don't say five, say from three to 10, and that is 70% probability for that range. That's much, much better. You're very unlikely to miss by a magnitude of a hundred or a thousand. You might miss by a magnitude of 10.
But again, because of all the practices I told you before, release funding in trunches, think about this option. You will never over invest. It's very difficult to over invest in such a system. So that kind of protects you. But this range estimation is a skill that is very, very important and controllers I worked with. They all know that they just need to be reminded. So kind of the skill set is there, but because their daily job is working with daily operations and making sure daily operations are efficient, sometimes they forget their own part of the skillset. That's more useful for more uncertain ideas and projects. Again, if it's an innovation project, you can assume it's uncertain. Otherwise it wouldn't be an innovation project. And the third thing for business controllers as business partners, where they're really useful is actually connecting people within the organization.
Again, someone who is, let's say working in a, we have a example of consumer loan. So an employee that's working in consumer banking will probably not know all the connections inside the organization for the support roles, support functions, accountant or business controller is actually quite likely to work across the whole business unit and maybe even broader business. So this is where they can really go from gatekeeper to kind of networker to the connector. And again, this might sound so mundane, but this is so valuable because when we think, when we talk about ideas, people like talking about, I think, outside of the box, that's all nonsense. The best ideas come from connecting the dots. And if you, as a business controller can help the teams that are coming to you for help to connect the dots. You increase their likelihood of success and therefore increase the likelihood of your company's success.
And not only that, but then the social thing starts happening. People start reaching out more to you instead of being afraid like, oh man, now we have to go to call the Tony the business controller because we need his approval to go with this. You move from that to, Hey, let's have a quick chat with Tony. He has some really good, you know, perspectives, and he always knows who we need to talk with. So kind of then you really start fulfilling that business support role. And you know, these three things I just shared with you, they're all from practice. I've seen them all applied with great success and they don't take anything. All the know how you already have now is the difficult thing of actually doing that.
This has been Count Me In, IMA's podcast providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard. And you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.