Innovation risk and why it is often overlooked.

Innovation risk, like several other business risks, is one that if mismanaged or not managed at all can have a severe negative impact on a company’s competitive edge, bottom line and ultimately survivability. However unlike other business risks such as compliance risk, reputation risk, operational risk etc. that either have a whole department dedicated to managing them or have general rules and guidelines for the entire company to adhere to in order to manage them, innovation risk rarely gets that level of consideration.

So why is it that innovation risk is often overlooked or not treated with the same amount of consideration? From our experience and research, we have found 3 main challenges that facilitate this phenomenon.

1. The outlook on innovation risk

Most discussions and literature on innovation risk are geared towards the risk of doing innovation, the potential pitfalls and the difficulty in measuring direct benefits. This take on innovation risk intrinsically encourages minimizing if not actively avoiding innovation initiatives.

A more effective way of looking at innovation risk would be to define it at as the risk of NOT innovating or doing it the wrong way because ultimately that is the real risk that most companies face and one that has led to the downfall of many companies.

2. Impact of innovation risk

In the previous post, we talked about what innovation is, and our theory is that innovation is growth driven by creating new value for the customers. So another way to look at innovation risk would be: what is the risk of not growing fast enough? Or what is the risk of not meeting our customers’ unending desire for more value?

Well, the simple answer is either:

i. You will be disrupted, or

ii. Your customers will be slowly leaving you.

Disruption is a bullet to the head, and most companies, even when they see it coming, can’t do much about it. The second one is probably the biggest reason why innovation risk slips under the radar for most companies.

Customers leaving and going to the competition is usually a slow process happening over time and it can be hard to pinpoint the exact reasons why customers are leaving. And even then it might seem like it is just a small portion of your customer base, therefore not raising the appropriate amount of concern.

3. Calculating innovation risk

There is currently no framework, model or tool to assist corporates in calculating innovation risk, so as to determine the appropriate amount of resources to invest in managing such risk. Therefore it becomes very difficult for corporates to make informed decisions when it comes to innovation initiatives.

Moving forward:

At 10xre, we have been working on designing and building an innovation risk framework that can help corporates identify potential risk areas that can cause customer churn, how much it would cost them and how much they should invest to address the problem. This is all in service of having enough relevant data to make informed decisions.

We understand that the earlier that innovation risk is identified the easier and cheaper it is to address it, however innovation risk is not easy to identify in the early stages, sometimes until it is too late.

“At their beginning, they are easy to cure but difficult to recognize, but in the course of time when they have not at first been recognized and treated, become easy to recognize and difficult to cure.” — Niccolo Machiavelli, The Prince.

TAKEAWAY:

Everyone knows that innovation is necessary and it is the future, it is easy to prove that just by looking at how we got here. But very few people know where to begin with innovation and how to relate it to their current challenges.

Innovation risk is the risk of not innovating, or doing it the wrong way. A framework that can assist corporates to calculate innovation risk and its impact on the bottom line is necessary so that companies can make informed decisions when it comes to innovation.

This is not to say that innovation doesn’t come with risks. It does — and they should be managed as such, just like how starting or running a business comes with its own risks. But you don’t shut down the company just because it has risks…instead, you develop processes to manage them.