Treating Innovation Risk Differently, Dealing with Uncertainty

We need to open up our thinking about risk and innovation management.

We should aim for a really healthy construct that does help all involved or associated with innovation and managing risk, that gives a better chance of pushing beyond the incremental innovation that avoids most risk and disappoints those seeking real growth.

In this post two, within a three-part series, I build the argument on why we need to treat innovation differently within any risk assessment. Part one focused on linking risk into an innovation strategy that needed to align with the corporate one.

Each organization finds its own level of risk appetite. Regretfully innovation, often by default, gets swept up in this generalization of “risk management” that is corporately driven and the serious message of “risk” dampens exploration. There is a real need to make a clear argument that innovation should be treated differently. It can still come under the broad risk umbrella but judging innovation risk is utterly different from organizational strategic risk.

Innovation is a learning process not to be confused with a safety procedure, both can be effectively managed and different in their treatment. No new business model or innovation new to the market, or even service enhancement, is perfect from its inception, it improves with learning on what is valuable and needed, what can be ‘dampened’ down, switched off or reduced through market exposure.

Equally, we have learnt innovation evolves due to this learning process and how ‘it’ interacts with customer needs. We make an effort to get it as right as possible, as close to the launch, but there are often so many unknowns that only through exposure to the market and the customers do we learn to adapt, adjust, modify and improve the offering. This ‘adaptive’ process scares the board as it has implications on reputation, on the brand and on its abilities to get innovation right. This iterative process is felt should be left only inside the organization as some feel it conveys vulnerability and failing. How wrong this is.

So we tend to go to default. Risk mitigation kicks in. We strive to minimize the risks, reduce the learning and opt for a more incremental approach.

As Accenture in one of the few reports discussing risk and innovation, “The art of managing innovation risk” state:

“Few decision makers want to take responsibility for a failed experiment, so extreme caution usually prevails when new ideas are assessed. Opportunities tend to be defined narrowly.

Moreover, the tools commonly used to support the process exacerbate the problem. Based on retrospective analytics—Net Present Value (NPV) models, for instance, are built on market projections that are calculated using past trends—they tend to skew innovation decisions toward optimizing existing product lines rather than pursuing new ones.

As a result, promising ideas are often smothered. And while many of the innovation initiatives that do gain approval are low risk, they offer only low returns—incremental improvements that usually do little more than maintain market share”.

They go on to suggest with product lifecycles across industries shortening, successful innovation often hinges on speed. And that, in turn, requires a risk management process that can shorten learning cycles, recognize failures early and make timely course corrections—a process that facilitates a company wide dialogue around which risks are acceptable and how much risk is appropriate, based on potential returns”

They are quiet rightly suggesting “with risks well-managed, companies can then use rapid experimentation and the techniques of agile development—an iterative process closely linked to customers and markets—to boost their chances of coming up with a truly profitable innovation portfolio.”

Yet tell me how many our organizations have a clear, robust risk management framework for innovation? Is innovation even fully aligned into the corporate strategy?

Our obsession begins and ends with the search for numbers.

Clayton Christensen has argued that organisations’ agenda begins and ends with the “search for numbers”. Organizations have been focused for far too long around the importance of financial capital. It determines and drives organizations’ destinies. We are caught in a constant focus upon our achieving a return on our (financial) capital as our measuring criteria and innovation gets totally caught up in this mistaken measurement, it stifles ‘great’ innovation to emerge and provide truly differentiating advantage. Why do organisations stay locked into far too much “me too” innovation?

At a time when capital is not scarce, it is abundant and cheap, we still see a lack of bolder investment in game-changing innovation. Organizations are hoarding capital or passing it back to the shareholder. Both admirable but they don’t build the future, they only keep you in the present. When financial capital is the final arbitrator it totally fails to tell us in numbers alone where and what creates the value, it simply reports the end result, it is always backward looking, never conveying the future unless capital investment is being made.

Today our balance sheets hides or can’t report the loss of opportunity value, if only innovation had been treated differently. We are caught in a time that most of our business organizations are in a period of risk-aversion where the innovation ‘bets’ are more incremental, more short-term pushing for greater utilization of existing assets. The longer-term health of organizations seems to be kicked down the road for later generations to tackle, if they are still in existence!

We need to that prompt more on risk and innovation, reflecting why and how it should be treated in different ways and this might encourage a greater top management engagement. We need to encourage a shift and seek out the dimensions, criteria and thinking that can be applied to encourage more risk-taking, more radical and breakthrough innovation.

Can we walk a different innovation risk path?

The understanding of risk will always have associated with some fear, discomfort and resistance and for many can be an uncomfortable place to go. The whole ‘act’ of letting go is never easy. It is the ability to manage risk that reduces the fear. It is through experimentation we gain our best learning, we actually are forward learning as we are accelerating our knowledge.

Surely the more we attempt something different, proving or disproving it, does make for exciting work? We move towards a leading edge perspective, we evolve more towards a pioneer, an experimenter and this can be contained and managed within a radically different risk management framework. We all can be encouraged to raise our risk appetite with establishing clear guidelines and parameters, so we all become more motivated and engaged, excited about a different future, curious to explore, wanting and  encouraging an environment to experiment but this ‘signal’ and risk appetite guidelines must come from the top. If it is left unsaid, radical innovation will never naturally happen, what a pity.

We need to recognize that allowing greater risk and investigation encourages us to see change differently, to offset the growing disruptive aspects swirling around us. Recognizing we are mostly operating  in markets with slower growth, higher volatility and potential for disruption needs pushing risk in innovation. Risk needs to be proactive not reactive.

Equally the sentiment reinforced by this demand for clear, demonstrative ROI measurements from innovation tends to send the clear message that we cannot disrupt our core, yet others are working purposefully at doing this, knowing your weakness is not taking risk and wanting to disturb the present equilibrium..Risk comes from not knowing and experimenting outside the core. When you are not restless, someone else certainly will be, seeing opportunity.

Achieving a growing certainty of return needs to be paramount in our minds as innovators.

We need to manage the ‘certainty of return’ by making the knowledge that comes from many incremental steps, of experiment to validate an idea, that eventually builds into a new innovation, that needs managing differently. That can come from steady ‘readiness-based decisions’ that prototypes or pilots that are put into the hands of the consumer or customer to explore around, will advance our knowledge, each time clarify the potential value and ‘seen’ worth of this concept over the existing ones in the market place or require us to re-evaluate our assumptions.

We need to develop those risk-mitigation steps to constantly increase confidence. We need to find a real space for uncertainty, for a risk-tolerance so as to allow the shaping ideas, exploring and learning in taking controlled risks, encouraging experimentation, providing tolerance (of failure or expecting stronger debate), exploring the unknowns, all should be an integral part of innovation in any new risk management framework.

Stage-gates is also not the innovation panacea to manage innovation.

I would argue we should stop regarding the Stage-Gate as the panacea for managing all of the innovation needs. Stage-Gate handles the incremental product cycle fairly well, but when you are on a more open innovation platform collaboration or more radical design, it struggles to be flexible, agile and fit the different challenges presented by the collaborating parties. We need something significantly different to handle the other types of innovation, those more radical, distinctive and breakthrough.

True innovation goes through much of an iterative process

We need to adopt a more flexible and adaptive process, one where learning, looping back, iterating constantly, that promotes and encourages an experimenting environment for innovation that is more new to the world. As we iterate, we learn, as we learn we can improve our understanding of its growing value.

This needs to be in a more dynamic ‘management of the portfolio’ concept, from concept to commercialization process.

A place where risk-mitigation needs to be built-in all the way, to search for and then build new knowledge as it ‘reveals’ itself. In innovation, it is never apparent, you have to ‘tease ‘ it out on its value and contribution, in providing concepts, pilots and prototypes. Everything simply cannot be available when you often just don’t know, you take small steps often to feel your way and build that knowledge up. This comes from engaging with your customers, in the market place not your own premises.

How about approving some pilot projects and providing resources to have unfettered six-month periods with no rules and no reviews? At the end of this agreed period ‘something’ that shows promising value and clear advancement on the past position that has been seen and tested with customers gives confidence, reduces the risk fear. Then you embed the learning and further scale it, if it shows the promise and shows a ‘interesting business case’ for more investment.

It encourages increasing the risk of spending funds, dedicating resources that lock up assets but by setting these in clear time frames and with a definitive result that the outcomes not just advances knowledge but it can show that the concept does takes you closer to its future value.

Progressive in building risk management for innovation

Over time progressively learning increases our risk-tolerances, we become progressively more creative in this risk-taking orientation to seek out and push for more innovation.

Equally allow those who are willing to take risk, as their more natural position that head room to explore, to push boundaries that often reveals different innovation. By sitting down and outlining the risk acceptable within evolving guidelines, those that are not ‘well-set in stone’ but will evolve and loosen as we learn. We should expect them to be broken on a few occasions but work with this if it was an informed risk, learn on why, talk with those that overstepped the limits, to see what was right and what everyone can learn from this.

Equally, leaders need to stay totally engaged and constantly talking about what innovators are doing where-ever you can, through face-to-face discussions, dedicated meetings where risk assessments being clearly known to be up there on the agenda, to be evaluated and determined for the next steps. Also being prepared to step back to bring the risks that seem uncomfortable back into alignment with the risk tolerance levels, allowing the engaging in the ‘healthy debate on why this innovation might be different and needs different criteria. Innovation needs to be a dialogue and risk management can become its friend not its inhibitor.

Through this more enlightened approach to risk and innovation we do allow-in that greater desire for the capacity to be innovating and how we all want things we are working on to improve, to give us a greater meaning within our lives. More purpose, more satisfaction, greater identification. More value, greater growth and impact.

Fostering risk tolerance designed specifically for innovation does need treating differently, to grow and thrive. You can push innovation beyond the ordinary, back into the extraordinary and that enables innovation to deliver far more on its true purpose. There is a strong case to be explicit on the risk profile for innovation to be different.

Part three of this series looks more at the mechanics for improving risk maturity for innovation.