Thursday, February 23, 2012

How to reduce innovation risk

Every day when I come to work I scan my Twitter stream and get insights from hundreds of people who have excellent perspectives on innovation.  There are people who write about open innovation.  There are people who write about business model innovation.  There are people who write about new products, innovations in specific industries and topics like reverse innovation.  The diversity of insights and range of topics demonstrates how valuable innovation can be.  But while there is great diversity of opportunity, there also remains a great distribution of success and failure, which creates innovation risk.  And while there are many types of innovation, one common factor in all innovation efforts is risk.

As I've written in Relentless Innovation, innovation is fraught with risk.  There is risk that an innovator won't identify important needs.  Risks that innovation teams disrupt the regular operations of a business.  Risks that even a promising idea isn't accepted by the customers whose need it was meant to address.  Instead of the scarlet "A" from Hawthorne's novel, every innovator and every innovative idea wears the black "R" for risk.  And in the modern business model, risk is to be avoided at all costs.

Risk introduces uncertainty, costs, variability and unpredictability.  These factors run in opposition to business as usual - the work most firms have done to streamline operations, create predictable short term results, eliminate unnecessary costs and reduce or eliminate variability.  Innovation introduces the snake of risk back into the garden of efficient, effective business operations.  And yes, that snake whispers sweetly to some executives about the mythical risk/reward tradeoffs.

Clearly, if our highly efficient, productive business models are to become more innovative, they need to believe that innovation risk can be reduced or controlled.  Either that or the operating models must become far more comfortable with risk and its costs and variances.  I suspect the latter requires far more cultural change than many firms will sustain.  If the tradeoff is trying to reduce innovation risk or reduce the resistance of the culture to risk, I think the former is the place to start.

How does a firm reduce or eliminate innovation risk?  I think there are at least five actions that can dramatically reduce innovation risk.  Note that I didn't say eliminate risk.  I doubt that is possible, but I do believe innovation risk can be dramatically reduced through the following actions:

  • Align innovation to strategic goals.  Far too often, innovation activities jump the tracks, pursuing interesting ideas that aren't in line with corporate goals and strategies.  This is an especially damaging result:  good money and resources spent on poor outcomes.  A clear strategic goal and documented scope provides a framework for innovators, increasing their chance of success.
  • Executives clearly committed to innovation.  Rather than propound the need for innovation, executives need to provide the best resources, provide funding and stay engaged in early innovation efforts.  Otherwise innovation is viewed as the flavor of the month and slowly withers from a lack of engagement and a dearth of resources.
  • People who understand what to do.  Many innovation teams are simply going through the motions of innovation, pantomiming their way to an acceptable idea.  They aren't trained in innovation tools or techniques, and, more importantly, aren't open to really big ideas.  They haven't changed their perspectives, still encumbered by the risk profiles of the business.  Only when the best people are on innovation teams, have released their thinking anchors and have received training on the best innovation methods and tools can innovation succeed regularly.
  • Clear insights into customer wants and needs.  Far too often innovation teams review existing market research and suggest ideas that extend existing products and services.  It's rare that an innovation team meets a real customer, much less explores new unmet or unarticulated needs.  Identifying and validating new needs and creating ideas based on these needs will greatly reduce the risk of innovation.
  • Doing innovation at speed.  Most innovation teams struggle with the culture, which is resistant to innovation, focused on the status quo, stuck in meetings.  Most innovation teams lack sufficient resources and pull people on a part-time basis from their day jobs.  Most innovation teams have to invent their innovation processes, which delays the work and forces the people around them to question they ability to innovate.  The longer an innovation project drags on, the less likely it is to be successful.  And the longer a project drags on, the less valuable any needs or insights that were spotted become.  Innovators can reduce risk by creating educated teams following defined workflow and working quickly to ascertain needs, generate ideas and validate those ideas in the marketplace.  Instead of slow and steady, move fast and steady.
By the way, while we are on the subject, there are several ways of reducing risk that don't work well:
  • Reducing the scope of the idea.   Many, many ideas start life as interesting and disruptive concepts, and over time are reduced, shrunk and rounded off to become incremental at best.  Yes, this reduces the risk but also eliminates much of the differentiation and the reward
  • Fast follower.  Many organizations believe that they can wait for others to innovate, then quickly copy the product or service.  The fast follower model works if 1) your development teams are truly fast (which most aren't) and 2) you understand what the customer values in the product you are copying (many times firms don't understand the customer value proposition).  As product cycles shrink and customers become ever more discerning, fast followers are left with less and less margin.  Again, little risk but little reward.

There are many more ways to reduce innovation risk, but we don't have time or space for them in a blog post.  This should be the first order of business for any innovator - trying to define the types and nature of risk that innovation presents, and understanding how to eliminate or reduce risk.  It's strange actually - everything about business is a risk/reward tradeoff, yet in many organizations we've lost the ability to balance the two, and seek only opportunities with no risk and little reward.
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posted by Jeffrey Phillips at 5:49 AM

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Blogger Augusta Tina said...

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