Using risk management as a catalyst for innovation may seem counterintuitive, but a recent Accenture survey of executives across 10 industries including manufacturing revealed that, in addition to managing compliance, risk management is seen as an enabler of long-term growth and profitability. An overwhelming 91 percent of those surveyed feel that the risk management organization is important to infusing the desired risk culture into a company to support its innovation platform. Furthermore, the same percentage believes that strong risk management enables long-term profitable growth, while 85 percent think that it is critical to achieving a competitive advantage.
Typically, risk management has been viewed as the enemy of the ‘innovation ideal’. Major companies are often complex global enterprises held together by a battery of controls. The side effects of such a structure can be toxic to innovation, creating a decidedly risk-averse culture that stymies the discipline’s lifeblood, creativity. Some organizations also employ the “funnel” process, using a series of stage gates designed to reduce uncertainty as exposure to risk grows. For many companies, the funnels end up producing only weak, incremental ideas that often come to market slowly and miss cost targets.
However, if properly used, the fusion of innovation and risk management can aid industrial manufacturers in avoiding these scenarios and play a major role in accelerating their ability to produce the kinds of innovative products that spur growth.
There are three fundamental principles industrial companies should practice that will help them harness risk management to drive higher value from their innovation initiatives. These include flexibility, speed and control.
Flexibility. Companies should apply risk management to introduce more flexibility into their portfolios and avoid using the “funnel” to construct an innovation portfolio consisting only of incremental / low-value initiatives. Instead, they should develop and refine processes that identify gaps in portfolios, such as competitive vulnerabilities, both from a product and geographic standpoint, to balance their portfolios with the right product mix, thus reducing risk.
Speed. Successful innovation often requires speed. Using agile development that goes beyond traditional risk controls, industrial manufacturers can increase their chances of filling innovation portfolios with new products, while effectively managing the risk. Agile development is a process that repeatedly gleans valuable insights from customers and markets, drawing regular attention to risks and integrating them into the decision-making process.
One software producer replaced its R&D department stage gates with an agile approach using cross-functional teams that worked regularly with the market to gain greater insights and streamline decisions. As a result, the company was able to increase the frequency of its software product releases, after it had slowed in recent years.
Control. In an innovation culture, companies need to use controls in a way that embraces the logic of intelligent mistakes. In other words, failure should be acknowledged as a part of learning based on the reality that few ideas make it out of the pipeline.
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Encouraging such a risk-tolerant culture also bridges organizational mindsets like finance and operating units that often are at odds. Finance functions are wired to avoid or mitigate risks, while operating functions like product development are responsible for boosting risk taking. Effective risk governance can cross the divide, establishing rules, oversight committees and assessment policies, creating transparency and buy-in throughout the organization.
Innovation is more critical to success than ever, as it is the engine for sustained growth in our industry. Industrial manufacturers that can use risk management as one more way to ratchet up innovation can increase their ability to grow and achieve high performance.
>> James Robbins, email@example.com, is managing director for the automotive industry & industrial equipment industry, North America, with Accenture (www.accenture.com), a global management consulting, technology services and outsourcing company. The Accenture survey referenced is “Stage Gates Can Kill Innovation, Risk Management Can Fuel It,” by Wouter Koetzier, Adi Alon, and Kenneth Hooper, copyright 2012 Accenture.