Developing a new framework for risk and innovation.

Innovation & StrategyI believe we need a new way to manage risk within our innovation activities. It needs to be treated differently from the general ‘risk management’ criteria applied within our business organizations.

In a three-part series, part one outlined the implicit need to align innovation to the corporate strategy and through this we can determine ‘acceptable risk’. In part two I offered up numerous reasons why we should recognize and treat innovation risk differently, so as to allow it to perform closer to its promise of driving growth and achieving real advantage.

This post here is the third and last part, part three, where I lay out different mechanisms and framing of risk and innovation. These need to be evolved to fit your own risk appetite, not one size fits all. I hope it helps.

Risks are certainly shifting. In a recent piece of work by Deliottes called “Risk sensing:the (evolving) state of the art, the risks of most concern are changing each year. Interestingly, the pace of innovation stands among the top three risks in 2015 and tops along with regulatory risk, the list foreseen in 2018. With technology disruption, business model disruption and growing competition, social and customer engagement challenges the ability to manage innovation is growing as a concern and in risk management. We need to formulate a more robust risk innovation framework. Risk management for innovation needs to evolve to keep pace with the changing demands and pace of change we are undergoing in business challenges. Risk is becoming an evolving capability.

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Treating Innovation Risk Differently, Dealing with Uncertainty

risk innovationWe 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 to 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.

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The Pressing Need to Link Risk into an Innovation Strategy- part one

Road to InnovationI want to bring together some thoughts on risk and innovation. This is the opening part and sets the scene. I feel we spend less time on the management of risk within our innovation initiatives. We so often simply measure risk on established risk / return lines of known existing business criteria, treating it as part of our existing ongoing business and that is plainly wrong.

Risk assessment within our innovation activities need a different, far more distinct framing that reflects the nature of the unknowns we are working with, in my opinion.

Our organizations need to relate to the differences far more, to allow this ‘innovation risk assessment’ to play an increasing role in ‘advancing’ innovation and its understanding, at boardroom level to relate too and take a different risk-related profile position that many take today.

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Uncharted Waters Disrupting the Corporate Boardrooms

The storm clouds of Radical InnovationWhen you read a report that has within its executive summary this: “In combination the boards stand unarmed to enter the battlefield of future business creation in a disrupted world it makes you want to read on.

In a recent report called Radical Innovation and Growth: Global Board Survey 2016 (link opens the pdf) we have results from a survey jointly conducted by Deloitte Denmark and Board Network – The Danish Professional Directors Association, that opens up much that can concern us about the current boardroom and its great difficulty with managing more radical innovation.

It seems within our boardrooms they are ill-equipped to managing in today’s world, grappling with the past, holding on, perhaps too tightly, to the present and certainly being unsure of the future. It is struggling to adjust to all that is entering their world.

In this report, they surveyed 614 global board professionals from a total of 50 countries during the period covered from November 2015 through to February 2016 and then published in February 2016.

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Risk and Innovation frustrate me

Managing risk and innovation managementI have been really struggling in the past few weeks. Partly a niggling health issue finally got resolved with a ‘delightful’ week in hospital, a couple of operations later, with a reasonably speedy recovery now thankfully under way.

The plan of course was for me to really use this confinement period as one of those opportunities to catch up on an awful lot of reading around innovation, planning out some areas to focus upon in the coming months and year ahead.

My logic was at the time, well this is similar to a long train journey or flight, you use this time and climb into a number of areas that have been quietly ‘festering’ away in the back of my mind, sitting on on my desk or tucked away in my computer.

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Figuring out a different strategic alignment with innovation being central.

Strategy as we have previously known it is officially dead. Strategy is stuck! Competitive advantages have become transient. We are facing situations where advantages are copied quickly, technology is just one constant change, and our customers seek other alternatives and things move on faster and faster.

In a new book written by Rita Gunther McGrath, a professor at Columbia Business School in New York and one of the world’s leading experts on strategy, she has been exploring the changes rapidly taking place called  “ The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business

 “Strategy (in the past) was all about finding a favourable position in a well-defined industry and then exploiting a long-term competitive advantage. Innovation was about creating new businesses and was seen as something separate from the business’s core set of activities.” “Sustainable competitive is not just ineffective, it’s actually counter productive” says Professor McGrath.

She rightly states:“Think about it: the presumption of stability creates all the wrong reflexes. It allows for inertia and power to build up along the lines of an existing business model. It allows people to fall into routines and habits of mind. It creates the conditions for turf wars and organizational rigidity. It inhibits innovation.

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What is the missing cost of not innovating?

We can often be asked “what is the ROI on this particular innovation or alternatively, on our innovation activity?” This questioning increases particularly when there grows even more uncertainties in marketplaces, when you are forced into making tougher investment decisions, in allocating resources, in adjusting a strategy to meet changing circumstances. Then you get the “well, what’s the payback period then?” Often we struggle to offer a half-decent reply as most innovation has stayed mired in incremental approaches and so becomes fairly complicated in identify the new part from the old that is already the invested part, or it remains uncertain, as it is often exploring the unknowns.

Perhaps we should reverse this question or be ready to ‘gazump’ it and beat them to the question before they ask. Two specific ways to think about this come to mind. The first was suggested in a post back in 2005 by Ruth Ann Hattori called “the cost of not innovating” and I like this one. The other came from a post by my innovating friend and collaborator, Jeffrey Phillips “what are the opportunity costs on not innovating?”  Jeffrey is still not residing on a tropical beach as he still has not got the complete answer to that one. Both are tough questions but well worth reflecting over.

Merging both of their thoughts here and adding a dash of my own spice let’s explore this a little more

To quote from Ruth Ann’s article “What is the cost of not innovating?” What can happen when you don’t innovate but your competition does? If management’s evaluation of the cost of innovation is only focused on ROI and doesn’t account for the cost of not innovating, they are only seeing half of the picture and may be missing the half that’s strategically critical for the future.

Well how would you answer the following questions?

Again Ruth Ann nicely raises a few uncomfortable ones with some small adjustments on my part.

  1. In the past couple of years, have any of your competitors brought to market an innovative product/service that you had the capability to create but failed to bring to market? Why?
  2. Has someone recently entered your market/industry with a new or novel new business model that is placing your business at a higher risk than in the past?
  3. Have any of your competitors found a way to streamline or reinvent processes that you still struggle with, to become increasingly open and find new collaborative ways to speed innovation to the market?
  4. Have your customers begun to drift away in search of a completely new solution to an old irritation as they continue to experience frustrations with existing products?

The cost of not Innovating is the estimated dollar value your competitors have gained and that you have failed to capture through your own innovation efforts and this strikes more at the core of the need for ensuring innovation is well-managed and supported. The cost of not innovating includes everything you miss when your innovation efforts aren’t focused on your entire business process.

Can we compare the value of the missed opportunities to the opportunities we chose to pursue?

Jeffrey thinks the answer is a qualified “yes”.  He suggests “that is, we innovators should attempt to place a value on every innovation or every good idea, and suggest that the avoidance of innovation means that we miss out on new customers, new markets and most importantly, new revenues streams and new profits.  Those missed opportunities come at a cost – usually in disruption or product or service obsolescence.  This analysis requires a number of assumptions – that we can create a new product or service, that it has value or benefits to customers, and that we can assert some knowledge about the downstream revenues or profits that will be missed if we don’t innovate”.

Jeffrey puts it really well, do managers ever ask “what is the size of the opportunity we miss if we avoid innovating?” You should consider not just the short-term costs but also the longer term implications if you choose not to innovate by investigating and exploring all the options, otherwise someone else will slip into this ‘void’.

What needs to be recognized by all is that measuring ‘returns’ is really hard

Often the person asking the “what is the ROI on innovation” has never been involved in creating, designing or managing innovation. They can often be the ‘bean counter’, the hard-nosed CFO out to drive up the short-term performance, imposing short-term deadlines on getting the innovation launched within a given calendar year to meet much of his performance measures. They also often do not really appreciate that there are real disparities on time, investments and resources for managing an incremental project against one that leads to discovery or disruptive innovation and why these are dramatically different.

Of course we need to measure, including ROI, by attempting to qualify and quantify investments and their returns. ROI on innovation is just that much more complex. It is actually where you start in any discussion on returns. We should always start early; keep the dialogue going as thinking becomes validated by new data, by new understanding.

The most valuable return comes from creating ‘something’ that separates you from competition and has the potential for a sustainable advantage. We should actually start here.  Achieving this outcome raises the bargaining power; it raises the perceived value of future attraction from investors. Innovation that is different from other offerings in the marketplace gives you a clear space from the route that most travel, that of commoditizing the marketplace, often through everyone just pursuing incremental innovations.

Sadly, many within organizations are only given the one choice within their innovation hands are just the incremental cards to play with. These cards are the only ones dealt out by a leadership that often simply do not understand, or allow others to dictate, as they are not fully engaged in innovation and what it can truly offer. We need to raise the stakes, play innovation poker perhaps and ask the question of them “what is the true cost of not innovating? “What is the true cost of not engaging in innovation?”

Recently I’ve been making the case for closing the leadership gap on innovation.

So before I even get into asking “the cost of not investing in innovation” I’d look at the leadership gap or engagement with innovation as that gives a “fair” indication of where innovation truly fits, beyond just simply jargon and talk. We have to ask constantly where else do you grow a business, besides extending into new geographical areas – and tell me what is the investment in years and resources before you see returns here? Or you safely continue to incremental-away as your contribution to having a comfortable and safe life. That just might be one comment to far but might lend its self to being rephrased in a way that is palatable.

No, until we change much of the prevailing thinking, innovation is our only primary source of new wealth- of a country or organizations growth-to get true engagement, that is our real imperative to achieve. Innovation primary aim is to strengthen profit, not weaken it, to build on what we have with something that advances benefit and many often fail to recognize its place here also. We all wish to be part of something truly exciting and certainly can’t get that much excited if we are asked just to engage with innovation simply as ‘appropriately’ or without any real understanding of what is being asked but not supported. I wish we could get a greater innovation engagement.

Sadly the leadership tends to push innovation down the organization and in so doing is handing over their future, our future, and no wonder we are seeing shorter tenures at the CEO level. Investors and stakeholders can only live with this level of perhaps, at best, ‘steady’ performance for a limited time as this approach is increasing allowing for others to seize opportunities, chosen to be ignored often by current management or not fitting with their prevailing attitudes and tenure. It is time innovation sits ‘squarely’ in the middle of each board room, well represented and searching constantly in linking innovation to the strategy. I’ve outlined much on this alignment in different articles but start here to get into these previous articles.

So often too little too late

Just look at the attempted turnarounds left far too late because the warning signals were ignored or not wanted to be attempted, as they would have threaten the existing ‘core’ of what had been achieved and invested in, often build for different times. By taking a more evolutionary approach, they would see emerging the rising stars of  tomorrow where the organization will, over time, become their new core businesses.

Emerging new business help answer the “not investing” question

These emerging innovations or businesses may be step-outs from the core or more related extensions that simply need new capabilities and time to build. They might be completely new areas to invest in. Building successful future businesses requires much seeding but then the questions on “when do we get returns” rises up again-

A leadership team simply focusing on their short-term performance makes choices others never know about that are the real stakeholder, the real investors that take an equity stake. Why do investors often remain ‘blind’ to innovations that have horizons that are not within the annual review; even external board members often lack an innovation clarity that covers all the three horizons that innovation should be actively worked across.

The missing engagement for innovation at the top

A clear lesson or message lies at the heart of this missing engagement gap at leadership level. Either we invest and engage, to be beyond “average to good” in performance and drive the business with a “no compromise on innovation” mantra to get you above the majority and work hard at managing the risk and return equations this needs. I believe this is the pathway to a healthy, sustaining future and we need more of this “quest” for real growth.

Or you hanker down and become “frugal” and continue to par back to “good enough” where the majority of organizations wish to be, so they can safely draw down their ‘result package,’ You try to keep the majority of the ‘passive’ shareholders happy to receive a steady return on their investments. To achieve this often there is a need to sacrifice employee’s for the short-term and throw away their knowledge, trim away the products that don’t fit, divest in assets that don’t yield immediate return, attempt geographical expansion on a “foothold” strategy and with products simply adapted but not built from that markets understanding up. The final straw is the announcement of buy back schemes instead of investing in the future by committing to innovation. Risk and investment in the future has got lost completely. This is the pathway to eventual destruction but often the leadership choosing this path are not around to see the “bitter fruits” of these decisions.

This is our real innovation dilemma, our innovation blind spot when we look at where innovation fits within organizations, often we really do not know what is actually taking place. I believe innovation roadmaps should become part of the reviewing process to give a better indication of the areas of future promise.

Those that do constantly ask “what is the return for this innovation” really know this is hard but are often I feel defending the (their) status quo, wanting to maintain the existing practices, denying in themselves by ignoring what is going on around them and re-affirming short-term performance as the focus, at whatever cost. Those that look at innovation differently, across different horizons  are searching for opportunity, for new innovation pathways to a better, sustaining future. I very much subscribe to the three horizon approach to innovation where you operate in different mindsets and scenarios.

We do need to ask constantly “what is the cost of not innovating” and “what is the lost opportunities we missed” by avoiding or reducing innovation down to meet these short-term pressures. These that do want to engage in answering these two questions I feel, are really keen to explore and embrace the future through innovation. They recognize uncertainty and risk-taking are necessary needs in today’s more competitive environment and have to be a fair slice of the ‘investment pie’ going forward in managing.

Perhaps these are the perfect questions to ask each time –  it begins to sort out the visionaries from the plodders. Those engaged in innovation, those going through the motions. Then if you are still having difficulties in receiving replies then ask “well, what actually becomes the final cost when we are forced to respond, often when it is too late?

Let me know how you get on in your personal investment return by asking others about a lack if innovation investment. Be ready for a spirited discussion perhaps and look for a positive outcome. It improves everybody’s innovation rate of return.