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.

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