Does Innovation Actually Reduce Risk, Not Increase It?

Posted by: Bruce Nussbaum on May 11, 2007

I was at the Front End Innovation Conference in Boston put on by the PDMA this week and heard some terrific presentations. One quick conclusion from several of them is this: CEO’s comfortable with Six Sigma and reducing risk may be wrong in seeing innovation as increasing risk.

Now it is true that risk-taking is an important part of the design culture (central to innovation today) as opposed to the risk aversion taught at most B-Schools. Yet in the practice of design, especially at the fuzzy front end with consumers, risk is actually reduced.

Why? In the past, innovation meant companies developing new products by having their scientists, engineers and mathematicians (in finance) cook up new ideas in labs, toss them over to the product development and marketing folks to shape them and then throw the stuff at consumers—hoping the products/services would be embraced. Now, this is really risky.

Compare that to what increasingly happens today—inverting the innovation funnel. Companies first use ethnography to observe actual consumers’ behavior (seeing what they do, not what they say in focus groups), take the information to determine unmet needs and move back to the scientists and engineers (around the world, not just inside the company) to come up with new products that satisfy them. With this knowledge, new products are developed and offered to consumers in the marketplace. Now, this kind of innovation process actually reduces risk.

Indeed, as companies increasingly co-create with consumers over time, the risk of innovation is further reduced.

So we should be re-thinking the whole risk-reward equation when it comes to innovation. In the past, we talked about high-risk, high reward. Now perhaps it should be lower-risk, higher reward.

What do you think?

Reader Comments

Jim Rait

May 11, 2007 6:51 PM

I used to find risk boring but find generating information and facilitating its conversion into knowledge seductive. Someone excited me by defining risk as a gap between what we know and what we should know... Now it is interesting and I can now actively work (with enthusiasm) on mitigating risk.. the other thing I realised that exposure to risk was what worried my bosses each time the project manager asked for larger cheques at each funnel gate. If we could show how we managed risk over the last period and what and how the risk issues we face next were to be managed... we found the cheques were signed faster! The Gantt chart for the project became a risk mitigation plan and enabled more exciting ideas to proceed as risk exposure reduction was the game.the

Adam Richardson

May 12, 2007 2:09 AM

A key point that needs to be understood and embraced is that to be innovative in this new paradigm you need to be open to different types of "data" to build a case. Risk is reduced by bringing together multiple types of data, and multiple datapoints of each type (e.g. user insights, competitive analysis, technology trends, business analytics, etc.). No single type of data is sufficient to make a case solid enough that the perceived risk is lowered.

Chris Conley

May 12, 2007 2:32 AM

I definitely agree, Bruce, in the sense that companies' current management of the front end is relatively ad hoc or over managed. Simply by using a modern innovation process (ethnography + iterative design + testing of alternative concepts) reduces risk and greatly improves capability and returns. However, this improvement must be tempered depending on the expected return of a given initiative. I am continually surprised by the number of managers who are unspecific about the size business they are trying to create with a given innovation initiative. $5 million, $50 million, $100 million? As if you have the same strategy no matter what! For really big ambitions, like the proverbial "billion dollar business", different economics are at play and a different management approach is necessary. In a nutshell, creating this size of business is a "black swan" or highly improbable event. As a result, one must truly manage a portfolio of opportunities. De Vany's Hollywood Economics lays out the base theory with a statistical and economic analysis of the movie business. In fact, the movie business is not only highly risky, but chaotic and unpredicatbale as to which movies will be blockbusters. A blockbuster cannot be correlated to any of the obvious variables like budget, stars, # screens, director, etc. In this case, the suggestion is for leadership is to manage a portfiolio and get out of the way of the TALENT. "Character, creativity, and good story-telling trump everything else." These principles and others from the business of creative production are more applicable to innovation efforts than Six Sigma. Mark my words -- you're going to be working more like Pixar and less like McKinsey in the coming decade!

Gong Szeto

May 12, 2007 8:54 PM

bruce,
are you aware of any studies that look at the relationship between political leanings and attitudes toward risk? at the relationship of the political leanings of a company's leadership (CEO/BOD) and the culture of innovation that exists in that company? at what you and BW consider to be innovative products and the political (historical to present-day) leanings of the leadership behind those innovative products?

i was always brought up with these simple definitions of our 2-party system:

1) conservatives: "Things are fine the way they are."

2) progressives: "Things are NOT fine the way they are."

i suspect that a level of discomfort must underly any impulse to change or improve a condition, and why wouldn't that include what goes into (or doesn't go into) the development of new products and services?

it's just my hunch, but the most innovative products come from those who are the least comfortable with the way "things are".

what do you think?
g

Phil Barrett

May 14, 2007 8:26 AM

There are still heaps of organisations out there who haven't understood this yet. They use the old school approach, technology-centred approach to innovation.

But the user/customer-centred innovation process is vital for controlling risk.

This links back to the philosophy from the book "Payback" which you posted about a while back. Successful products usually need a large volume of sales before they achieve payback. So the key factor, the authors point out, is not time to market - it’s time to *volume*. And that's great ammunition for supporters of user-centred design (UCD).

Organisations that really understand they are trying to reach high volume, not high speed, also grasp pretty quickly that they need to invest in customer satisfaction. They need to make sure their product is easy to use and fits with customer needs. If the customers don't want the product or like it, the volume will never come. And the cash curve will flatline.

In other words, these organisations choose UCD.

A favourite example: Nokia incentivises its product teams based on units sold. They get a bonus linked to sales 6 months and 1 year after launch. And those teams have cottoned on quick to the fact that UCD will give them the biggest bonus.

UCD is about taking a longer term view. It’s about selecting the right projects based on an understanding of user needs. And it’s about not just getting *a* product out the door, but getting the right product out of the door, even if it takes a bit longer. Because you'll win the volume game in the end.

"Payback" does allude to this a little, but it does over-emphasise time to market, from my perspective. For me, there's almost always a trade off between time to market and time to volume. You need to get the balance right.

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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