INNOVATION IS NOT ALL ABOUT DOWNSIDE RISK

During the strategy workshop I referenced in my previous two articles, there was also a discussion about how failure to innovate – read adopt new technology – could lead to non-achievement of objectives. In this regard I deliberately moderated the discussion towards use of innovation as a risk management tool. Unsurprisingly, majority of the participants focused on how failure to innovate could lead to financial losses, decline in client numbers and market share, competitive pressure and general inability to achieve strategic objectives amongst others negative outcomes.

I was not surprised by this development since generally, human psychology gravitates towards loss aversion, a situation where people tend to be more sensitive to potential losses than gains. Individuals thereby prioritize avoiding negative outcomes over pursuing positive ones. In addition, losses and negative outcomes tend to be more predictable and tangible than gains and opportunity, both of which tend to be ambiguous and intangible.

The foregoing is reinforced by the fact that traditional risk management frameworks and practices tend to prioritize the identification and mitigation of negative outcomes, also known as downside risk as well as overlooking the proactive management of opportunities and positive outcomes, also known as upside risk. In addition, cultural and structural factors within organizations can discourage employees from taking calculated risks or proposing innovative ideas that have the potential for significant gains.

In today’s fast-paced and competitive business environment, there is often pressure to deliver immediate results and meet short-term targets. This predominantly short-term focus often leads to prioritization of fire fighting, problem solving and quick wins which I turn dilutes focus on strategic and forward-thinking initiatives, often associated with upside risk. This is compounded by limited resources and competing priorities which often leads to prioritization of immediate challenges and mitigating downside risk over investing in speculative ventures with uncertain outcomes.

While the primary focus of risk management efforts revolves around prevention and mitigation of negative consequences (downside risk) there is need to dedicate effort, time and resources to positive outcomes and opportunities (upside risk). This can only happen if leaders and organizations understand the psychological, cultural, and structural barriers that inhibit the prioritization of upside risk and take steps to foster a more balanced approach to risk management. If the foregoing is done organizations can encourage innovation, adopt flexible risk management frameworks and empower individuals and organizations to proactively identify and capitalize on upside opportunities which in turn could drive sustainable growth and success in an increasingly dynamic and uncertain world.

Dr. Weru Mwangi is the CEO & Lead Consultant at Ultimate Management Solutions, a firm specializing in training & consultancy in Finance, Governance, Strategy, Risk Management and Leadership Development.  He can be contacted on weru@umslgroup.com