How to manage risk effectively in order to innovate better
Throughout history, risk management for businesses has been tied to an attempt to control risk. This is even more true in the field of innovation. Business leaders like to compare themselves to captains capable of steering their ship through a storm — their talent lying in the ability to anticipate the unpredictable, weather setbacks, and keep moving forward. In the innovation economy, they cannot simply forge ahead against raging seas; they must also innovate at the same time.
With a catastrophe such as Covid, the share of unforeseeable risk increased drastically; it was concluded that leaders were less and less in control and increasingly subject to an agenda they had not chosen: how to continue innovating when humanity is obsessed with a pandemic? Yet this ordeal also acts as a revealing test. True, the crisis is an absolute unknown against which it is impossible to predict anything and which absolves decision-makers of all responsibility. But is this not paying too much attention to natural selection and too little to our capacity for resilience? When we have an unexpected opportunity to draw even more deeply on our resources to achieve the impossible, overcome the unforeseen, and place even greater confidence in available skills to innovate and anticipate risks? How do we translate theory into practice? Here are some reflections on attempting the impossible task of mastering risk in the field of innovation.
Costs, timelines, results
In a sector such as technological innovation, most projects are built on collaboration; as a consequence, risk-taking is shared — and so the key question becomes: "who is taking on the greater share of the risk?"
On the subject of costs, these can vary enormously, ranging from non-recoverable investment (where the investor has no guarantee of recouping their outlay) in the context of R&D work, to funding provided by whoever will directly profit from the returns in the event of success (as is the case, for example, in big pharma).
The best way to share risk in terms of investment is a "stop and go" approach, which allows costs to be controlled at every stage by proposing a lean process. In this model, risks are equally shared by the partners who wish to innovate. Regular monitoring of progress limits unnecessary expenditure and prevents any loss of control.
In terms of risk hierarchy, timelines come second. Failing to control time means risking significant financial loss — but not only that. Failing to bring an innovation to market at the right moment, particularly in a highly competitive space, can also create confidentiality risks. This risk parameter depends on the team directly responsible for the innovation, but also on the entire subcontracting chain. Measures must be taken to guard against all eventualities, particularly to account for potential component defects. A component is therefore ordered in 3 units: one found to be defective upon receipt, one destroyed during development, and finally one that is operational and integrated into the prototype.
Lastly, the final result is the ultimate measure of risk. It is at this point that partners can perceive reality, determine whether the venture was worthwhile, and whether they were rewarded in proportion to their initial stake. It is at this pivotal moment that one discovers whether a project meets market expectations — or exceeds them — the latter being perhaps the most difficult risk of all to measure.
Risk-taking is inseparable from innovation
It would be a mistake for any leader to imagine a business world free from all forms of risk-taking. On the contrary, risk is an integral part of the mechanism that selects the products which will succeed in tomorrow's market. Going even further: risk-taking is inherent to innovation. Without it, no invention is possible. Companies would endlessly reproduce the same products, simply copying what already exists and has proven itself. Attempts to improve products therefore proceed through trial and error — and this implies risk-taking, along with the possibility of being wrong, of doing things poorly, or of thinking too big. The entrepreneur's challenge is therefore far less about preventing risk than about attempting to manage it.
We have seen, through the factors of costs, timelines, and results, that it is possible to put certain rules in place to limit the damage. It is worth noting that this is fundamentally a matter of balance, and that an equilibrium must be struck between the three parameters of cost, quality, and timelines. It should also be added that risk-taking is not the same for a university, an engineering firm, or a self-employed individual. While each act of risk-taking is different, they all share one common thread: the attempt to anticipate the unpredictable.
From these considerations, one key takeaway is that trust and communication between the parties involved — including the sharing of both successes and setbacks — are essential factors in sustaining risk-taking. This is all the more true in today's world, where every company faces the risks of change (linked to Covid, for example, but not exclusively) and environmental risks (every innovation must be conceived in light of sustainability criteria and compatibility with identified environmental challenges). Faced with this accumulation of risks and negative externalities, one must move forward in concert with one's partner, with composure — and preserve one's motivation, one's enjoyment, and above all one's curiosity.
