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Risk Management and Innovation

By Mark Johnson

Remember those analogy questions on the old SATs? An ordered pair was followed by several other pairs from which you were to choose the closest comparison—dogma is to heresy as rule is to exception, or consensus to dissent, and so on. Here's a hypothetical one I'd like to test out on executives responsible for breakthrough innovation in their companies:

RISK MANAGEMENT:INNOVATION:

  1. ballast:ship
  2. dead man's pedal:locomotive
  3. vaccine:influenza
  4. reconnaissance:battle
  5. engine:automobile

My guess is that the vast majority of marks from the No. 2 pencils would show up beside answers A through D—risk management balances innovation, keeps it from going off the rails, inoculates it against danger, or scouts the territory ahead for danger. Few respondents would likely choose E, yet I think it comes closest to capturing the practice of the most successful and efficient innovators. Their approach can be summarized in three counterintuitive observations about the often poorly understood relationship between risk management and innovation:

1. Risk management isn't the antithesis of innovation; it's the essence.

How an organization conceives of risk management will in large part determine how effectively innovation is pursued. As with the first four answers to my hypothetical question above, many people see risk management as largely preventative or as the opposite of the bold risk-taking that breakthrough innovation is assumed to entail. In this view, risk management is the guy in the green eyeshade whose job is to stand behind the visionary with his head in the clouds and keep his feet on the ground—and sometimes hold those feet to the fire.

But risk management and innovation aren't opposed. As Clark G.Gilbert and my colleague Matthew J.Eyring recently argued in Harvard Business Review, the core competency of the most effective and successful innovators is risk management. To repeat: Risk management is their core competency. For these innovators, whether in new ventures or in a corporate setting, the ability to identify, prioritize, and systematically eliminate risks is what drives innovation forward.

Read the full article on Bloomberg BusinessWeek

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