Friday, January 18, 2019

It's past time to reintroduce risk into corporations

I was on a conference call recently, discussing an upcoming keynote that I'll deliver to a academic-federal government program meant to accelerate new technologies from basic research into the market.  We were talking about the "ecosystem" of contributors that can help move basic research from academia and research labs to market.  One participant talked about the role that large corporations could play, and sometimes do play, in commercializing new technologies.  At this comment one of my colleagues chuckled.  He said to me, after placing our phone on mute, that few corporations are willing to do much with technologies coming out of academic research.  They are simply too early in their development, with too little consideration for use in the real world.

We rejoined the call and encouraged the speaker to include the role that entrepreneurs play in moving ideas from academia to the market, rather than focus so much on corporations.  The coordinator wanted to know why we were encouraging more emphasis on entrepreneurs rather than corporations.  It's simple, I said.  Corporations are not longer willing to take any risks.  And there, my friends, is one of the major reasons that we see so little innovation from established companies, and so much disruption from unexpected sources.  Risk has been eliminated from corporations.  And we need it back.

Certainty and Risk Reduction

Corporations don't like risk or uncertainty.  In fact their bureaucracy, structures and pace are in place to ensure that any new project is carefully reviewed, carefully inspected and carefully scoped to either eliminate risk or mitigate risk to the greatest extent possible.  This means that most new products or services are so carefully managed and monitored that they can only be incremental change at best.  Nothing earth shattering or revolutionary will come from larger corporations given their structures and processes. 

Everything these companies have done over the last 30 years was focused on reducing risk and uncertainty.  Paychecks are based on being predictable, hitting quarterly targets as suggested in whispers to stock analysts months before.  A large and unexpected increase in revenue from a new product might be viewed negatively since it would be a surprise!

Could I get that with a side order of risk?

Risk avoidance leads to complacency and then to blinders.  Recent advances from asset-less companies like AirBnb or Uber demonstrate that easily accessible adjacent opportunities to large corporations were available, out in the open, ready for the taking, but none did.  There was too much risk associated with going into the room rental business for Marriott, Hilton or Sheraton. 

We need to increase the amount of risk we are willing to tolerate within larger corporations, or more will lose market share and the creative edge to others who are willing to take the risks.  When markets were stable and steady, the basis for success is to stay the course and not distract from a good thing.  When markets become more frothy, endure more change and more sudden change, when products and services can be rolled out much more quickly, companies must adapt to these changes by incorporating more risk into more projects.  Otherwise the risk isn't in product development, it will be found in revenue, profits and even viability.

Thank you, next!

Of course talking about incorporating more risk in new projects is like deciding to scale a sheer cliff when your previous experience in mountaineering has been limited to practice runs in the gym.  Compensation schemes, cultural phenomenon and other factors will constantly work to limit the amount of risk that is allowed in any project, so wholesale change must be the order of the day.

That means strategy and planning must incorporate more risk, and communication from the top down must encourage more risk in key innovation projects.  Corporations may need to create new measures and metrics, because existing ROI models simply won't countenance newer, riskier projects based on older ROI models.  Corporations can create new projects that incorporate more risk, but if these changes aren't made, the response when it comes time to fund these activities or staff them will be:  thank you, next!

When your industry is safe and secure, change is moderate and predictable, threats are low, you can operate in a very predictable manner and keep risk in check.  Given the state of the market, political turmoil, international trade tensions and the rapid evolution of new technologies through digital transformation, your level of operating risk and product risk just went up.  Are you able to dial up your level of new product development risk to help create the next generation of products? Or will you outsource risk to a new generation of entrepreneurs, thinking that you'll acquire their companies or products as they reach scale, only to watch them scale so rapidly that they eclipse you?

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posted by Jeffrey Phillips at 6:22 AM


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