Risk and Reward of Progress

While “Try fast, fail fast” is the mantra in Silicon Valley, it’s not something you typically hear in the hallways of large, complex organizations. The concept of risk often carries an inherent bias for an established company and for valid reasons. Risk can disrupt a healthy revenue stream, a stable customer base, and upset shareholders who like predictable results. Risk is something you manage. It’s something that you mitigate, not embrace.

There is no such thing as “risk-free” innovation. However, without taking some much-needed risk, we’d be forever stunted and static rather than curious and dynamic. In today’s market where innovation is driving success in every industry, there really isn’t much tolerance for risk averse cultures. So why do organization’s avoid risk? And how can organizations reframe risk to better balance the upside of risk (and not just the downside)?

Where risk aversion comes from

Conway’s Law

Conway’s Law explains that over time, a company’s offering will begin mirroring the company’s organizational structure because its governance structures, problem-solving routines, and communication patterns influence how the organization looks for new solutions. There’s a great Harvard study called “Exploring the Duality between Product and Organizational Architectures: A Test of the “Mirroring” Hypothesis” that looks at this phenomenon in more detail.

A major obstacle then for successful organizations is breaking away from the organizational structure and processes that made them successful in the first place. When launching Nespresso, Nestle took the approach of creating a new company. Everything about how they wanted to take coffee to market was changing and their old (but successful) way of doing things was going to get in the way. What they were attempting to launch was so different that they understood they needed to start with a blank slate and a new company.

Interruption of revenue flows

In an earlier post, Steve Woods CTO and Cofounder at Nudge, suggested that it’s impossible to compare a large organization with a startup when it comes to risk.

Large organizations operate in a completely different world. Unlike a startup where you begin with a revenue stream of zero, large companies must consider how risk would affect their existing business. It’s not easy to take risks, no matter how calculated, when there are millions of dollars on the line. When a large organization interrupts a revenue stream, it can be very significant and much more noticeable than when it occurs at a startup. The stakes are simply much, much higher.

When you’re a large successful business with a broad set of customers and you try to do something new and different but unproven, Steve explains, the large successful business is going to suck up all the oxygen in the room. The innovative, unproven idea will never survive.

How are you going to hit this quarter’s revenue targets with this little business idea when all it is is just an idea? And all it’s doing is consuming more resources than it’s generating? You have to hit the numbers first to keep the street happy, then you can worry about how you’re going to do exciting things. But this often leaves little or no time to focus on these exciting things.

The paradox of accountability

Accountability is another factor that contributes to risk aversion at large organizations. If you’re the person who spearheaded a risky venture that failed, you can be singled out. Your name will likely carry the legacy. When a risk results in a positive outcome, because things are more complicated and a bigger team is needed, that success is often shared among the team. Everyone wants to say they had a piece of it. Not many people would buy into that level of responsibility. As an individual, the risk is exponential while the upside is fractional.

The potential of breaking a well-oiled machine is terrifying. But it’s the nature of the beast. Often times breaking something is the only way innovation, true innovation, can take place.

The upside of risk

Growth comes from risk

Ted Graham, Innovation Lead at PwC, mentioned in an earlier post that there’s a team at PwC that analyzes whether the organization as a whole is taking enough risks. The concern is that if there isn’t enough calculated risk and innovation happening, there’s an even greater risk that growth objectives won’t be hit. As a result, Ted spends time working with leadership to help reframe risk so that opportunity and growth become a part of the conversation as well.

Risk helps you develop and keep your best people

You might not see the benefits in the marketplace right away, but by taking risks, you will attract talent. As Ted said, talent wants to work for organizations that will allow them to take some risks. Top performers achieve personal growth and development by pushing new boundaries and taking calculated risks. I’ve heard it 100 times in interviews with potential candidates, too. The reason why talent wants to work at a startup is that startups take risks. Candidates see this as an opportunity for growth.

You learn more

Finally, taking risks is one of the most meaningful ways that organizations can learn. And the best way to learn is by doing. Brandon Weber, Founder, and CEO at Hightower believes that you need to redefine your relationship with your customers. That they increasingly want to view the supplier/customer relationship as a partnership. The most well thought out and researched hypothesis doesn’t always turn out. It’s sophisticated guesswork. A customer feedback loop is critical to truly understand what customers value and by redefining your relationship with your customers, you can create an environment where you can test ideas in the real world.

As a successful organization, you have to be careful to protect your revenue streams and customer base. However, being too risk averse in today’s environment is probably an even bigger risk. Understanding where the risk comes from and giving the positive elements of risk equal consideration can help. In a follow-up post, I look at some ways that organizations can embrace risk in a smart way.