Reduce Risk With Robust Innovation Management
5 practical ways to minimize risk with innovation
By its nature, innovation requires risk-taking. It calls for companies and individuals to review their ambitions for growth and seek opportunities for future value creation that differentiate them from the competition. The innovation process from conception to implementation is often challenging - and the outcomes are not guaranteed.
The time, energy, and resources needed to innovate often divert attention from the core business and are accompanied by high levels of uncertainty. This risk, however, can be reduced if it is supported by best-practice innovation methodologies and frameworks that aim to maximize the probability of value-creating outcomes. Financial institutions, by their very nature, are in the business of managing various financial and non-financial risks. The approach to innovation management should be no different.
Through carefully structured and systematic incorporation, an innovation management program can be embedded with alignment to the business strategy and supported by sound governance, risk appetite, documented processes, and clarity of roles and responsibilities that enable cross-functional teams to embrace agile principles for rapid development and commercialization. This approach de-risks the innovation management program and creates resilience ‘through the cycle’, that is, during economic upturns and downturns.
This is contrary to conventional organizational behavior that has been observed, which is to close down or reduce investment in innovation management programs during downturns in business cycles. However, research has shown that companies who continue to invest in their innovation capability during times of economic recession consistently outperform their peers - a virtuous cycle is thus created between a well-structured innovation management program and business performance.
Market Capitalization of Top 50 Innovative Fast Companies (2007 - 2013) compared to S&P 500:
5 Practical Ways to Create Robust Innovation Management Programs that will deliver competitive outperformance:
Creating a resilient innovation management program with the right risk management guardrails is well worth the time and effort, with a few quick ways to get started:
Implement a customized risk management process for innovation projects: By implementing a risk management framework based on a true 'risk-based' approach that teams can follow easily, risk management principles can be incorporated from the start of each project. The standardization also helps senior management assess the risk-reward profile of innovations against one another, helping with the efficient allocation of resources across the company instead of in silos. The involvement of risk and compliance teams early in the process will also ensure that any risk concerns or regulatory requirements are considered early in the design phases and do not become impediments in the commercialization phases.
Encourage an innovation management process that favors iterative implementation: Build an innovation culture that identifies key assumptions up front and finds ways to test these as hypotheses with end clients early on. This slowly builds an innovation in stages and helps limit the amount of resources invested in each innovation. This will help companies quickly assess which innovations are viable and which innovations match their perceived value-added.
Collaborate with different lines of business to develop the innovation in a diverse way: Each line of business has different ways of operating. Involving business units that may be affected by implementing an innovation in the development stage will help reduce the risk that an innovation does not fit the company's operations. It also has the added benefit of socializing the innovation with the affected team members for faster adoption.
Incorporate a scan of the regulatory landscape for relevant current and pending legislation: Pending legislation and regulatory changes often need to be considered during the build, especially when dealing with truly disruptive innovations. Understanding where this legislation or regulation will most likely impact innovation will help with the solution's sustainability. Effective horizon scanning will help reduce the need for significant changes to the solution after the build.
Establish risk tolerance levels appropriate to the company and its industry: There is only progress with risk. For risk management and innovation to comfortably work hand in hand, a risk tolerance level needs to be established based on the company's strategy and growth aspirations. Identifying this upfront will help manage the innovation selection process efficiently and reduce concerns of adverse outcomes.
The success that arises from a deliberate and well-structured innovation management program is supported by data and observations spanning multiple sectors, and their performance has come from different economic cycles. While these tactics will not create a zero-failure environment, they will help reduce the risks associated with innovation and create an environment where companies can continue to thrive.