An interview with Thomas Vogth-Eriksen, CFO DNV GL, on how innovation is changing the CFO’s role
Recently, Dan Toma, the co-author of The Corporate Startup, sat with DNV GL’s CFO, Thomas Vogth-Eriksen, to discuss the changes brought about by the digital economy to the CFO role. DNV GL is one of the world’s largest accredited registrar and classification societies headquartered in Høvik, Norway. The company currently has about 14,500 employees spread in 350 offices operating in more than 100 countries. The company provides services for several industries including maritime, renewable energy, oil & gas, electrification, food & beverage and healthcare.
Their conversation focused on:
- The changes to the CFO role brought about by the digital economy and the constant threat of disruption from adjacent industry players and startups
- The interaction of Chief Financial Officers (COFs) with new roles on the board such as Chief Digital Officers (CDOs) and Chief Innovation Officers (CIOs)
- The way CFOs should approach investments in innovation
- General advice for CFOs in companies that are yet to start their digital transformations.
Q1: The competitive landscape has changed significantly over the past years. Today large organizations face competition not only from within their own industry or from other traditional competitors but also from startups and competitors in adjacent industries. In this context, how is the role of the CFO changing?
I’ve been CFO of DNV GL since 2012. Maybe that is not that many years, but in the digital world of today, seven years is a long time. And yes, things have changed – in some sectors, the change has been faster than in others.
Probably the biggest change however, is the speed of change. It’s higher now than ever before. So you might get surprised when a new competitor, or potential competitor, is on the ground. You are surprised by the fact that you are getting surprised that suddenly.
Change is the constant, rather than anything else, so you should expect that things are changing.
I think another reflection that I have, is that the digital transformation is eventually going ‘to kill’ legacy business models based on time and material . When I say that, it doesn’t mean that we will not have people in the organization; we will for sure, have people in the organization, but you can no longer price your product or your service to the customer in terms of time and material.
Q2: To keep up with the changing times most companies are, on the one hand, going digital to keep up with the trends and, on the other hand, doubling down on innovation for growth. This has resulted in new functions appearing on the board of many established companies: the Chief Digital Officer and the Chief Innovation Officer. The role that you have, CFO, is a key one for the company and it’s a traditional role. How do you interface, and how do/should other CFOs interface with the new roles on the board?
Well, I am quite lucky, because our Chief Digital Officer, is sitting next door to me. And that makes it easy to talk and exchange ideas. So a tip for other companies would be to have the CFO and CIO/CDO communicate more frequently and even have their offices closer together. We don’t have so many formal meetings, but rather very interesting talks; because he is so focused on two dimensions.
One is the digital, but before that, he’s actually talking about customers, and interactions with the customers, and listening to the customers; and getting the feedback from the customers, into the innovation process instantly, from the very beginning.
And you may think that traditional CFOs can’t spell the word ‘customer’, because the only thing on their mind is the bottom line. But a lesson I learned more than 20 years ago when I had my first intern training, a lesson that’s staying with me to the day is: “business comes from customers”. And I think this customer centricity should be key for any CFO. So, unless we have satisfied customers, we can’t talk about revenue and profitability.
Customer centricity should serve as a basis of communication between the CFO the CDO/CIO.
Also I should add one more thing, next to the Chief Digital Officer, is our Chief People Officer. And in this way, you have these three dimensions next to each other. In this way, if there’s an opportunity we need to look at we can easily have three viewpoints. Today we can no longer afford to say this is just a CFO topic or just an innovation topic or just an HR topic – the world is so interconnected and so complex that all 3 dimensions need to be carefully weighed at the same time.
Q3: Innovation is a cost, or at least a short term cost with an unknown long term benefit. How should CFOs of companies committed to growth through innovation, deal with the ‘anxiety’ of investing in innovation? What lense should CFOs use when looking at these investments that have an impact the bottom line tomorrow and they might return something in 2, 3, or 5 years (if anything)?
I think this is absolutely true! The risk traditional CFOs face is that they are too focused on the history. The books only show the things that have happened. You can learn from history, but you can not change it. The key is to learn quickly and cheaply, then adapt for the future.
The ‘anxiety’ of investing in innovation can be alleviated by the knowledge that change is a constant and we have to always renew ourselves. Our biggest challenge however is that we need to invest equally in the existing business as well as in the future one.
So when innovating and looking into the future, you have to have a multi-year approach; or a multi-period approach, depends on whether you’re using years or other methods. Patience is a virtue as long as you trust the innovation process and the people building the new. CFOs in general need to dare to fail, because that’s the only way to learn about the market and the consumers, learning from failures. Obviously these failures need to be systematic and scientific – only in this way we can move the company forward.
I know that investing in innovation will have a negative impact on our short term CAPEX but if we don’t invest at all we can’t hope to get any new revenue in a couple of years or even later.
Q4: How should modern CFOs manage the 2 conflicting time frames: short term time frame focused on bottom line and exploitation of existing business models, and long term time frame focused on continuous growth focused on exploration of new business models?
The two time frames that you’re referring to I see them as two rooms where we need to have two distinct conversations. One is the performance room, and here we discuss performance metrics, the other is the innovation room, and here we discuss innovation metrics.
In the first one, on the performance side, I think you can continue to apply a lot of the traditional metrics and we don’t need to debate a lot over these. But sometimes the line between these two rooms is blurred and we have to discuss innovation during a performance meeting for example. So we need to be fast in adapting our mental model to a different time frame, where we have different metrics for success. We don’t measure early stage innovation projects on revenue for example.
Important to note is that every question we have for an early stage digital product for example is connected to the potential of commercial success this project will have later on. The goal of any innovation teams in the end, is commercial success. But we are not going to talk about pricing for example without even knowing if the customers have that particular problem that we think we can solve with our solution. Basically we are adapting our conversation to the time frame, to the two rooms.
Q5: What would be your advice for CFOs that are a bit more reluctant to go down the path of being supporters of innovation & digital transformations? Or the CFOs that haven’t yet started these activities yet?
First and foremost, I think you have to look at yourself in the mirror and understand that it’s about, “change or be changed”. You have to accept that change is happening without you or your company’s consent. And hiding behind traditional spreadsheets and analysis, focusing primarily on the history, will most likely not be sufficient.
And then you have to create a framework for innovation that everyone in the company agrees with. A framework supported by different tools, different competencies, different ways of interacting with customers, and different way of organizing work as well.
This framework then needs to be supported by investments, especially in competence and talent. People that are not traditionalists – innovators and entrepreneurs.
From my point of view I always see 3 potential outcomes for any project: two successful ones and one failure. Obviously the first type success is a commercial one. But the second type of successful outcome is a good and fast failure. Maybe we shouldn’t even call it failures, but kind of a good learning opportunities; and if you have a good learning opportunity, with a lot of interesting and valuable feedback from customers, well it didn’t materialize in a new service or product, but it gave you a lot of learnings. Maybe that is a success in itself.
The final outcome, the failure, is a project that’s stuck. I mean, that doesn’t come anywhere, because nothing happens, and then should then be stopped, as quickly as possible.
Finally I think that one of the things that a CFO needs to say to everyone else on the board is: “A longer term perspective is good for business.” Actually not just for innovation, but also for the everyday existing businesses too. One of the things that I introduced in DNV GL some years ago, was something we call: ‘15 month rolling forecasting’. This way every quarter we look 5 quarters into the future. My intention for my company and advice for others is to spend half of the time at board level talking about the past (the accounting books) and half preparing for the future. Unfortunately we are not there yet ourselves but we are gradually getting there – especially with support from the CDO and our Chief People Officer.
The CFO needs to contribute to the future not only with financial resources but to force proactive conversations and move everyone away from reactive conversations. It’s no point to be stuck in the past, because you can’t change it anyways. It’s more important to learn from the past and prepare for the future.
About Dan Toma
Dan Toma is a founding partner at Outcome, where he helps large companies transform to be able to innovate for the future, while running their core business. He holds a dual MBA degree. He co-authored The Corporate Startup which was awarded the 2018 Management Book of the Year Award for Innovation and Entrepreneurship by the Chartered Management Institute. He has worked as a consultant for several companies including Bosch, Bayer, John Deere, Deutsche Telekom and The World Bank. Besides his work on company wide innovation transformations Dan is now working on a new book looking at ways of measuring innovation and intangible assets in large organizations, Innovation Accounting.