Renovate your risk management process to improve your innovation capacity

Innovation and risk go hand in hand. They are the yin and the yang. Highly innovative projects have the highest projected return and also carry the highest risk of failure. By using risk management, organizations take a structured approach to dealing with uncertainty, finding ways to manage and mitigate risk.

Traditional risk management processes rely on the evaluation of the impact vs. the likelihood of occurrence. As every innovator will tell you, Murphy has a permanent spot in their team. Given that, accurate assessment of the uncertainties the innovation process brings would be like walking on water. More importantly, attempts at managing those risks can stifle the innovation process. Using a mindful approach to risk management, organizations can improve the effectiveness of their development activities while fostering their innovations simultaneously. To start, evaluate your existing project risk management processes and update it using the following ideas.

1. Understand the nature of the risk: Start with a high-level breakdown of your project risk areas. For each item, identify:
   • the type of risk: schedule, cost, resource, market, brand, operations, …
   • the level of impact and to whom
   • the level of innovativeness: cost reduction, incremental improvement, major revision, product extension, next generation platform, technology/market newness to the firm, technology/market newness to the market, …
2. Assess your appetite for risk: Risk appetite is the amount of risk an organization is willing to take on in the pursuit of value, such as new innovative functionality, achieving market objective, financial results and so. Every organization, project and risk is different. With that, for each of the risks identified in #1, also assess your risk appetite. To facilitate an empowered decision making process, the risk appetite could incorporate trigger levels. For new technology implementation risk:
   • threshold #1 – 2 week schedule slip – managed within the project team
   • threshold #2 – 2-6 week schedule slip – managed within the Program Management Team
   • threshold #3 – 6-8 week schedule slip – managed within the Sales and Marketing Team
   • threshold #4 – 8+ week schedule slip – managed within the Business Unit Team
3. Prioritize, prioritize, prioritize: Incorporate this understanding of your risk areas and customer impact into your prioritization process. Life is about tradeoffs. For projects, this means deciding how to allocate your resources, manage your schedule, and how much of what functionality to implement. Your risk prioritization should align with your resource and budget allocation.
4. Agree on risk management strategy: For every risk area, you need to determine how to manage the risk:
   • nullify – make it a non issue by removing the risk area, such as by eliminating the new functionality
   • transfer – identify a 3rd party to transfer the risk to, such as through partnering
   • reduce – either through reducing the likelihood of occurrence or the potential impact. For technology projects, using roadmapping processes and agile development practices are a good way to reduce new product development risks
   • agree – “yes, it is a risk and that is OK”. However, combining this acceptance with risk appetite analysis would improve results.
5. Compile a risk portfolio heat map: Incorporate risk management as a portfolio in your strategic planning process. Colorful heat maps can visually demonstrate where your investments are along with where your risk lies.
6. Align organizational structure to support risk management strategy: Build an effective team, promote the right capabilities, rebalance resources, … In the process, make sure to support and reward your leaders based on the characteristics of the innovation and risk levels they are responsible for. In the end, if they are not rewarded for failing and learning from those failures, they won’t take risks. No risk, no great breakthroughs.

In addition, make sure the following key ingredients are necessary to achieve a healthy balance of risk and innovation.

1. Build a culture of accountability and responsibility for results. Don’t forget to manage the white space!
2. Foster an environment that enforces and encourages organizational learning and knowledge sharing. It will enforce an innovation focused culture with emphasis on furthering the capacity to innovate.
3. Emphasize the KISS Principle. Keep the risk management process simple, and incorporate it into everyday decision making activities and embed it into the DNA of how your organization works.
4. Change is hard . Build a systemic process to deliver and implement change.
5. Embed the following practices into your processes and culture to ensure success:
   • senior management commitment;
   • clear and stable vision;
   • information and knowledge exchange;
   • flexibility and the ability to improvise;
   • collaboration under pressure;
   • openness and transparency;
   • data/evidence driven decision making;
6. Improve your communication skills, as good communication is key to effectively dealing with risk. It will enable better decisions, better implementation, empowered teams, increase in trust, …

In summary, by ramping your risk management process to foster your innovation projects, you will:

• enhance overall innovation capacity of your organization;
• contribute to efficient use/allocation of capital and resources;
• develop and support your people, and increase your organizational learning;
• optimize operational efficiency while balancing for innovations and risk taking;
• improve your decision making, planning and prioritization;

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