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Risk aversion in innovation

Innovation vs. Risk Aversion: How Non-Techs Can Strike the Right Balance?

Big tech players built their reputations on a bedrock of innovation. In fact, innovation is seen as the primary ingredient to the success of any tech startup. However, this isn’t the case for non-tech businesses; the pursuit of innovation often comes face-to-face with the inherent fear of risk. 

For non-tech players such as retail, hospitality, and consulting, the fear of failure, the potential for financial losses, and the disruption to established processes can make innovation seem like a hazardous undertaking.

That said, the risk of skipping on innovation is just as high as the cost of adopting new technology, and this is where the equation becomes tricky. 

An Often Discussed Dilemma

As the saying goes, “innovate or evaporate,” explains the CEO of VALUWIT, Tamer Gouda, whose leadership consulting company witnessed the high cost of delayed adoption of new technology for some of its clients.

Adopting innovative solutions comes after careful consideration of two factors, Gourda explains, how high its return on investment is and how much it will increase the efficiency of operations. It’s a much safer bet if those two pillars suggest highly positive results.

Similarly, a survey, by PA Consulting of 821 senior executives around the world to understand why innovation matters to them, found that 66% of organizations—both tech and non-tech—won’t survive without innovation.

However, the same report found that too many organizations are delaying technology adoption, with 37% of companies “making little to no change.” Moreover, 50% of surveyees said their company leaders don’t “fully display the vision and passion needed to make innovation happen.”

Understanding Risk-Averse Decision-Making

Despite the global movement towards digital transformation, many experts believe that non-tech companies tend to be more risk-averse. A joint report by Deloitte and MIT Sloan, titled “Strategy, Not Technology, Drives Digital Transformation,” found that more than half of the respondents from non-tech companies see their organization’s fear of risk as a major shortcoming.

Moreover, a technology report by PwC found that 80% of CEOs of non-tech companies believe that innovation is critical for their company’s future, yet only 40% of them are actively pursuing innovation strategies. This disparity between recognition and action suggests that risk aversion often holds companies back from embracing innovation despite its perceived importance.

The are several angles when addressing risk aversion. First, the cost of innovation can be expensive, both in terms of the initial investment in research and development and the ongoing costs of keeping up with new technologies. For some non-tech companies, that are already operating on tight margins, the financial risks of innovation could be too high to bear.

The second is fear. Some 40% of leaders reject disruptive ideas because of a fear of failure, according to PA Consulting’s report.

Third, a lack of expertise in managing the innovation process can make it difficult for non-tech players to identify promising technologies, integrate them into existing systems, and assess their potential impact on the business.

Furthermore, risk isn’t the only concern, other often raised fears are about security breaches and data loss

“Resistant personnel to technology disruptions also tops the list of barriers to innovation adoption,” says Gouda.

Driving Growth with Innovation

Embracing technology and innovation as base ingredients in growth offers many benefits. Primarily, the development of new products that create untapped markets. 

Over 80% of digitally mature companies cite innovation as one of their core strengths, according to the joint study by Deloitte and MIT Sloan. 

Second comes, a better understanding and responding to customer needs. Ongoing innovation does a better job of attracting new customers and retaining existing clients. 

The PA Consulting survey showed that 66% of innovation leaders are very good at understanding and anticipating customer needs, compared with 43% of their less successful peers.

Third, driving business growth. Innovation helps companies identify emerging trends and anticipate shifts in the market in advance. Tools that allow them to tap into new markets and seize new opportunities.

Fourth, businesses can increase efficiency and productivity as innovation can help them find new ways to improve existing processes, streamline operations, and implement new forms of technology.

Finding the Right Balance

Risk is a base ingredient of any innovative process, and the key to success comes in finding a relative balance between those two forces.

However, VALUWIT’s CEO believes, “there’s no such thing as a 100% balance.” Companies will always have to make sacrifices of some sort.

That said, there are some efforts that help businesses improve their ability to mitigate risk during their digital transformation journey.

One such step is shifting the team’s mindset with new risk-related skill sets. According to a PWC Digital IQ survey, 44% of 1,250  senior executives believe their hiring and upskilling of employees in matters of new technology is among the moves that positioned them to thrive.

Involving risk executives early and across the innovation process is equally important and has also been shown to help reduce risk.

Risk assessment at inception keeps innovation-related risks at the forefront throughout the innovation process, helping to make critical decisions jointly with the business along the way. The frequency with which risk executives assess risk management effectiveness helps businesses track and respond to rapidly arising risks, for example, by halting specific activities and adopting risk-based alternatives.

Businesses must also foster a culture that encourages experimentation. This can be done by setting up a safe space for employees to experiment with new ideas and providing them with the resources for innovation initiatives, because this is how learning happens. 

In a nutshell, a combination of strategic planning, informed decision-making, and a willingness to learn from both successes and failures are the keys to mitigating innovation-based risk. 

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