It seems almost like an oxymoron to be expected to manage risk and drive innovation. So in order to get this column off to a solid start, we should understand innovation and how it relates to managing risk.
Let's start with Webster's view. Innovation is "the introduction of something new; a new idea, method or device."
Dare I say that just because it's new, doesn't mean it's worthwhile? But in fact, in the purest sense, innovation does not imply any qualitative aspect to that which it is applied. I think we see a lot of evidence of "new" things in the risk and insurance business, but much of it confers little value. We are presented with innovative ideas, products and concepts frequently, but I for one rarely find value in many of these presentations. New things for the sake of "new."
However, the truth is that business grows primarily through innovation; innovation that brings value to the company that employs it. And value laden innovation brings a competitive advantage to its users.
But why should risk managers care about innovation? Well, quite simply, risk and risk taking is at the heart of the matter, since in order to grow (that pesky fundamental expectation of capitalism) companies must innovate and to do so, risk must be kept in balance.
When a company is risk averse, innovation is stymied and growth is limited if not stalled. Similarly, when a company operates with complete disregard for risk, it will ultimately fail. So risk taking requires balance to play its part in the process of innovation and its impact on growth.
Risk managers play a critical role in helping to facilitate and enable this balanced approach to risk taking. Risk managers must step up and convince management that in order for employees to feel as though they can take prudent risks, they must feel safe in raising their dirty laundry without undue personal risk.
Here's an example. In a previous life, I worked for a Fortune 25 company where one day the CEO brought the headquarters' employees together to "celebrate a failure." He brought up a vice president who he said he had charged with exploring a new product concept and gave him many millions to build a test store and try it out. The VP did just that with great enthusiasm. A year later, the concept store was closed amid substantial losses.
In presenting this individual, this CEO called him his hero. He was pleased because this VP had done what he asked him to, despite the failure of the effort. He extolled that the VP was willing to take a certain amount of prudent risk and though he failed, he succeeded in the eyes of this CEO.
The CEO made it safe for the VP to take risk and no doubt within some stated limits. He made it safe to fail. He promoted innovation and ultimately over time that willingness to take risk to drive innovation led to other growth opportunities for that company.
Risk managers need to help make risk taking itself a competitive advantage. It is key not just to survival in this age of change, but to long-term growth through innovation that makes a difference to stakeholders.
CHRIS MANDEL is the enterprise risk manager for a leading financial institution and a former president of the Risk and Insurance Management Society.
October 1, 2008
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