A balance must be struck between facilitating innovation and mitigating the various risks it creates

A firm’s business units should always be striving to produce the next creative masterstroke to give the company a fresh, competitive advantage. However, innovation often involves taking a leap into new, potentially risk-laden areas of expansion. This is where risk managers have a key role to play. The gatekeepers of innovative progress, risk managers must facilitate innovation while simultaneously implementing the best risk management processes possible. How can such a delicate and complex balance be struck?

Senior risk consultant at JLT Christopher Chai says too many companies pay scant attention to innovation, instead focusing on cost saving initiatives. “On that basis, a company culture and environment that discourages rather than encourages innovation, can be perceived as a primary risk to innovation,” he says. “Innovation can be identified as an iterative process which requires creativity, learning, and trial and error, which may not represent corporate natural behaviour and attitudes. A corporate culture that overly emphasises procedures and controls that support success – instead of embracing failure and associate lesson learnt – will limit the incentive for staff to innovate.”

Chief innovation officer at Aon Hewitt Pacific Michelle Reynolds agrees that the major risk rests in not taking risk. “Some risk is essential to make innovation happen and to drive the organisational change that supports it,” she says. “In fact, decisiveness and risk tolerance are the top two defining traits of innovative organisations, according to Aon Hewitt’s research on high performing workplace cultures.”

Reynolds says when innovation is seen as “someone else’s job” rather than how the organisation behaves, corporate support functions may fail to adapt. “A lack of collaboration creates risk,” she says. “Rather than forcing new business models into today’s decision tools, control functions need to develop new ways of helping the business make informed decisions. There is risk in moving away from known approaches, but it is outweighed by the risks of perpetuating the status quo – seeing promising ideas killed off too early, or driving innovation efforts underground.”

Chai says a business can manage innovation risk by creating a culture that embraces the logic of “intelligent mistakes”. “This is a culture that supports effective risk taking and presents every failure as a learning experience,” he explains. “To allow such a culture to flourish, organisational leaders must have, and encourage, a tolerance for failure and drive an enthusiasm for risk taking in pursuit of growth.”

It is also important to ensure that workplace culture supports an innovation mindset and gets everyone involved, Reynolds adds. “It’s well known that the majority of innovation efforts fail,” she says. “Does your organisation give people the freedom to try things and learn from that? Managing innovation through a portfolio of small-scale, experimental implementations tests effectiveness and customer value. It can also provide risk managers with experience to anticipate and mitigate new risks – without too much at stake.”

Avoiding ‘anti-innovation’

Companies cannot afford to allow their back office to dictate how the business should position itself in the future, according to chief innovation officer at Aon Risk Solutions Stephen Cross. This is because they typically have a bias towards safety and can therefore be resistant to change, he says. “Risk management and marketing should be looking at their future and next generation buyers and their habits, and adapting their products, solutions and offerings accordingly,” Cross explains. “Many of the risks of innovation can be hedged, so be proactive in working with your risk advisory consultants.”

Chai says that to avoid being perceived as “anti-innovation” and too focused on controls and measurements, risk managers should endeavour to provide a “common language” that the business can use to translate and integrate a strategic and innovative agenda. “The risk management team can help foster a company’s innovative culture and agenda by revealing blind spots and area of under-investment, and can do this through explaining risk culture and appetite as it relates to innovation,” he says. “The right question to be asked is ‘how can the risk management team help support an innovative risk culture whilst ensuring a strong governance agenda?’”

Reynolds says risk managers should not see themselves as separate from the process of innovation. “Diverse teams lead to the best innovation outcomes,” she says. “Creative problem solving thrives under constraints; touchscreen was the outcome of an Apple ban on the stylus. Organisational risk is a very valid constraint. The innovative risk manager does not ask ‘Can we?’ but ‘How can we?’ to achieve the desired outcome within acceptable risk levels.”

Cross emphasises that it is not a risk manager’s remit to create a company’s innovation strategy. “Their role is to develop methods of realistic and consistent models to identify, quantify and manage risk,” he says. Cross recommends looking at companies “that have innovation built into their DNA”, such as the pharmaceutical, telecoms, media and car manufacturing industries, which are highly competitive and strive towards creativity.

Embracing failure

Ray Crook is the APAC head of innovation and product development at market research and business analysis firm TNS Global. He points out that many large multinational companies are cautious of innovation and have a very strict process in place to avoid mistakes when going to market. “A common one used is the ‘Stage Gate’ process,” he says. “Within this process are a series of actions and checks at each phase of development to ensure a water-tight strategy. However, a time-consuming process such as this has its downsides. Less risk-adverse companies are able to go to market quicker and secure the prized first-mover advantage. They embrace failure and are willing to launch early, learn from their mistakes and refine once in the market, if required.”

Reynolds says that highly reactive organisations with “a core focus on short-term results and protecting current revenue streams” will struggle to innovate, while Chai believes many senior executive teams are still wary of pursuing edgy new ideas. “Therefore many organisations today still focus largely on ‘extension’ instead of ‘innovation’, which reduces the potential to release new ideas and generate new revenues,” he adds.

Crook says innovation is a key focus for senior executives in Asia and points to a recent TNS client survey conducted within the region that makes it clear that most want to launch more innovations, and do it faster. “In addition, 84% of senior executives in a McKinsey & Company study indicated that innovation is a key pillar in their growth strategy,” he adds. “Given this focus, we believe that senior executive teams accept that innovation carries risk but are keen to push forward at breakneck speed.”

Crook is careful to point out that this does not preclude senior executive teams from attempting to reduce the risks, however to do so they must first be willing to challenge the status quo. “They must adopt newer research methodologies that are significantly more accurate than the traditional methods they are currently using if they want to reduce the risk and to drive growth,” he says. “Technology is enabling them to adopt new methodologies that are significantly more accurate in comparison to traditional methods, and use them to their advantage. It’s clear that by taking an informed approach to innovation, it is possible to minimise risk and create successful new products and services that drive market share.”

‘Second order effects’

Cross believes that senior executive teams need to think beyond quarterly and annual earnings targets and recognise that longer term survival and success is more important. To do this, he says, creative thinking around “second order effects” on unrelated innovation is vital. “For example, what other industries could be disrupted by driverless cars? The answer is many. Will a taxi service be as vital? Will parking revenues for cities and governments disappear as the car can drive itself home? Will offices or meeting spaces now become mobile as it becomes realistic to have a meeting room on wheels? … Will insurers lose profit and income as road traffic accidents all but disappear? Will we see the disappearance of high performance cars? Are car repair shops and parts shops needed anymore, or does the car simply download an update or reboot?”

Cross says the board needs to think of the opportunities this creates for their industry. “If the driver of a driverless car is now in fact a passenger, how do you tap into that time and make them a customer? This is just one of many examples you can think about on second order effects,” he adds.