Risk managers are increasingly seen as key players in driving business innovation

Risk managers need to assess future risks if they are to be truly innovative, argues Asia-Pacific vice-president for insurance and risk management at DHL Global Business Services, Johann de Waal (pictured).

“The recent [MH17] disaster in Ukraine made me think about this point: Don’t disregard the Black Swans!” he says.

“To only look at historical risk data (as is so often the case) cannot result in true innovation.”

However, risk management itself has historically been considered an obstacle to successful innovation, with business leaders arguing that managing risk stifled business growth and innovation.

Many contended that risk management would make businesses so risk averse that it could hinder expansion.

Nevertheless, insurers, risk consulting groups and think-tanks have, in recent years, explored the benefits of better linking the risk management and innovation/product development functions.

As Accenture’s senior managing director at finance and risk Steve Culp, and the firm’s managing director of innovation and product lifecycle management Wouter Koetzier, wrote last year in Forbes: “When properly fused, the two disciplines can help organisations pursue opportunities that a risk-averse culture might leave on the cutting room floor.

“Risk management can help foster a company’s innovation agenda by revealing blind spots and areas of underinvestment that threaten the upside its future.”

Risk managers are increasingly seen as partners in business development, rather than adversaries and, as such, more risk managers are beginning to look at managing the risk of failing to innovate.

As one risk manager told StrategicRISK recently: “Failure to innovate is a dangerous strategy”. Another commented: “Innovation and risk management are two sides of the same coin”.

But being innovative is not easy. It is clear that although risk managers often want to take a more innovative approach, they face significant challenges.

The two main hurdles are, first, that businesses are reacting to change rather than pioneering innovative solutions; and, second, that risk managers are not innovators.

Change or innovation?

InterContinental Hotels Group (IHG) head of risk management for Asia Australasia Shuh Lin Tan believes that the key to innovation is the continuous investment of resources. However, Tan wonders whether most businesses are really innovating or whether they are changing merely to keep up with the market.

“In my opinion, it is the latter,” she says. “Advancing or leading companies are perhaps much more adaptive than others in meeting the changing needs of the market and hence can respond quickly to emerging risks, or come up with innovative solutions from lessons learned from the bad experiences of others.

“In terms of managing risks, you don’t know what you don’t know, and it is really how companies react that can make a difference to the consequences.”

“It’s about who can do better than the others even though they may not be the forerunner in innovation. Those companies that are still sustainable may not be innovators, Swiss watch companies being the classic example.”

IHG’s senior vice-president, global risk management John Ludlow suggests three steps to consider: “It helps to divide innovation into operational, strategic and tactical innovation.”

“Operational innovation is often seen in the slow evolution of products – they get better and better, but never really changing; car manufacturers, for instance, are brilliant at this, often finding continuous improvements,” he says.

“Then, there is strategic innovation. This is where risk managers work with strategy team to predict the future risk landscape, so that opportunities and risks are seen together in order to establish the best course of action.

“Then, companies should risk manage the change from their current position to where they want to be in the future. This is tactical risk management supporting innovation.”

Ludlow says that a balance should be achieved between all three, adding that different rules apply for each.

“Operational innovation is for everybody and strategic and tactical innovation needs to be controlled,” he says.

“Strategic innovation mainly involves the business model and how it changes over time. It’s important for a company to look at all three.”

Adding something new

Microsoft Asia’s chief security officer Pierre Noel says that understanding the difference between change and innovation is “tremendously important”.

“Change usually implies that we are going to evolve from what we are doing, but not necessarily a strong departure,” he says.

“Innovation usually means that we are going to add something brand new to our existing environment.”

Noel says that he has witnessed senior leadership teams in several organisations going for an innovative new environment without any prior feedback from the people handling the risks.

“Sometime it is because the risk team was not designed within the organisation to perform a risk evaluation of something that would be a true departure from their existing environment, and sometimes it is because the senior leadership did not think that the CRO and his/her team would truly provide meaningful input at this stage of the process.”

Furthermore, Noel says he is aware of cases in which, after having announced innovation, an organisation “faced tremendous issues and sometimes had to kill the project behind the scenes”.

“Some of these issues would have been picked up by the risk team should they have been kept in the loop upstream, and assuming they had a proper ERM in place to give them the opportunity to analyse correlated risks,” he says.