Insights | By Howard Tiersky

Overcoming Risk

We’ve been going through the five barriers to innovation faced by large enterprises.
 

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Do you struggle to get the kind of support you need to transform your company’s products, services or marketing for this ever-changing digital world? Do you find there’s willingness to fund incremental improvements with fairly predictable short term results, but a lack of readiness to place big bets on large-scale organizational transformation? For many companies, it seems less risky to stay in the areas they are comfortable with than venturing out into the unknown.

Are they right? Is it risky to transform your enterprise? Yes!

Sure, something could go wrong. Things might not work. You might misstep. In fact, you probably will. But when the world is changing, failure to change is riskier than change itself.

Here’s the good news: CEOs and those managing business units understand a lot about risk. You could make the argument that managing risk is their main job. When deciding where to invest so as to achieve the biggest upside with the lowest risk of downside in the public market, they know that if someone offers them a stock with supposedly huge returns and zero risk of downside, it’s time to run the other way. And just like in the stock market, the steps to successful innovation include good insights into the market (e.g. understanding your customers’ needs and current trends), combined with a portfolio approach, so you’re never placing all your bets on one horse, because the outcome of any one idea or innovation is unpredictable.

Our jobs as innovators and change agents is to communicate this risk profile in such a way that the risks make solid business sense, and secondly, to then structure the approach to keep the risks as low as possible. Once you have alignment around the idea that some level of risk is necessary and appropriate, a key way to gain confidence from enterprise funders is to show that you are envisioning the different types of risks that your efforts face, and are developing smart remediation strategies.

So let’s get specific! When talking about risk, we have five different types that affect transformational initiatives.

   

Type One: Implementation Risk

You could have a great idea, but fail to pull it off. The technology could fail — the manufacturing process could produce too many defects, or the cost might be way higher than anticipated. Implementation failures are generally the result of the unforeseen. The best antidote is having a diverse team collaborating effectively together to consider the key aspects that are essential to implementation in an orchestrated way, well in advance of actual implementation. Even more important: SIMPLIFY. Using the concept of the minimum viable product, less ambitious, less expensive launches lead to more sophisticated ones. If you can significantly reduce the complexity of bringing the product to market, you can more successfully mediate the implementation risk.

In any case, you want to create the expectation that innovation efforts are an iterative process. Management would rather hear that you are confident of large scale success from the get-go, but don’t fall into that trap. One of the biggest impacts on the aversion to risk is not necessarily the unwillingness to fund innovative projects at the outset, but the unwillingness to continue supporting them, if they are not initially successful.

Microsoft is famous for developing version 1.0 products that are terrible. But by version 10, those same products often dominate the market. All too often, we are aware of innovative products once they become wildly successful. However, when you look at the history of the product, you see that they were iterating and pivoting to find their way to success.

Type Two: Adoption Failure

Even if your product is perfectly executed according to vision, there’s always the risk that people just won’t like it. Ebay started out as a site for trading pez dispensers; Facebook started out as a dating site. And Flickr started out as an online role playing game. Leveraging an iterative process, combined with upfront customer research to understand consumer demand, are good ways to reduce this risk.

   

Type Three: Disintermediation/Cannibalization

Disintermediation is an example of “failure by success”. It’s the risk that, for example, a new digital channel, in its success, will take money away from another area of the business (like offline channels) or that direct sales to customers might cut out key partners or distributors, and cause them to retaliate in another area of the business relationship.

Tim Cook recently shared Apple’s philosophy about new products cannibalizing their pre-existing product lines. He figures that if Apple doesn’t do it, someone else will, so they might as well embrace it! Clearly the iPhone cannibalized the iPod, and the iPad is doing the same to the Macbook, so there’s good evidence that cannibalization is a risk worth taking.

When it comes to similar concerns about business relationships with distributors or retailers, (which, frankly, was more of an issue 10 years ago) there is a wide recognition in most industries today that there is little exclusivity of distribution, and retailers often compete with the direct sales of manufacturers. The main principle here is to ensure a level playing field, so if your partners play their role effectively in the customer buying lifecycle, they still have ample opportunity to succeed.

   

Type Four: Legality

The fourth category of risk is arguably another success scenario. When new ideas start to gain success, it can result in legal action against the company, or the government interpreting a violation of some law or regulation.

On one hand, appropriate legal advice is necessary for anything we do in business. But in my experience, the bigger problem is this: any time we move into uncharted water, it becomes unclear what the legal ramifications will be. Airbnb and Uber are constantly fighting legal battles, while their valuation has climbed to tens of billions of dollars. When Google launched, they faced legal challenges surrounding whether or not it was legal for them to index other people's sites on the internet.

The reality is, when you’re trailblazing, some legal uncertainty is par for the course. Attorneys are often asked to focus on protecting the company from any risk. It’s important that legal counsel is a part of the innovation process, so they can understand that the goal is not to entirely avoid risk, but to take intelligent risk.

   

Type Five: Perception Failure

Successful innovation requires experiments, wrong turns, learning and persistence. There’s always a risk that those who don’t have a knowledgeable mindset about innovation will judge the projects or their leaders as failures, because failure is always part of the innovation process. Nobody likes to be perceived as a failure, so this risk creates emotional barriers in committing to innovation. Furthermore, in the political world of the enterprise, and the psychology-driven world of stock prices, perception can often be reality. This makes it critical that the right expectations for innovation projects be set in advance, including their time frame and expectations for return.

Companies that are successful at innovation create cultures that reward following a diligent innovation process, and that don’t punish the natural failure that comes as part of innovation, especially when it’s accompanied by useful learning. In the end, risk is mostly about ROI. Like any investment, those deciding to back innovation projects want to know if they’ll get their money back, and whether or not the rosy projections associated with the project's business case will really come true.

It’s impossible to be certain. The best we can do is make intelligent projections, apply iterative and collaborative processes driven by customer research, and maintain a portfolio of initiatives, so that we aren’t putting all our eggs in one basket.

So, yes: there is risk that ROI will not be achieved. And it’s true that the time frame of the Return on Investment is often unclear. However, in these changing times, failure to fund transformational initiatives leads to another kind of ROI: Risk of Irrelevance. While it’s probably not the right message for your next investor call, I’ll leave you with this famous quote by Teddy Roosevelt. “Far better is it to dare mighty things, to win glorious triumphs, even though checkered with failure…than to rank with those poor spirits who neither enjoy nor suffer much, because they live in the gray twilight that knows not victory nor defeat."