Smart risk management practices translate extremely well into the innovation process. Here's how to apply smart risk management.
Company A wants to be innovative. They create a small innovation team, give them some fancy innovation software, and let the team just innovate away. The team comes up with ideas, and Company A tries all of the ideas. Then they file for bankruptcy. The end.
Company B wants to be innovative, too. So they assemble an innovation team of their own, invest in good software, and the team starts producing ideas. Since Company B is really smart, and puts all of the ideas generated by their team through a series of "stage gates". At each stage gate, a reviewer sends the innovation back to the team -- demanding more research or more testing. The innovation team gives up and starts their own company with all their rejected ideas, earning millions, while Company B continues to produce the same stale products they have since 1953. Eventually they go out of business. The end.
Company C wants to be innovative, as well. Company C studies what venture capitalists do, and they employ smart risk management practices to their innovation process. The innovation team is productive. Some ideas succeed, but more of them fail. But that's okay! Because Company C knows when to nurture a fledgling idea, and when to put the ax to a loser. The winning ideas generate plenty of revenue to cover the ideas that didn't succeed, especially since the bad ideas were cut short and used to generate insight and intelligence that was applied to more successful ideas. Company C used the same risk management practices that business uses for other endeavors, like making real estate purchases.
But wait! Risk management is an innovation killer! If you start employing the same risk management principles to your innovation process, you'll end up like Company B: a miserable failure. Not really. Smart risk management practices translate extremely well into the innovation process. Here's how to apply smart risk management to innovation and end up a winner.
1. Identify the Risks
Venture capitalists build a portfolio of investments. When one struggles to succeed, they nurture and invest and find solutions for the problems. If one can't be saved, they quickly shut it down. The winners deliver enough return to pay for all the losers -- plus a good bit to line the VC's pockets.
Every innovative idea comes with risks. The problem with Company B is that they fail to differentiate between the risks worth taking and the risks best left alone. The problem with Company A is that they never assessed risks at all. Company C identifies the risks and determines which are minor, which are major, and which risks offer enough potential reward to be worth it.
2. Categorize the Risks
What type of risk is involved? Some risks are related to the market: perhaps the market won't bear another similar product or maybe the market for that product is shaky due to economy, supply and demand, or other circumstances. Maybe the risk is competitive: a competitor has something too similar. Other risks include technical and operational risks (can it actually be done?), financial risks (can your company afford the investment?), people risks (do your employees have the necessary skills?), and finally legal risks (is it against some law, or could we get sued?).
3. Determine the Likelihood of the Risks
Venture capitalists build a portfolio of startups. They stay in constant communication with these companies. When problems pop up, they work to find solutions. If a problem has no apparent solution, or if the solution is more costly than the potential return would warrant, the VC moves quickly and decisively to shut it down. That's what companies have to do with their innovations. What are the chances that the risk will outweigh the potential gain? Is there a reasonable, viable, affordable solution? Can you control, manage, and measure the risks? You need to know how likely any given risk is in order to assess whether or not it's worth taking.
4. Weigh the Consequences of the Risks
When you employ solid risk management practices, innovation success doesn't come down to the luck of the dice. It's mathematically sound and backed by good business sense.
Just like cooks, not all risks are created equally. Sometimes the consequences of facing a risk are devastating. Other times, it's really not that big of a deal. It's also possible that taking a risk and failing will deliver valuable insight or present new opportunities. Determine if the consequences of taking a risk are serious enough to derail the project.
5. Identify Your Mitigation Tactics
Go ahead -- let your innovation team reach for the stars. Just ground them well by weighing all the risks with the potential return, and determining the consequences of each risk.
It's also possible to mitigate all or most of the risks in many cases. Can you take out some kind of insurance? Is there another way to cover the damages of a failure? See if the risks can be mitigated before scrapping an innovation project.
6. Determine the Costs of Mitigating Your Risks
Will the costs of mitigation be worth the potential payoff? It's possible to mitigate a risk, only to spend more on mitigation than you would if the risk actually failed. Some risks can simply be ignored, because the consequences aren't that bad. Others aren't worth taking, no matter what the potential promises are.
7. Realize How Multiple Risks Add Up on You
Let's say you identify 10 potential risks. Assume that there is a 90 percent chance that each of these risks becomes a reality. That means you have only a 10 percent chance of facing a risk, right? Um, no. Ten risks, each with a ten percent chance of happening equals a 35 percent chance that one or more of the risks will go south, reducing your chances of success to just 65 percent. Now, some of these risks might not be critical and the consequences might not be devastating. Just be sure you know your odds when determining whether to proceed with an innovation project or issue it the death penalty.
What did Companies A, B, and C all have in common? They all invested in great innovation software! Ready to get yours? It can help you identify and mitigate risks, find opportunities you might otherwise miss, and even get all of the useful information you need out of failed innovation projects. Contact us at HYPE Innovation to learn more today.
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