Having a “Risk Averse Culture” Increases Your Risk


The Worst Excuse for Avoiding Innovation

The most common objection I get from when we talk about the necessity of innovation is: “But I can’t innovate, we have a risk-averse culture.”

I can’t tell you how sick of hearing this I am – it’s a terrible excuse for not trying out new ideas.

I’m currently running a Lean LaunchPad course with six teams of researchers who are trying to build effective business models to support their scientific work.  During the last set of team presentations, one of the groups got up and said:

We did some interviews, and everything we thought about our primary market was wrong.

Think about the risks involved here.  First off, these are scientists, not marketers – so going out and talking to people is a leap.  Second, by working on their business model now, they are taking time away from their work in the lab.  Third, they risk status by getting up in front of their peers and admitting they don’t know what’s going on in the market.

If you’re risk-averse, you could avoid all of those risks by not doing the program.

But what is the point of Lean LaunchPad? It is to reduce the overall risk of failure when you send your great new idea out into the world.

The biggest risk that these scientists face is that their research won’t get results.  The second biggest risk is that they get the results that they want, but they fail to get their ideas to spread so they don’t have the impact on the world that they are hoping for.  Both of those outcomes are lousy, and the risk of both is significant.

By doing the Lean LaunchPad program, the reduce both of those risks.  They are doing very applied research, so getting feedback from industry makes it more likely that they will get good, usable results.  Furthermore, getting this feedback also makes it more likely that they can turn their good scientific results into commercially successful products that change the world.

As Ian Frazer often says – there’s no point curing mice. If you’re doing important research, making it real and changing the world have to be your goals. Accepting the short-term risks of making yourself uncomfortable by talking to people in the market, investing time in the business side of your research not just the science, and being embarrassed in front of your peers is absolutely worthwhile if doing so reduces the risks of the larger failures.

The Default Case is Not “Everything Stays the Same”

This is the way innovation works – you test out new ideas, and doing so reduces uncertainty.  Testing new ideas is the primary driver of learning.

You can afford to ignore this source of learning, if your business environment is completely stable.  But for most of us, that isn’t the case.  Consequently, we must innovate, we must try out new ideas in order to address the uncertainty that an unstable environment causes.

Clayton Christensen, Stephen Kaufman and Willy Shih look at this issue in their article Innovation Killers (link to pdf). They illustrate it with this great diagram:

When we assess the potential risk of innovating, it is normal to assume that things will continue as they currently are. In a stable environment, it might be safe to assume that taking the ‘do nothing’ option will result in stable returns.  In a dynamic environment, avoiding small-scale short-term risk actually increases your long-term risk.

Imagine what would have happened if the scientists hadn’t learned that every one of their assumptions about the market was wrong – they would have invested more and more into building the wrong product on top of their research.  If they had avoided the short-term risk of doing the program, they would have dramatically increased the long-term risk of not realising the full impact from their research.

Learning Reduces Risk

Finding out that one of your assumptions is wrong early is one of the best possible outcomes you can have. It shows your learning, and that increases your chances of success.  Here are some thoughts from Peter Drucker in his classic book Innovation and Entrepreneurship:

Entrepreneurship, it is commonly believed, is enormously risky. And indeed, in such highly visible areas of innovation as high tech – microcomputers, for instance, or biogenetics – the casualty rate is high and the chances of success or even of survival seem to be quite low.

But why should this be so? Entrepreneurs, by definition, shift resources from areas of low productivity and yield to areas of higher productivity and yield. Of course, there is a risk they may not succeed. But if they are even moderately successful, the returns should be more than adequate to offset whatever risk there might be. One should thus expect entrepreneurship to be considerably less risky than optimization. Indeed, nothing could be as risky as optimizing resources in areas where the proper and profitable course is innovation, that is, where the opportunities for innovation already exist. Theoretically, entrepreneurship should be the least risky rather than the most risky course. (emphasis added)

Why should this be so? Because entrepreneurship and innovation reduce uncertainty, and doing this reduces your overall risk.

Personally, I’m averse to going completely out of business.  That’s why I try as many small-scale experiments as I possibly can.  In the short-term, it looks as though I’m increasing my risk, but in doing so, I improve my long-term prospects.

If we say you can’t innovate because our culture is risk-averse, we’re thinking about risk in a completely wrong way.  And that’s awfully risky.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

4 thoughts on “Having a “Risk Averse Culture” Increases Your Risk

  1. To do what you always have done, is to get what you always got – then consider changing your tile from ‘manager’ to ‘caretaker’….
    No need to create graphs for that. As there is no need, in the beginning, to research the obvious.

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