Discover PerformanceHP Software's community for IT leaders // April 2014
The smart way to embrace risk—and make it pay off
Business advisor and Stanford lecturer David Matheson talks about how business and IT can better make bold choices pay off.
For too many business leaders, risk is something to be feared. Yet businesses thrive on innovation, and the innovative, by nature of being unproven, is inherently risky. As IT takes on increasing importance in the success of the entire enterprise, CIOs will have to change their relationship with risk.
David Matheson, who teaches at the Stanford Center for Professional Development, notes that not only is risk inevitable, but the surprising results of uncertainty can present new opportunities. Matheson, who cofounded SmartOrg, which helps companies discover their most valuable opportunities, says the most successful ideas may only emerge from road-testing a few bad ones.
Discover Performance interviewed Matheson on how to approach—and strategically nurture—innovation.
Q: How do companies today, particularly tech companies, tend to approach risk?
David Matheson: Risk can be a dangerous word. To most people in IT, for example, risk is a project management term that tends to indicate "things possibly might not go the way we think they will." When you think about it, the world we live in values predictability—execution on a plan. Uncertainty and ambiguity are things that are generally feared.
Today’s business and IT leaders really need to accept risk and rethink their processes. I would tell a CIO: "Embrace ambiguity and uncertainty. Make them your allies."
Q: How does this relate to innovation? How can today’s businesses do a better job of bringing new solutions to life?
DM: The traditional models of innovation, based on planning and making reasonable assumptions, simply don’t work for innovation. Think about the great successes that are the bedrock of the company today, and think back to when they were merely proposals. On the path from proposal to success, ask yourself two questions: Did they go according to plan? No. Did they meet reasonable expectations? No, they wildly exceeded them! We need a radical rethink around innovation to create cycles of learning. Not to deliver on results, but to discover the unreasonable upside.
In talking with business leaders about innovation, I describe what I call the "bird model." Most of us want our innovations to soar like a bird, but how do we get there? The bird model includes four distinct phases: ideation, formulation, incubation, and acceleration.
Q: That’s an interesting metaphor, but how does the model work?
DM: The first phase, ideation, starts with the parent bird, who is totally committed to building the nest. This is your committed innovator—the individual who will "go the distance" with an idea. Keep in mind that ideas are not the inputs to the process, they are the byproduct of the committed innovator.
The second phase, formulation, is the continual process of mapping out multiple strategic hypotheses, identifying the key proof points for each, and creating a learning plan that delivers on the proof. Most companies take their idea and just run down the most obvious path. But the best ideas typically can go in multiple directions and are plagued by uncertainty. You’ve got to ask: "Of all the possible eggs we might focus on, which one is our golden egg?" Make uncertainty and ambiguity your allies by taking the time to formulate your innovation, developing an aligned learning plan. Formulation is continual, as most innovations need to be reformulated as you learn.
Q: OK, so what happens when a great idea—a golden egg—just doesn’t seem to work?
DM: Good question, and this leads me to the final two phases of the bird model. Phase three is incubation, which is really the execution of the learning plan. Most companies focus on delivering on the work that needs to be done. What matters more is delivering proof that your strategic hypotheses actually perform. Most hypotheses don’t perform, so delivering evidence that disproves in an inexpensive and quick way is to be celebrated. The key is to use the learning plan to fail forward, learning and revising. When the egg breaks, other possibilities often emerge. What you thought was the golden egg may not have worked, but in the process you’ve found a really good alternative. Innovation is about finding the unreasonable upside.
Once you’ve got your golden egg, you’ve got to incubate it to prove it out. Don’t focus on the work to be done—instead, focus on demonstrating the proof points: What do you want to know before mortgaging your house to invest in the idea? Along the way, expect to break some eggs, and reformulate a few times, as you expand your idea and finally close it down on a proven opportunity, your fledgling bird.
The last phase, acceleration, is of course when the bird begins to leave the nest. Resist the temptation to kick your fledgling out of the nest immediately by, for example, submitting it to the crushing pressure of the quarterly P&L statement. Like an adolescent, fledglings benefit from some adult discipline, but have many awkward issues to work out before they are ready to fly. Transitioning from proof-based metrics to business-based metrics is the work of the acceleration phase, and the result is a scalable business. Your innovation can then soar!
Q: Any final thoughts on how today’s IT leaders can inspire innovation among their teams?
DM: Well, in IT today, it’s tough to break out of the process-driven and budget-driven mold. We’re often stuck in rigid contracts and processes, iterative deployment, and such. This makes it very difficult to embrace ambiguity and uncertainty. One thing I try to encourage CIOs to think about is identifying "oyster" projects (high risk, high return) versus "bread and butter" projects (low risk, low return). Make incremental gains with the bread and butter projects, but have a few oyster projects championed by key innovators who will take them the distance.
As cofounder of SmartOrg.com, David Matheson has helped senior executives in the United States and Europe improve their results in portfolio management, product development, innovation, R&D, capital investment, and strategy. An expert on measuring value and managing uncertainty, he is co-author of The Smart Organization: Creating Value through Strategic R&D (Harvard Business School Press). He holds a PhD from Stanford, where he teaches Strategic Portfolio Management at the Stanford Center for Professional Development.
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