Calculating Risk by Jolito Ortizo Padilla

Innovation is a risky business. I repeatedly find that when I talk to business leaders about innovation.  They complain that their organization has become "risk averse". They complain of the need for new ideas and yet so much of our work in quality management has been designed to remove variation and at the same time remove risk. In the current financial climate , facing the aversion of risk has become stronger.

Paradoxically, the only way out of the present situation is to change and take risks. This does not mean risks have to be wild and random , but it does mean that they have to be taken in the recognition that future will occur. One of the strongest attributes on innovator must possess is willingness to fail and, most importantly , learn from that failure. Silicon chip manufacturer Intel says that if it is not getting ten failures for every success, it is not taking enough risks.

A new product portflio needs to contain those offerings that will come to fruition in the next three years, but also products and services that may not hit the market for five or even ten years. We assess that long term risks and give it a high percentage error, but keep re-evaluating the risk on a regular basis as we gain more knowledge about our new idea. Xerox , a highly innovative company evaluated its history of new offerings and found that the median return on investment was seven and a half years.

One of the other fundamental errors we make in tough times is to go looking for new customers. It is far less risky to focus on retaining your existing customers and finding new products and services that will keep them interested through tough times. This does not mean cheaper, it means radical. Radical means risk. Radical is the right kind of risk.

The risk that companies repeatedly fail to assess is their external risk. Youcan be certain that if you are making a new offering then you have new suppliers or subcontructors. Frequently we will assess their product or service but not assess their management system The quality management system of your supplier has as much, if not more, influence on your level of risk than the product does.

For xample, say you have four new suppliers involved in one product. Three of them have a 90% probability of delivering your product to you and the fourth has a 40% probability. Your overall probability of this coming together is 0.9 x 0.9 x 0.9 x 0.4 = 0.29% This is clearly a serious case for risk mitigation . Use your internal audit capability to assess your new suppliers and work with them to overcome their weaknesses if they are critical to your success.

The other external risk is in the delivery chain. Too often we leave this until it is too late to change and find we have insurmountable obstacles to getting a product to market. At the onset of the innovation process when identifying an opportunity, you will also identify potential new customers. Take your closest customers with you through that innovation journey and have them ready for your new offering when you hit the market.

A classic story of faiure to assess delivery chain risk is attributed to Michelin. The company developed its amazing " run flat" tire back in 1994. However, it did not adequately evaluate the risk of original equipment manufacturers and  garages failing to adopt the tire, both of whom needed to invest in new technology. To this day the company has not broken into the volume market. The good news for Michelin was that it found a ready customer in the military where the tire became a must for ligh-armoured vehicle

Innovation is a risky business, but your risk can be calculated and should be constanly recalculated as you gain knowledge. Your risk can also be migrated and you have the tools and techniques for doing that within your existing quality management system.