Saturday, October 15, 2011

Innovation as a profit center

No matter what a business tells you is important, what's really important is what drives profits.  Yes, many CEOs will talk about sustainability, or being more green, or being more empathetic with customers, or a whole host of other foci and factors.  But at the end of the day, CEOs and other executives have a fiduciary responsibility to themselves, their employees and especially shareholders to create profits that allow for reinvestment in the firm or growth or dividends and a rising stock price for the investors.  That's the capitalist way.

In that regard, understanding that what drives profits gets attention, gets the best people and gets executive focus should help a nascent innovator.  If you want to know how to attract attention to your capabilities and ideas, demonstrate that you can develop an innovation capability as a profit center.

There are plenty of examples, but the one I wanted to focus on was GE and how GE treats its tax department as a profit center.  GE uses legal tax loopholes to find ways in the tax code to pay as little tax as possible.  With a tax department of over 1000 people, GE has a significant investment in its tax team, and they pay huge dividends and contribute substantially to the bottom line.  I know that there is a hubbub about GE paying so little in taxes, but they are acting in the interest of their shareholders, and following laws that accommodating politicians created.  GE is understandably proud of its tax department and treats the team as a profit center, which means it gets focus and attention from management, good resources, funding and a lot of other things that a typical "overhead" department would not receive.  Or, to put it another way, GE's tax department receives a lot of attention and benefits that many innovation teams would kill to receive.

If GE can designate a tax team as a profit center, and demonstrate the results, why can't innovation teams designate themselves as profit centers?  Sure, it's rare we can move a billion dollars around and impact the income statement in a given year merely by recognizing revenue in certain ways, but innovation teams will drive the new products, services and business models that will create the real, organic revenue.  Manipulating revenue and costs doesn't increase the top line, and while investors like firms that produce consistent profits they become concerned by firms that don't seem to increase the top line.

Certainly the challenge with much innovation work is that the costs are in the near term and the revenues and profits are in the out years, which doesn't do much for this year's profits.  This means innovators can try to work on ideas that will "pay off" in less than one year, or acknowledge that the initial "investment" is expensive but the downstream opportunities and impact on revenue and profits are substantial.  But if we allow our teams to be designated as "overhead" to the business or to a product line, we are doomed to poor staffing, constant scope reduction and limited thinking.  Sometimes the way you position a thing is as important and valuable as what the thing really is.  If innovation is considered an overhead cost, then don't be surprised when you have difficulty finding funding and talent.  What gets funding and talent?  Things that drive profits.
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posted by Jeffrey Phillips at 12:53 PM


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