Rule 4:First, Let’s Kill All the Finance Guys

o When it comes to innovating in business Finance guys do not have good reputation.

o Limiting their involvement during the early stages of innovation is necessary.

o What are devastating effects of the methods that finance uses?

Two devastating effects:

1. It’s almost impossible for big, long-term, uncertain innovation ideas to pass the short-term tests that are applied to an existing business.

E.g.1 mygofer.com: Designed for online shopping at low prices and delivery at the same day. Problem : the site was hard to use.E.g.2 Blue Crew: Problem: just trying to sell products. The initial page online was full of products.

2. Traditional finance methods distort the learning process. Disruptive innovation The right strategy is not clear. The right strategy has to emerge over time. E.g. Net present value : Two weaknesses: First, expecting profits well into the future. No one knows, especially with a big innovation project, what those profits will be. Second, the uncertain nature of calculations is generally hidden. Do not treat numbers with more respect than they deserve.

This rule is about what not to do: o Not use traditional financial measures for evaluating big

innovations. o Don’t pretend to have numerical certainty about new ideas before you really know what will happen.

What to do ?o Take a more iterative approach to understanding the

finances of new businesses.o Stablishing the culture

Why IMB was successful?o Deferring decisions until you have real data.o Taking “let’s figure this out as we go along” approach.o Not going for producing real numbers.o valuing anyone who could reduce the complexity of running

huge data centers.

As IBM shows:o financial analysis can be great, but only when it’s based on

real numbers.o Many attempts at innovation are analyzed too soon, when

numbers are based on potentially dangerous biases.o Competitors that didn’t Start Small, later panicked, bet big,

and flopped. Ex. HP.

Conclusion

To start small, large company innovators must fight the tendency to settle on financial projections too soon; such projections can’t be accurate, and they hamstring innovation.

If all you do is remove the individuals who happen to be performing the finance function, there is no change. They will be replaced by others who perform the same function.

How to redefine the function that the finance guys perform?

Answer:

A new objective function for decision making:o In the Creative Economy, the objective decision-making

criterion for all organizational decisions needs to be in terms of “profitably adding value to customers,” not simply finance results. Financial considerations are still present, but they are not the only determinant.

o This means a new role for the “finance guys”. Instead of the “single objective finance function” being the final arbiter on all decisions, the finance function fulfills a less dominant role and ensures that the firm goes on making profits as it continuously innovates and adds value to customers.