Management Strategies

05:00 PM
Mick Simonelli
Mick Simonelli
Commentary
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Risk Taking Is Essential for Innovation

Executives increasingly understand the need to drive innovation in their organizations, but they will succeed only if they aren't afraid to fail.

Major innovations require risk taking. There is no way around it. Innovation is inherently risky, and the more innovative the idea, the more risk involved. There are lots of ways to mitigate risk and fail fast and cheaply. But no matter the precautions and methods taken, risk can never be fully eliminated.

When I worked as an innovation leader at USAA, I would successfully launch 10% of our innovation efforts and be satisfied with that 10%. That means that 90% of the innovations were failing, and most of the bets didn't pay off. However, the 10% that succeeded more than made up for the losses of the others. In fact, innovation became a huge competitive advantage during my tenure at USAA. The successful innovations and their resulting advantages would never have happened without courageous leaders and innovators who swam against the risk aversion current.

Leaders need to take risks now more than ever, because innovation is on hyperdrive everywhere within financial services. The turnover rate for products and services is faster than ever, and the turnover of Fortune 500 companies reflects that. Giant companies are made small when their ideas become stale, and small companies grow rapidly when their ideas create new markets. Behind the successes and failures are leaders who boldly pursue new ideas or sheepishly avoid the risk. We've definitely entered a period of unprecedented innovation tempo, but history also teaches us that innovation requires leaders with courage and the ability to overcome risk.

Alexander the Great understood the need to take big risks to achieve big goals. On some of his larger campaigns, he moved across terrain for which there were no reliable maps. Imagine the risk of moving a large army without knowing for sure where it was going or what hazards would be encountered. He took the risks because he knew the rewards were even larger.

Christopher Columbus also took tremendous risks in his voyages of discovery. He was willing to travel into areas where known experts said the earth fell off into space. Imagine the burden he took managing a small fleet, financing the journey with loans from aristocrats, and running the risk of sailing off the edge of the earth. But the earth wasn't flat. There were amazing discoveries to be made, and it required a daring leader like Columbus to make them.

The conventional avoidance of risk is very strong in financial services. Most leaders have come up through the ranks learning to focus on incremental revenue growth and cost reductions. The art of taking risk has been subjugated to the skill of eliminating risk while growing. Many will talk about innovation, but few of the senior leaders I meet as an independent consultant are true agents of change.

A recent (short) engagement I had with a midsized financial service company that wanted to launch more big innovations illustrates this. I noticed right away that the senior leaders of the company lacked a vision for their innovations. As I talked with these leaders, each one deferred the vision to someone else. No one was willing to put a stake in the ground because of the risk of failure.

This company was very hierarchical in structure and decision making, so the CEO was probably the best source for the innovation vision. He would need to be this company's Alexander or Columbus and assume the risk. Unfortunately, when I met with the CEO, he also deferred the innovation vision, because he hadn't been meeting his board-directed goals. When I suggested that innovation ultimately would help him achieve and exceed his goals, he agreed and suggested that I come up with the vision. Needless to say, I didn't continue working with this particular company, because the leaders were so risk averse that they were afraid to make a plan and act on it.

Conversely, I work with a number of companies with very bold senior leaders who see the benefits of taking risk and know that it is their role to overcome fear and lead their companies to greater heights. Only those leaders who are willing to take risks will realize the benefits of innovation. Buzzwords don't launch innovations. Courageous leaders and innovators who are willing to take calculated risks launch them.

Mick is an independent consultant and thought leader on innovation in financial services. Previously, Mick served as the senior innovation executive for USAA, where he built and led the innovation program to world class status. During his tenure, USAA received numerous awards ... View Full Bio

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Byurcan
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Byurcan,
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8/13/2014 | 9:49:38 AM
Re: Innovation
It's a delicate balance, but one that must be figured out....
MickSimonelli
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MickSimonelli,
User Rank: Author
8/11/2014 | 3:19:37 PM
Re: Once burned ...
KBurger, I think it can be learned but is very difficult to "teach." I've found that traditional "teaching" methods like speakers, courses, and instruction arent very effective. You need more experiential and cultural methods to make it stick. i.e. An innovation day produces good feelings, and causes leaders to feel positive about innovation. But then they go back to their normal routines and perform the same incremental functions in the same way. To really move the needle, you have to change their incentives, provide innovation performance objectives, dedicate time and $$ earmarked for innovation, reward some disruptive activity, and do other such behavior changing tactics. Its not easy in financial services but (if successful) the gains are incredible. Mick
KBurger
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KBurger,
User Rank: Author
8/11/2014 | 2:05:00 PM
Re: Once burned ...
I wonder if that is something that can be learned/taught, or it depends on a more inherent "born with" point-of-view and mentality. I guess that's also one of the motivations for hiring outside the industry (tho that's not a guarantee). What do you think?
MickSimonelli
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MickSimonelli,
User Rank: Author
8/11/2014 | 1:45:42 PM
Re: Once burned ...
Amen. Modern leaders need to be ambidextrous--able to manage the day to day operations on the one hand while also taking some calculated risks for innovation on the other hand. 
MickSimonelli
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MickSimonelli,
User Rank: Author
8/11/2014 | 1:42:52 PM
Re: Once burned ...
You are sooo right! The "innovations" of the financial crash really set back most banking and investment firms. I think the nuanced understanding of how innovation can help (that you mention) is there again, but most leaders are doing well enough without taking risks. However...risk aversion in this hyper innovative environment isnt going to carry most companies through their strategic horizon. Mick
Kelly22
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Kelly22,
User Rank: Author
8/8/2014 | 5:19:58 PM
Re: Innovation
Good point, Jon. There is a "right way" to fail, and that's not a lesson easily learned.  Firms have to balance the right amount of risk so they can afford to fail while learning from the experience and not causing too much damage, and that's definitely tricky. Those that can figure out that balance will undoubtedly stay ahead. 
Byurcan
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Byurcan,
User Rank: Author
8/8/2014 | 3:07:54 PM
Re: Innovation
Indeed, it takes practice and experience to do innovation the right way.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
8/8/2014 | 2:48:47 PM
Re: Innovation
There's a lot of skill in learning how to fail the "right way" though, and it takes experience to gain that skill. And it takes a willingness to take risks to gain that experience to begin with. Some banks are way ahead of others in terms of gaining that skill and experience, and I think that will be a huge competitive advanatge for them down the road.
Byurcan
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Byurcan,
User Rank: Author
8/7/2014 | 10:28:32 AM
Innovation
Good points, as they say "nothing ventured, nothing gaines." You have to be willing to fail to be a true innovator.
KBurger
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KBurger,
User Rank: Author
8/6/2014 | 2:48:58 PM
Once burned ...
You have really gotten to an essential dilemma for financial services companies, Mick. I think many organizations believe there must be a trade-off -- they want innovation and growth but don't want to assume the related risks, and believe it must be one or the other. Also, there are some very bad precedents in recent history where what was touted as innovation was irresponsibly risky (subprime mortgages, CDOs, Enron ...), and the fallout gave innovation a bad name. If there can be a more nuanced understanding of how to take the right kind of risks and how to innovate with accountability, that could really benefit many insurers and other financial institutions.
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