One of the biggest challenges that corporate innovation teams face is that results can take years to pay off. The road to success with long-term research and development has many unexpected twists and turns. Failure is a natural part of the journey. Teams need to cast their nets wide, take risks, and navigate short-term losses. So how can corporate intrapreneurs and executives see eye to eye when it comes to balancing shareholder value? How much risk is too much to take on? When should CFOs push themselves past their comfort zones?
Corporate innovation consultant Dave Binetti works with companies to strike the right risk management balance. A six-time entrepreneur who has served on the founding teams of companies like QFN (later Quicken.com) and Arch Rock (acquired by Cisco Systems), Binetti has had a direct lens into innovation in both startup and corporate settings. He's the creator of the Open Options Framework, which quantifies value and risk in new product development, and has also consulted for the United States Government. Here's his take on balancing risk with reward in corporate innovation.
Q: What are some of the biggest reasons why corporate innovation teams struggle?
DB: Corporations aren't willing to take risks, so they put constraints on corporate intrapreneurs to make the most out of limited resources. Instead of lowering risks, however, companies end up raising them. The reason? With too many constraints, companies are unable to innovate quickly. Regardless of the size of your company, when you're dealing with unknown products in unknown markets, the ability to bring initiatives to market quickly is essential.
Q: How is corporate innovation different from traditional R&D?
DB: There's something called the Red Queen hypothesis, which basically means that you always have to innovate—otherwise your company will fall behind the competition. So there are business operations that yield incremental improvement that happen as part of the normal course of doing business.
In addition to innovation that needs to be happening, to maintain where you already are, there's a completely separate bucket—high-growth opportunities. For those, you need disruptive, discontinuous innovation, and you need to create something fundamentally different from your current business model.
Q: Can you explain why corporate budgeting is a challenge?
DB: Corporate budgeting becomes a challenge when innovation is not incremental improvement but a big shift that can bring huge gains to your company. Disruptive innovation also creates risk. Often, intrapreneurs are dealing with unproven business models because existing business models don't work. But shareholders don't like uncertainty.
Intrapreneurs need to consult the expertise of corporate finance leaders to understand their risk thresholds, but finance doesn't have a go-to framework to make an informed decision. How can corporate finance teams ensure that resources are being used efficiently? Budgeting for risk isn't a straightforward process.
Q: What is the clearest path forward?
DB: What corporate finance teams typically do is look at a form of discounted cash flow, typically at present value. In every day terms: "I'm going to take money right now and give you a lot more money in the future." Finance teams require proof of this idea. And that's when learning stops—the person who came up with the idea is no longer trying to test the validity of her idea. Instead, she focuses on trying to fit her idea into your existing business. Eventually she gives up because the barriers are too high, or her ideas get rejected.
Any success that happens thereafter is function of pure coincidence. We turn these people into mythical entrepreneurs who always know the answer, even though it was coincidence driving them forward. That's how companies produce these massive disasters—and there's no accountability because nobody wants to take responsibility for looking like a fool. Nobody wants to talk about failure. Innovation efforts become a blame game.
It's time to create an established process for the way that corporate innovation decisions happen. Failure needs to be a part of the equation. Learning should be how companies measure progress. Wishful thinking doesn't create disruption.
Q: What can finance leaders do to responsibly tolerate corporate innovation risk?
DB: Focus on business models that emphasize risk reduction through iteration.
When you look at something like a traditional risk mitigation strategy, we often try to reduce the potential for defects and variability of something that comes off an assembly line. I'm simply going to reduce the negative effect by taking these things that I know are going to happen, at these regular intervals, and these regular things that I know what the bad outcome is going to be, and then I'm going to go fix and address that.
This is in contrast to the concept of risk reduction through iteration, where you're saying, okay, I'm going to do this process this way, and then I'm going to do it a second time, and then I'm going to do it a third time, and I'm going to do it as many times as I possibly can, within a given period of time, so that the actual variance, the variability around that event, goes down.
Here's an analogy. Risk mitigation would be, I'm going to go bet $1,000 on black, at the roulette table. If I worry I might lose that $1,000, then I'm going to buy my dinner before I put that $1,000 on black. So that I'm at least going to eat. Right? That's a risk mitigation strategy. Risk reduction is instead of bidding $1,000 on black, all at once, I'm going to bet one dollar 1,000 times. If you do that, you're actually going to reduce the variance that's associated with that particular activity. That's what risk is — variance. And so, by doing that same action, but breaking it up into 1,000 steps, you're going to have the smallest amount of risk, associated with that activity.
Some risk will be necessary. The key is to reduce risk in your overall portfolio through the process of rapid iteration. Keep risk controlled and make it count towards learning.
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