Freedom to Fail: Risk Appetite for Innovation

The manner that failure is embraced instead of feared in a business can improve the way the company evolves and responds to new market opportunities.

At a recent National Association of Corporate Directors Master Class event, Protiviti moderated a discussion among the participating directors about making innovation work in today’s rapidly evolving and disruptive markets.

  • The premise underpinning the conversation was that the risk-reward balance of years past with respect to innovation may not be suitable in the years to come.

The big picture is one of constant change fostered by disruptive technologies — generative artificial intelligence, the metaverse, digital twin solutions, quantum computing, the ever-expanding Internet of Things, and increasing broadband speed and access.

  • The effect of technical debt and the likelihood of waves of regulation to protect consumers from harm and avoid unwanted consequences are also relevant considerations.

Strategic agility — the ability to improve performance and thrive amid disruption — has emerged as a critical success factor in sustaining relevance.

  • This makes innovation the organisation’s lifeblood.
  • It is about sustaining alignment with changing business realities, including reinvented business models, redesigned workflows, and new and improved market offerings.

Apply an “Outside Looking In” Approach: Innovation strategy cannot be formulated in a vacuum. The organisation should avail itself of external perspectives.

Focus on the expected innovation results: The board should engage management in setting innovation policy and facilitating risk-taking. Excessive processes and controls can stop innovation in its tracks.

  • Periodically, the board and management should consider whether the company is taking on enough innovation risk.

Why it matters: In today’s digital world, it’s easy to recognise the power of technology in driving continuous improvement in processes, products and services as well as creating a disruptive force to reinvent business models. But technological underpinnings are not always needed for innovation to be transformative in strengthening brands and leapfrogging competitors.

Fail fast to learn quickly: A higher innovation risk appetite can increase speed, provided there is a strong focus on failing fast and learning quickly. This reduces project risk by minimising the time and resources invested in unsuccessful initiatives.

The bottom line: The board should ensure that the necessary data and information are available to support the innovation process without sacrificing decision-making velocity.

Organise the board for innovation excellence: The board should set the tone and culture for innovation.

  • To that end, directors need to be adept at strategic thinking, abreast of the evolving technology landscape, and cognizant of how emerging technologies can impact the customer experience and the company’s talent acquisition and retention strategies.

Taking calculated risks in an intelligent and proactive way to drive innovation and sustain competitiveness is necessary to thrive in a rapidly changing world. Innovation inherently involves uncertainty. Accordingly, not all endeavors will yield desired outcomes.

Go deeper: Read more here.

(Board Perspectives — Issue 168)

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