Driving Change with an Effective Innovation Risk Culture
Driving Change with an Effective Innovation Risk Culture
COVID-19 has been a major Health emergency, and there is no doubting that there is a sizeable Economic emergency unfolding as a consequence. During any economic crisis, many organisations choose to reduce their risk tolerance and focus on their core capabilities. This, in turn, can often mean that ideas with the highest risk (even if they also offer the greatest potential impact) never make it off the drawing board. It can seem counterintuitive to continue taking risks when it seems that there is more than enough risk around, but when it comes to innovation it is the riskiest bets that often have the greatest potential.
In this piece, we look at what effect an organisation’s risk culture can have on its ability to generate and progress transformative ideas and how we can investigate ‘high-risk’ ideas while reducing the risk profile. We will also consider how new ways of working can increase involvement in the innovation process and why this can help to reduce risk by identifying and dealing effectively and swiftly with any dangerous assumptions.
Often, organisations that have a low tolerance to risk find that most ideas received from employees are in areas that are considered safe, therefore ideas for incremental process improvements are more numerous than, say, ideas that relate to the development of a new product or market.
In such organisations, as a consequence of the highly controlled environment that is common, the level of checks and balances that are imposed from the top of the business means that most ideas of any significance will need board level sign-off before being selected for further exploration or implementation.
Unfortunately, the approaches and measures that are regularly used by these organisations to assess potential projects often adversely discourage the investigation of the more radical, high impact ideas. This was explored in an HBR study1 which identified 3 areas that commonly create barriers to successful innovation in organisations.
First, they found that “misguided application” of a number of commonly used financial measures (which are already inherently risk-averse in nature!), not surprisingly favours the development of existing resources rather than new, transformational capabilities.
They also found that methods such as stage-gates employ measures (for example, expected revenues) at each gate which are more difficult to estimate accurately for breakthrough ideas than incremental improvements of existing products and services.
Lastly, an issue that is specifically found in publicly listed companies, they also pinpointed that senior managers may be focussed on the short-term return to their investors rather than the organisation’s long-term health.
At the opposite end of the scale, organisations with a high tolerance for risk may experience confusion as individuals feel emboldened to progress their ‘pet ideas’ without feeling the need for sanction. These “Lone Wolves” could be progressing ideas which are not in-line with the organisation’s objectives, or worse, are contradictory with the organisation's Vision & Mission. There may well be frustration among the employees when few ideas lead to real change due to the lack of organisational governance.
So, if an organisation is to keep its staff involved, with proper governance but without too much bureaucracy getting in the way of its workforce finding and advancing those truly transformational ideas, what does it need to do?
Retaining & Growing Engagement
The first step is to ensure effective communication of how ideas will be assessed. This will build confidence that the evaluation process is fair and transparent. Employees must be confident that their idea will be treated in the same manner as an idea from the Senior Management Team.
Secondly, the assessment measures that are used must align with the operational objectives for the area of the business to which the challenge relates, and these measures should relate directly to the overall organisational objectives.
Submitted ideas should be visible to others with a stake holding in the challenge area, and all stakeholders must be able to openly feedback their view of the idea’s validity. When ideas move forward to formal evaluation, the outcome should be fed back to the idea submitter. For ideas that are being progressed further, the reasons for progression should also be communicated, and the option for the original idea contributor to be involved in the subsequent exploration and development phases should be seen as best practice. Success should be celebrated; case studies of previous successful idea implementations will build confidence that the organisation takes idea generation seriously.
Finding & Advancing Transformational Ideas
If one assumes that an organisation has selected, or shortlisted, one or more ideas first based on the impact that that they might deliver (since there is little point in progressing ideas that will deliver negligible impact!), the most important next selection criteria when looking for transformational ideas is identifying how radical an idea is.
Here, we demonstrate this by plotting the idea on an X, Y graph (Fig. 1). We are mapping how new the product or service is to the organisation and against how new it is to the market. In our version, each axis is measured on a scale of 1 to 10. The product of these two scales tells us the difficulty or risk associated with implementing an idea - if a product is new to both, this is likely to be because it hasn’t been done before, i.e. it is difficult to do. The more difficult or risky the idea is the more novel it is, and the greater the chance that this idea will create competitive advantage.
In highly controlled environments, those ideas with a low-risk profile are the ones that are likely to be implemented – however they are rarely novel and are unlikely to bring competitive advantage. Where such low-risk profile ideas relate to product development, they are likely to have been developed before by others, meaning that competitive advantage can usually only be achieved by competing on price.
Other ideas that often fall into this category are incremental process improvements. Since they have little risk attached and are therefore likely to be easy to implement these ideas should still be advanced, but no one should be under any illusion that they will bring long-lasting competitive advantage.
Reducing the Risk
So, given that those ideas with the highest risk-profile are the ones that are most likely to bring about real competitive advantage, an organisation should go ahead and select the high-risk ideas and implement them? Well, yes and no. We would suggest a portfolio approach where, of the ideas selected for progression, 70% are low risk ideas and 30% are the high-risk, potentially transformational ideas.
High-risk ideas should be put through a rigorous exploration and validation process so that the risk of failure in the implementation phase is reduced to an acceptable level. Valuable project implementation resources should not be allocated until the organisation has sufficiently increased its confidence level in its ability to successfully implement them, and until it is able to demonstrate that they will deliver real value to customers.
The Exploration phase should investigate all the assumptions that have been made about the idea. Innovative ideas by their nature will have had many assumptions made about them, common examples being that they deliver something the customer wants and needs, that customers will be willing to pay an acceptable price for, and that development and roll-out at scale is technically and/or financially feasible – for example, access to materials that will be commonly available at the required volumes and economically viable cost.
The truth is that making the wrong assumptions and proceeding with an implementation project that later fails is one of the biggest consumers of R&D budgets, and one of the key reasons that organisations’ senior leaders lose confidence in their innovation programmes.
An organisation that is able to demonstrate a rigour in risk management – through an understanding and acceptance that uncertainties exist, but that adequate, repeatable processes are in place that minimise the risk to an acceptable level – is much more likely to embrace its goal of finding and advancing transformational ideas.
The Old vs the New
This is all great in theory, but how does it relate to the practice of preparing the organisation for managed risk taking, particularly in light of the challenges that a more dispersed workforce will bring to the new ways of working that many organisations face post COVID-19?
To answer this, it is instructive to look how risk was often identified in an innovation setting Pre-COVID-19. Given the high level of uncertainty that is naturally involved in transformational innovation, it is key that all assumptions are brought to the table as early as possible. Coming from a wide range of domain viewpoints, and with the interdependencies across business units that innovation often entails, a conversational, workgroup setting would often be the norm to elicit the required information - i.e. getting a project team together in a room to discuss, debate and identify the key threats to a given idea.
Further, the management of those risks also benefited from in-room debate. Where a key threat to an idea was being explored, conversation between team members was often critical in raising to the surface previously un-stated areas of uncertainty that needed to be added to the list of exploration areas. More often that not, these late addition uncertainties would actually act as a catalyst for improving the idea, sometimes taking it in a new and better direction as a consequence of the new learnings.
Depending on the geographically dispersed nature of the business and the need for key stakeholders, wherever their location of work, to be “in the room” at both the risk identification and risk management stages, the in-room workgroup approach was normally challenging to organise, often leading to key voices not being available - adversely affecting project momentum and decision-making, and increasing the project time, cost and risk that was perceived by senior management.
Rolling forward to the new reality, where a more dispersed workforce is likely to be normal, the opportunity arises for an organisation to take a step back and look for ways that it can improve how it manages this aspect of innovation – how can it better increase transparency (everyone can see anyone else’s contribution, as soon as it happens); improve engagement (people can contribute and respond when it is convenient for them, not when a meeting has been convened); Involve more people (projects teams no longer need to be limited by the number of people you can fly into Head Office); minimise the risk of failure (anyone in the business who is interested in the idea can flag a previously unsurfaced threat or edge-case interdependency); increase governance (diligently and transparently work through all steps and learnings in the idea exploration and decision making process); and importantly create a more “innovation capable” workforce (building an environment that enables the capability to do all of the above to be developed incrementally across the organisation, further reducing risk across its portfolio of innovation projects.
In further articles in this <<resource centre>> we present our thoughts on how many of these challenges can be overcome. Whether by means of a technology solution or otherwise, one fact is clear – where an organisation is able to convince its senior leaders that they have got it covered when it comes to managing risk, the likelihood of the organisational risk profile changing to embrace transformational thinking is only going to increase.