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Innovation: How finance can help

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29th May 2013
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Finance leaders can play a key role in helping their companies “commercialise innovation”, according to new research from CIMA and the AICPA.

Chief financial officers are perhaps more widely associated with saying no to projects and investments than encouraging innovative ideas and business practices.

But according to the research from the accountancy institutes, management accountants, led by the CFO, are “performing a vital and growing role in driving advancements at some of the world’s most innovative companies”.

In these businesses the CFO and finance team are deeply embedded in the process of innovation and have a clear framework to let new ideas take shape, the report says. “They partner early with other departments to identify concepts with market potential, replace rigid financial metrics with staged measurements to avoid eliminating ideas too soon, and accept that failure is a tolerable outcome for projects along the path to commercialisation.”

In the report Managing Innovation: Harnessing the power of finance Royal Dutch Shell CFO Simon Henry explains his company’s approach: “A finance function needs to be able to understand the business well enough to know what is a worthwhile activity, but also, in this part of the business, to have a bit more of an open mind. It is less mechanistic, and has the ability to live with ambiguity, to identify risk and to manage it…

“We want to encourage innovation and not stifle it, but not in a totally uncontrolled way. We have a well defined 10-stage gate process. At each stage gate you can say, this is going to be funded by Shell through to the next four stage gates, at which point we’ll take another decision. Or we put it into a joint venture and we keep an equity stake. So there are different routes to commercialisation.”

The study defines five stages of innovation, from idea generation and selection through to investment, launch and follow-up, and suggests a set of appropriate risk assessments for each stage. Striking a balance between flexibility and creativity on the one hand and the need for discipline and good financial controls lies at the heart of a healthy innovation strategy.

As Jonathan Blackmore, a risk leader at Ernst & Young, puts it, “The perception that risk management is there to apply the brakes is a misconception by many. The risk function is there to encourage the business to understand that they need balanced strategies or actions in order to grow the company.”

The report recommends five areas where finance professionals should take action, including:

  • Create an innovation-centric mindset - Develop a framework in which innovation can thrive and accept that sometimes projects will fail
  • Nurture creativity - Explore ideas like ring fenced budgets that offer more flexibility for the innovation process
  • Prepare the path to profits - Finance can be a valuable part of innovation teams – for example, helping build more robust business cases to secure further backing
  • Take a balanced view on innovation risk - Companies increasingly employ a portfolio of strategies to drive innovation. Management accountants should seek to create an opportunity framework that promotes clarity, transparency and discipline across a business
  • Match metrics to the stage of development - Finance leaders shouldn’t put metrics used in the operational business around nascent or experimental initiatives. Consider a phased approach to give an idea room to breathe
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By Antony Stemp
30th May 2013 11:01

Innovation - How finance can help

Never forget too that the R&D Tax Credit Scheme exists to help Limited Companies  of all sizes with innovation. There were only 10,500 claims registered to June 2011 so certainly SME businesses  need to wake up to its existence currently providing £25k of CT rebate for every £100k of qualifying cost in profitable businesses and  potentially £24.75k for loss making qualifying SME projects. Remember in addition if you havent claimed for a historic project you can retrace qualifying costs over two prior financial periods. A great source of finance.  

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By merlyn
30th May 2013 11:29

R&D isn't really for business innovation

Whilst R&D tax relief can be a massive benefit to qualifying limited companies, it's not focused on business innovation but scientific and technological innovation via the creation of advances in science and/or technology.

That said a company looking to create new technology (software etc.) to increase their business innovation may also qualify.

 

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By RandDTaxUK
30th May 2013 17:38

Its not just the SME businesses that need to wake up

Obviously Anthony and Merlyn are the exceptions, but many (large and small) advisers need to accept that if they do not have the skill set to properly undertake / advise their clients on R&D  claims then they should still bring it to the clients attention and suggest bringing in a specialist.

I have seen a number of cases where existing advisers have not only ignored the opportunity, but some actually try to obstruct the use of specialists even when the benefits to clients are delivered at in excess of £100k per annum. 

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By merlyn
30th May 2013 17:51

It's the perceived threat

The issue a lot of advisers have is a number of the firms that offer R&D advice also offer accountancy services so are worried if their clients use one of these firms they will then try to cross-sell other products.

There is an element of truth in this as when I worked as an R&D consultant for a top 20 accountancy firm they saw doing an R&D claim for a client as a foot in the door and would then try to get the clients audit and tax work.  A favourite line being "If your accountant has missed the R&D opportunity for you then what else have they missed ?"

Thankfully I now work for a firm which only offers R&D tax advice and so is no threat to accountancy firms and as such most of our clients come from accountants.

 

 

 

 

 

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By RandDTaxUK
30th May 2013 19:17

True Merlyn

Merlyn is of course correct.  I was Director of the twice award winning R&D team, the largest R&D team in any of the Big 4, you can probably guess who but I am not going to advertise for them! Though very profitable in its own right as a service line the board saw R&D tax as a client acquisition team.

However as you may guess R&D Tax UK also only deals with R&D claims and the adviser in question knew this, but still tried to obstruct.

In these cases it is more the embarrassment of their having cost clients in excess of £600k in missed claims.  The lesson from both or us I think is seek advice early and if you are concerned do it from an R&D Tax only specialist.  

I would have to say though that it is not just the small firms that miss claims.  Big 4 and certainly top 10 firms still significantly under claim or miss opportunities altogether even when they have (allegedly) specialist teams.

There is also the case where, having dismissed the potential of claims for a number of years that are now past deadline, some of the SMEs own finance staff can be reluctant to have it identified that they could have been claiming for years.

 

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Replying to Justin Bryant:
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By merlyn
30th May 2013 21:27

Awards!

RandDTaxUK wrote:

Merlyn is of course correct.  I was Director of the twice award winning R&D team.

There are awards for R&D? Why have I not heard of these ? and why don't I have one!

RandDTaxUK wrote:
 

can probably guess who but I am not going to advertise for them!

Think I may have an idea...

RandDTaxUK wrote:
 

I would have to say though that it is not just the small firms that miss claims.  Big 4 and certainly top 10 firms still significantly under claim or miss opportunities altogether even when they have (allegedly) specialist teams.

There is also the case where, having dismissed the potential of claims for a number of years that are now past deadline, some of the SMEs own finance staff can be reluctant to have it identified that they could have been claiming for years.

Sadly both very valid points, the issue I found when working in a large practice which had it's own R&D team, was that the staff out actually seeing clients to do their audit etc. were not aware of what potentially qualifies as R&D and had no interest in cross selling services.

 

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