During any economic crisis, many organisations may reduce their risk tolerance and focus on their core capabilities. This, in turn, can often mean that ideas with the highest risk (even if they also offer the greatest potential impact) never make it off the drawing board. In this piece, we look at what effect an organisation’s risk culture can have on its ability to generate and progress ideas and how we can investigate ‘high-risk’ ideas while reducing the risk profile.
Risk Culture
Often, organisations that have a low tolerance to risk find that most ideas received from employees are in areas that are considered safe, i.e. ideas for incremental process improvements are more numerous than ideas that relate to the development of a new product or market.
In such organisations, as a consequence of the highly controlled environment that is common, the level of checks and balances that are often imposed from the top of the business means that most ideas of any significance will need board level sign-off before being selected for further exploration or implementation.
Unfortunately, the approaches and measures that are regularly used by these organisations to assess potential projects often adversely discourage the investigation of the more radical, high impact ideas. This was explored in a HBR study1 which identified 3 areas that commonly create barriers to successful innovation in organisations.
First, they found that “misguided application” of a number of commonly used financial measures (which are already inherently risk-averse in nature!), not surprisingly favours the development of existing resources rather than new, transformational capabilities.
They also found that methods such as stage-gates employ measures (for example, expected revenues) at each gate which are more difficult to estimate accurately for breakthrough ideas than incremental improvements of existing products and services.
Lastly, an issue that is specifically found in publicly listed companies, they also pinpointed that senior managers may be focussed on the short-term return to their investors rather than the organisation’s long-term health.
At the opposite end of the scale, organisations with a high tolerance for risk may experience confusion as individuals feel emboldened to progress their ‘pet ideas’ without feeling the need for sanction. These “Lone Wolves” could be progressing ideas which are not in-line with the organisation’s objectives, or worse, are contradictory with the organisation’s Vision & Mission. There may well be frustration among the employees when few ideas lead to real change due to the lack of organisational governance.
So, if we are to keep our staff involved, with proper governance but without too much bureaucracy getting in the way of us finding and advancing those truly transformational ideas what do we need to do?
Building and keeping engagement
The first step is to ensure that we are communicating how ideas will be assessed. This will build confidence that the evaluation process is fair and transparent. Employees must be confident that their idea will be treated in the same manner as an idea from the Senior Management Team.
Secondly, the assessment measures that are used must align with the operational objectives for the area of the business to which the challenge relates, and these measures should relate directly to the overall organisational objectives.
Submitted ideas should be visible to others with a stake holding in the challenge area and they should be able to feedback their view of the idea’s validity. When ideas are formally evaluated, this evaluation should be fed back to the idea submitter, and if the idea is progressed, then this progression should also be communicated. Success should be celebrated; case studies of previous successful idea implementations will build confidence that the organisation takes idea generation seriously.
Finding & Advancing Transformational Ideas
If one assumes that an organisation has selected, or shortlisted, one or more ideas first based on the impact that they might deliver (since there is little point in progressing ideas that will deliver negligible impact!), the most important next selection criteria when looking for transformational ideas is identifying how radical an idea is.
Here, we demonstrate this by plotting the idea on an X, Y graph (Fig. 1). We are mapping how new the product or service is to the organisation and against how new it is to the market. In our version, each axis is measured on a scale of 1 to 10. The product of these two scales tells us the difficulty or risk associated with implementing an idea – if a product is new to both, this is likely to be because it it hasn’t been done before, i.e. it is difficult to do. The more difficult or risky the idea is the more novel it is, and the greater the chance that this idea will create competitive advantage.
Fig. 1.
In highly controlled environments, those ideas with a low-risk profile are the ones that are likely to be implemented – however they are rarely novel and are unlikely to bring competitive advantage. Where such low-risk profile ideas relate to product development, they are likely to have been developed before by others, meaning that competitive advantage can usually only be achieved by competing on price.
Other ideas that often fall into this category are incremental process improvements. Since they have little risk attached and are therefore likely to be easy to implement these ideas should still be advanced, but no one should be under any illusion that they will bring long-lasting competitive advantage.
Reducing the Risk
So, given that we can now see that those ideas with the highest risk-profile are the ones that are most likely to bring about real competitive advantage, we should go ahead and select the high-risk ideas and implement them? Well, yes and no. We would suggest a portfolio approach where, of the ideas selected for progression, 70% are low risk ideas and 30% are the high-risk, potentially transformational ideas.
With the high-risk ideas we must put them through a rigorous validation process so that we reduce the risk of failure in the implementation phase. We should not allocate any valuable project implementation resources until we have sufficiently increased our confidence levels in our ability to successfully implement them, and until we are able to demonstrate that they will deliver real value to our customers.
If we can keep employee engagement levels high, ensure that we give levels of freedom to investigate innovative ideas while still ensuring that all ideas are in-line with organisational objectives, and have a mechanism for investigating radical ideas while reducing the risk profile then we are well on the way to creating competitive advantage.
In future blogs we will investigate these themes in more detail, for example, how to build and retain employee engagement in innovation, why the cascading of organisational objectives is key to innovation success and how to optimise experimentation to reduce the risk associated with implementing highly novel ideas.