If you read the name Stanley Black & Decker and think of your power tools you wouldn’t be wrong, but you’d also be missing the whole picture. Ryan DuRussel is the chief financial officer of Stanley Security Solutions, one of the groups within the more than century-old company. During his presentation at The2017 CFO of the Future Summit: Fueling the Growth Agenda, he spoke about the critical role of the finance organization in supporting innovations that have allowed the company to build a platform that services and supports 18 market-leading brands, while keeping an eye on the future.
Many organizations confuse tasks with purpose, which can hinder growth and innovation. DuRussel explains, "our task is what we are paid to do. But our purpose is trying to make the world safer and more sustainable." For DuRussel, having a purpose creates a long-term roadmap that the company can use to support continuous innovation and sustainability.
The way DuRussel and the entire finance team, led by CFO Don Allan, keep tasking and purpose separate is by defining two different types of innovation: core innovation and breakthrough innovation. Core innovation improves the daily tasks that customers pay for. Breakthrough innovation delivers a big strategic change that will help the company make it to its 200th anniversary. "We characterize breakthrough innovation as an idea that's going to generate greater than $100 million dollars," DuRussel explains. Anything less than $100 million dollars goes into the core innovation column. By redefining innovation and establishing new targets and investment boundaries, the CFO and the finance organization can more effectively balance the need to innovate with the need to deliver finance performance and manage risks.
Breakthrough innovation also enables the company to think very long term. Right now, the finance team is working within the organization to develop innovations to improve sustainability and corporate social responsibility for future generations. The tools of today aren't the same tools from 20 years ago. By creating the space for breakthrough innovations, the team at Stanley Black & Decker can focus on how people will use tools and power 20 years from now.
The two-track approach to innovation was inspired by the research and development ecosystem the finance team encountered visiting Silicon Valley. Technology companies often take a multi-faceted approach to developing ideas in order to take advantage of both short and long-term opportunities. Drawing inspiration from this model, the leadership team at Stanley Black & Decker created a special forces unit to focus specifically on breakthrough innovation. The special forces unit adopts a technology incubator mindset that allows them to create a lab of sorts in which to test ideas. The cost to the business is steep – $20 million – but the unit is going for big ideas with revenue potential of more than $100 million, so the lab more than pays for itself over time. In the incubator, through development and testing, the best ideas rise to the top. The special forces unit then works on taking those ideas to scale so that they can be integrated into the whole organization, driving revenue growth now and into the future.
Each part of the business is represented within the special forces team and develops their own slate of projects to test in the lab in order to find out what works and what doesn’t. The key, DuRussel explains, is that finance teams have to understand that the lab is for testing. The failure rate is likely to be pretty high. But, for those that succeed, the return is more than enough to make up for the cost of testing many different projects at once. This shift in mindset and approach demands that the finance organization evolve its strategy, systems, processes and culture.
Putting the right people on the team is also critical. Innovation requires free thinking and a willingness and ability to break away from established norms and business models. In many ways the model resembles an internal venture capital operation – management picks people with a demonstrated talent for innovative thinking and works with them to disrupt the business from within.
"Stanley Black & Decker has existed for 175 years. For the first 157 years, we grew by two billion dollars and in the last 16 years, we've grown by nine billion," DuRussel says. How did the company do that? By focusing on purpose and by creating a finance-led organization.
DuRussel and the finance team create value through what they call “mega-hedging”. Mega-hedging involves building a strategic operating plan that DuRussel says is “aggressive but attainable.” That operating plan forms the basis for the finance team to identify $200-300 million of new revenue or cost savings opportunities throughout the organization. These opportunities can run the gamut from cost control measures to productivity or volume increases. According to DuRussel, this extra $200-300 million of ideas is there to serve as a buffer that will allow the finance team to achieve its performance goals even if market conditions change. Mega-hedging is such a big part of what the finance team does, incentive compensation is tied to it in order to ensure a rigorous process.
In addition to mega-hedging, the finance team is also leveraging technology to improve order flow. Following the merger of Stanley and Black & Decker, the combined entity repositioned itself as a growth company by leveraging technology and the power of branding in order to offer the market a group of brands that are well regarded and attract repeat customers. An internal supply chain framework known as the Stanley Fulfillment System is a fully digitized logistics platform that ensures each of the 18 brands under the Stanley Black & Decker umbrella are well supplied. The system has helped the company generate more than a billion dollars a year of free cash flow, in support of Stanley's strategic goal of delivering top quartile financial performance.
The Stanley Fulfillment System fits firmly in the core innovation part of the business, but its strength will support breakthrough innovation. Having a fulfillment platform in place will also help the company reach its revenue goals. DuRussel readily admits that the company has aggressive targets, but says that by harnessing both types of innovation, Stanley Black & Decker is well positioned to execute on its goals.
Study after study has shown that the tone at the top is critical for companies that are working through a change or growth agenda. DuRussel notes that Stanley's CEO leads with a consistent message that carries all the way through to the company's public face on social media.
Rather than shying away from social media, Stanley Black & Decker built a significant social media presence for itself and its brands in order to be more responsive to customers and also to drive sales. "We have 50,000 associates across the globe and social is one way we can connect with them and build community," DuRussel says. Building those connections is a lesson the company learned from Silicon Valley and one that makes it easier for everyone to stay on the same page.
Few companies can stay in business for almost two centuries without being laser focused on quality and relevance. Stanley Black & Decker has been able to do that by understanding how different types of innovation impact the business, but that comes with a cost and requires buy-in at every level. Forward-thinking leadership in the c-suite opted to make a strategic capital expenditure on the special forces unit, while simultaneously working on the quick wins. In order to grow smartly, the finance team has to strike a balance between identifying improvements that can be done today and those that will keep the company in business over the long haul. This means avoiding the temptation to stay on the safest route and being willing to engage in a bit of controlled trial and error.