Everyone knows that innovation brings benefits.
But what about the risks that it comes with? What causes them? And what can you do to mitigate them?
In this article, you will learn more about what an innovation risk is, what its types are, and what measures you can do to manage them effectively.
Let’s start!
What is innovation risk?
Innovation risk deals with likeliness and repercussions. It refers to the probability of any untoward happening that may affect the innovation process at a given rate or time.
It also involves any unfavorable circumstance that may affect the success of a specific innovation measure or project. For instance, what are the odds of a certain concept not working out the way you expected it to?
Suppose the chances of this happening are high. In that case, the innovation team may experience several setbacks that could force them to go another direction or shelf out the project altogether.
For the business, this means wasted resources, effort, and time.
Although this scenario has not happened yet, the perception of failure keeps this idea from being implemented. At some point, the company may devise a specific set of contingency measures to address this and proceed with its vision.
Yet, for most businesses, particularly those who hold onto their natural inclination of risk avoidance, such an action may not be worth spending a lot of time on, so they decide to go for another idea instead.
In other words, despite their negative connotation, innovation risks are vital for organizations to evaluate and take note of to prevent further damage. It is crucial for innovation teams to uncover and identify them early on to prepare for them.
They need to be discussed in collaboration spaces and meetings so investors, stakeholders, and authorized executives can create the necessary decisions that may alter an idea for the better.
What causes innovation risks?
Technically, risks are inevitable. However, some actions may cause unnecessary troubles.
A few of these are:
- Experimenting too late. Organizations need to test ideas to refine them out. Once you have them organized, conduct rapid experimentation right away to incorporate findings in the early stages of product development.
- Not spending sufficient time in finding the problem. Most innovations fail because they didn’t go deep enough in the first stages (problem finding, solution finding). Usually, this results in big changes later on.
- Proceeding without really addressing an issue. In innovation, it is vital to find a problem or a situation to improve. Without it, an idea will only become a product without value — so if you want your innovation to be successful, find an issue and solve it.
- Creating products that only increase people’s curiosity instead of responding to their needs. Make sure that your product or service stays relevant. Match your innovation with your customers’ needs and add value to their lives by helping them out.
- Focusing too much on technology. Innovation is more than just coming up with the next Apple or Spotify. Innovation is the process of realizing new products, processes, propositions, or business models to create added value for customers and employees.
- Deciding with an inadequate number of ideas. One idea is not enough — you need at least 300 ideas for success. The more ideas that you have, the more solutions you can generate. Get varied insights and collaborate with other departments for diversity.
- Not involving sponsors from the start. Involving sponsors will not only help you with funding. But with them, you can also understand your value proposition better and tailor your business models before officially launching them for public use.
- Refusing to include experts and stakeholders. Collaborating with experts and stakeholders gives you access to a pool of useful information that can speed up projects forward and uncover risk areas to increase the project’s success.
- Building the business case too soon. Rushing the business case may result in an unclear and unstructured innovation. This will prohibit you from creating the best products, concepts, projects, and changes that could have made your innovation better.
What are the types of innovation risks?
Innovation comes with a number of risks. Some of these are:
Operational Risks
Operational risks involve challenges that are met by organizations in accomplishing innovation, particularly with materials, budget, and other necessary elements included in bringing ideas to life.
This type of risk occurs when decisions related to priorities, production, and management fail to meet what is imperative to ensure innovation success. Operational risks are also referred to as human risks as a way of attributing these repercussions to human error.
Some areas that involve operational risks are systems, equipment, third-party services, and other business components that are utilized by the organization in its daily business activities.
Examples of operational risks are failing to meet product quality standards and cost requirements.
Commercial Risks
Commercial risks deal with possible losses that an organization may encounter from its business partners or from its market. These are problems that arise from the company’s assets, liabilities, and cash flows.
Technically, this type of risk happens when buyer-related problems result in nonpayment. In innovation, such risks take place when an idea does not clearly establish its target audience and when demands are not met because of problems with suppliers and other related parties.
Other instances, such as not meeting the requirements and preferences of the product’s target audience, can also result in commercial risks. A concrete example of this is when a product fails to attract sufficient customers, leading the business to incur some losses.
Financial Risks
Financial risks are issues that may arise from losing money in innovation (negative return on innovation).
Depending on the nature of your industry, financial risks may mean failing to control monetary policies, inability to solve debt issues, and undertaking projects that place a financial burden on the organization.
It may also come as a result of flawed financial reasoning. This type of risk may also arise from failures in financial transactions and capital structure.
Other circumstances that may result in financial risks are changes in market interest rates that may push companies into lower-debt paying securities and negative returns.
Financial risks come in various forms.
Being aware of possible financial risks can help you prepare for it and in time, mitigate its effects to avoid negative outcomes. A simple example of financial risk is when a company invests in an innovation project that ends up being unsuccessful.
Why innovation risk may be different from other types of risks?
Innovation leads companies to implement certain changes that may revolutionize various processes and improve the way businesses and customers handle specific activities.
Organizations that like to innovate are able to enhance or formulate their own solutions, designs, products, technologies, capabilities, and services that add value to their employees or customers.
As innovation involves going beyond traditional boundaries, this complex process is made up of different phases that involve various experimentations.
Provided that these activities result in trial-and-error situations, innovation risk is different from other types of risks as organizations regularly expect failures to determine what works and what doesn’t.
What are the ways to manage innovation risks?
In innovation, making it right the first time just doesn’t seem to happen sometimes. Ideas get modified from time to time to fit certain requirements, and the risks that come with them have to be mitigated.
It’s important to ensure that any temporary setback won’t keep the concept from becoming a product that adds value to both the customers and the business.
Here are some methods that you can utilize in managing innovation risks:
Evaluate risk levels in the early stage of product development
Identify risks as early as possible. Collaborate with other departments to determine all types of risks that may occur in the entire innovation process.
Gather insights from both inside and outside of your project team to obtain diverse information, knowledge, and expertise. It is also imperative for businesses to evaluate the risk acceptance level of their stakeholders.
Some innovation teams like to set goals that might seem impossible for others, believing that taking enormous risks would lead to monumental success.
While this may be ideal for some, others would like to take a more conservative approach.
Whatever the aspirations of your innovation team are, make sure that it matches the risk tolerance of your stakeholders so you can take appropriate steps in implementing your ideas.
Address the bigger risks first, then smaller risks second
Bigger risks have a larger tendency to push projects off the trail.
Dealing with them early on avoids wasting time and resources while increasing the project’s success. Once done, smaller risks should be addressed right after as they can pile up and become derailing at some point.
Smaller risks also have a cumulative effect. Failing to respond to them immediately may worsen the negative effects of other risks, particularly if these risks are related to one another.
Take every risk as a chance to improve
Innovation risks may reduce a project’s success — but successfully mitigating them can be advantageous for companies. Addressing them boosts an organization’s creativity and problem-solving capabilities.
This leads innovation teams to come up with solutions to existing problems. Concepts are transformed into workable strategies, and successful breakthroughs are gradually attained over time.
In the end, managing risks is endless:
Progress and risks sometimes come as a package, and being proactive in looking out for them and addressing them will enable you to predict negative outcomes and avoid innovation roadblocks.
To make risk management easy, you can use software to manage innovation portfolios and establish a framework that converts roughly produced ideas into real investment opportunities.
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