Myth busting – innovation is too financially risky

Innovation is too financially risky and there’s too much uncertainty, or it’s too slow to pay off – these are commonly voiced concerns.  

Often I hear, “Wouldn’t we just be better investing money into the sure thing – the existing business model, the existing processes and the existing people?” 

These points are mentioned regularly and it’s no surprise because people like to bet on a sure thing. Quite probably though, it’s not the desire to deviate from the sure thing that is the problem but the amount of change that is required. People fear change.  

How to proceed?

Perhaps a better way to look at it, is that you need to do both. You need to invest in the things that pay off today and you need to invest in the things that are going to pay off tomorrow. It’s about finding the right balance. 

Executing today’s plan pays a salary but investing in innovation for tomorrow is your pension. 

The key is to find ways to do innovation and manage the financial risk at the same time, and the best way to do this is to take a portfolio approach.  

Manage the risk

A portfolio approach is where you have one investment fund and you spread it around a given number of innovation projects, accepting that some of those innovations will fail. Obviously, nobody wants failure but bear in mind the failures will only be a proportion of the investment and some of those innovations will be successful – the big hits for tomorrow. 

The way you manage your investment portfolio of innovations is to make small, measured investments into initial ideas to give them enough runway to prove or disprove that they are viable. Spreading your innovation investment around in this way and taking a metered approach to the funding of ideas greatly reduces the uncertainty.  

It’s a much better approach than betting big on a few grand ideas and then being over invested in them to such an extent that they become ‘must do’ or ‘can’t fail’ projects. Imagine the scenario of you continuing to invest more money into one of these big projects until the day where you actually put it in front of customers, and they don’t want it. That’s a disaster that happens all too often.

Betting big is risky and not for the faint hearted!  

Investment portfolio

Like any financial investment plan your goal should be to create a portfolio that produces the best overall return that is in keeping with your attitude and appetite for risk.  

Your innovation projects should be new ideas that add value. They can be modest, small or large, even breakthrough changes. The Innovation Ambition Matrix (sourced from Havard Business Review) demonstrates the wide range of activities that can occur in the name of innovation.  

Our recommendation 

We often recommend that you fund multiple small bets. Create in increments that build momentum. These can sit in any of three categories:

• Core
• Adjacent
• Transformational

The most important thing to do is to quickly test the idea with the people who ultimately accept or reject it – your customers. Move with agility by developing in sprints and test with customers, then make decisions to either proceed or drop.  

Your portfolio can and should change and fluctuate, and you could find that you have a number of failed ideas that you need to drop quickly but that will be offset by the ideas that are working and moving forward. 

If you follow our recommendation to build and test in rapid increments, you will take away key insights and learnings from the failures. Therefore your investment is not necessarily wasted – fast feedback from customers is vital and will give you clearer direction.

If you remain closely connected to your customers needs and develop innovative ideas with them, you will be successful. 

Finally, bear in mind that the new ideas you invest in could translate into products or services, the improvement of existing business models and processes that have a direct impact on the customer, or may even include things like acquisitions or partnerships with external companies.  

If you need help with developing an Innovation Portfolio for your organisation then we have the people to assist you.  Check out our Strategy, Leadership and Innovation team or talk to us to see how we can help you.