Innovation and risk

Sue Rogerson traces the link between organisations’ appetite for risk and their ability to innovate

What is your organisation’s appetite for risk? And how well do you apply this to your decision-making? If you don’t, you are hampering your ability to innovate successfully while ensuring accountability.

If boards and organisations do not understand and agree their collective appetite for risk-taking – and the reason behind it – erratic or inopportune risk taking may follow, exposing the organisation to a risk it cannot tolerate. Conversely, an overly cautious approach may stifle growth and innovation.

Here are a few of the benefits to be derived by being clear about your organisation’s appetite for risk:

1. Encourages experimentation

• Calculated risk-taking: a clear risk appetite allows organisations to experiment with new ideas, technologies, or approaches without the fear of punitive consequences for well-intentioned failures.
• Pilot programmes: establishing an acceptable risk level enables the initiation of pilot projects that can test innovative ideas on a small scale before wider implementation.

2. Reduces fear of failure

• Cultural shift: public sector organisations are often risk-averse due to public scrutiny and accountability. A defined risk appetite can signal that some degree of failure is acceptable as part of innovation.
• Learning environment: when employees feel safe to try new things, they are more likely to propose bold ideas and learn from setbacks and it increases opportunities for shared learning.

3. Aligns resources to innovation

• Prioritisation: risk appetite helps in deciding where to allocate resources by balancing potential rewards against acceptable risks to achieve the organisations strategic objectives.
• Targeted investments: for instance, a higher risk tolerance in areas such as digital transformation can channel investments into cutting-edge technologies.

4. Improves decision-making

• Structured risk assessment: a defined risk appetite framework ensures decisions are made with a clear understanding of risks and benefits, reducing arbitrary or overly cautious approaches.
• Transparency: decision-making becomes more systematic and less driven by individual bias, encouraging trust in innovative initiatives.
• Governance: a clear risk-appetite framework that is used openly throughout the organisation, strengthens decision-making governance.

5. Supports strategic goals

• Alignment with objectives: by aligning risk appetite with strategic goals, public sector organisations can pursue innovation in areas that have a high impact on service delivery and societal benefits.
• Breaking stagnation: risk appetite prevents the organisation from falling into a ‘play-it-safe’ mindset that stifles progress.

6. Builds stakeholder confidence

• Proactive communication: by clearly articulating its risk appetite, an organisation can reassure stakeholders (e.g., the public, government bodies) that risks are being managed responsibly.
• Justifies innovation efforts: this confidence can garner support for innovative projects, even those with higher perceived risks.
• Consistent communication: provides clarity at all levels within the organisation and to different stakeholders.

7. Enhances accountability

• Risk monitoring: a defined risk appetite comes with mechanisms to monitor and measure risks, ensuring that innovation efforts stay within acceptable boundaries.
• Learning from failure: when risks are accepted transparently, failures can be analysed to derive insights, creating a virtuous cycle of improvement.

Risk management as an innovation driver

To unlock the potential of risk management as an innovation driver, organisations should consider the following:

Risk appetite as a strategic tool

• Define clear risk appetite: Establish a clear and well-communicated risk appetite that aligns with the organization's strategic objectives. This provides a framework for taking calculated risks.
• Challenge the status quo: Encourage a culture of questioning assumptions and challenging the norm. By embracing a certain level of risk, organizations can explore new opportunities and break through barriers.

Risk-based decision-making

• Integrate risk into decision-making: Incorporate risk considerations into all decision-making processes, from strategic planning to operational activities.
• Prioritise risks: Focus on managing the risks that have the greatest impact on the organization's objectives. This allows for efficient allocation of resources and efforts.

Leverage risk intelligence

• Gather and analyse data: Collect and analyse data on potential risks to identify emerging trends and opportunities.
• Use predictive analytics: Employ advanced analytics techniques to forecast future risks and develop proactive strategies.

Foster a culture of innovation and risk tolerance

• Encourage experimentation: Create a safe space for employees to experiment and learn from failures.
• Reward innovation: Recognise and reward employees who take calculated risks and drive innovation.
• Provide training and development: Equip employees with the skills and knowledge to identify, assess, and manage risk effectively.

By adopting these principles, organisations can transform risk management from a compliance exercise to a strategic advantage. By embracing risk as an opportunity, they can unlock new avenues for growth and innovation.