14 Mar 17

    Innovation and Risk Adversity: Strange Bedfellows

    unlokq

    Much is said about the need of the traditional enterprise to adopt the innovative methods of the startup. But can they realistically achieve this?

    Innovation is Risky Business

    Nothing to do with the Tom Cruise film from the 80’s, the fundamental differences between the 2 architypes is their appetite for risk

    • Startup investors have a large risk appetite, but a strong belief that the ‘idea’ behind the business is good, typically there are a low number of investors looking for high growth potential over a [relatively] long period.
    • Large enterprises however are ‘owned’ by a large number of shareholders expecting a modest, but steady income through dividends every quarter, and throughout the life of their investment.

    So how does this reflect in the behavior of the people that run the business?

    The StartUp

    Entrepreneurial businesses such as those falling into the category of ‘lean startup’ are by their nature experimenters, they assume very little, perhaps nothing, about the needs of their customers. They try something small, and if they fail they pivot and try something else, if they succeed, they improve and mature it. Either way, they have learned something in an ongoing OODA loop. To this style of business this is an acceptable mode of operation.

    The Enterprise

    Large [traditional] enterprises make decisions based on their own internal experience, and the models that they have generated over time. Their experience is based on the assumption that these models are still correct, ergo, their decisions must be good.

    The problem is that [without exception] ALL models are flawed, since they are ‘simplifications’ of the real world. Just look at the economic models that could not explain the 2008 financial crisis (and its aftermath).

    The result of this is that they pursue a big idea with the absolute certainty that it is the right thing to do, since old men with a wealth of expertise have said so. If it is, then all well and good, but just as there are failed ideas for startups there are for enterprises, the first problem comes from the fact that the ideas are bigger [to start with].

    The second problem is the refusal to recognize when the idea is, in fact, a failure, and continue pumping money into the idea to ‘prove’ it a success rather than accepting failure, and learning from it.

    This leads on to a third problem in that, since we have manufactured success, then they are likely to repeat the same processes and mistakes ad nauseum.

    So why must we always succeed?

    • Partly hero worship, in that leaders responsible for specific activities want to receive the adulation that accompanies success.
    • But also senior leaders have delegated their ‘accountability to shareholders’. What do I mean by that;

    The board is accountable to shareholders, not YOU

    The C-suite is accountable to the shareholders of an organization, and they must make their [entire] organization successful, absolutely.

    But, in large enterprises there is a prevailing sense that EVERYTHING that is executed on in the name of the board members, by every leader and their subordinates must also be successful, and whilst it is true that we cannot fail at everything, we CAN afford some failures as long as the successes outweigh them and the overall business is profitable.

    Implications

    Shareholders; for the longevity of the organization in which they have invested they must accept a lower rate of return on their investment, since a high return on a company with a limited lifespan is eminently less desirable.

    Leaders & Managers; they need to understand that they are but a small cog in a bigger engine. Bosses do NOT, or at least should not expect every initiative to be a success, since there are other initiatives that may offset my failure.

    It is the line mangers responsibility to pick a broad portfolio of initiatives, some high risk some lower and some ‘dead-certs’ to meet a reasonable expectation, and not the maximum possible gains.

    Enterprise Labs

    And what for employees; since they are not governed by the efficiency by which they do their work, by doing the same things faster, they are free to create better, more effective ways of working, in some cases they may be radically different, ultimately this leads to happier employees as they are given more autonomy to affect the business.

    This may be formalized into innovation or ‘Enterprise Labs’. In some cases the culture of success may be so endemic in the organization that enterprises may ‘parent’ innovative companies specifically to drive this change in the parent organization.

    Celebrate the small wins

    As J.P.Kotter said, we must ‘celebrate the small wins,’ It shows that we are making progress. Where risky investments pay-off then this should be highlighted at all levels, board, employee, and especially with shareholders, to increase their risk appetite.

    In closing. Whilst enterprises must be the best that they can possibly be. This does not mean success is always required.

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