Watching Rory Sutherland, I saw an example where avoiding a small risk eliminated a major innovation opportunity.
As a one-man plumber, we must do each job well and follow proven best practices to avoid reputational damage and future business harm. The cost of a botched job is significant and may harm our cash flow. We’re likely risk-averse.
As a larger plumbing enterprise, we can spread risk by allowing one plumber to try a new approach. If the job fails, it won’t significantly impact our cash flow since other plumbers are operating normally. Even if we have an unhappy client, the other 19/20 or 95% will still recommend us, so our reputation is high. If we address the issue, we can restore 100% satisfaction.
By spreading risk across the organization, we can make it relatively small. If the new approach is successful, it can save us 20% effort on similar jobs, increasing our margin or profit and recurring over time.
We can divide risk (limited to one job and one client) while multiplying benefits by team size and job frequency. However, we must define success (e.g., client satisfaction and time or resource savings) and measure these. If the innovation fails, we must stop doing it.
If we want to limit the downside further, we can partner with the client where we intend to try it. Many will accept some risk if we pass on the savings or benefit. They’ll also tolerate problems or glitches more happily if they’re informed upfront.
Taking this into account, we need to be more tolerant of taking controlled risks and bringing in innovation, especially in large organizations.
The graphic shows a concept we introduced two decades ago for bringing innovation into an organization in a controlled way. A small number of innovators try out new things that may be beneficial. For those that are, they create proofs of concept and do some organizational learning, distilling how we can usefully use the technology or approach. The methods group translates their learnings into how these would be applied in the organization at scale and trains the operational teams in how to apply them. The operational teams apply what they’re taught and measure the results, feeding back to the methods group. This way, we exploit the effects of innovation - large infrequent gains, sometimes through radical change, while limiting the negative effect of taking the whole organization through a learning exercise and drop in productivity. The cycle of improvement, application, measurement, and improvement between the operational and methods groups exploits the principles of Kaizen, viz. small continuous incremental improvements, leading to high quality and efficiency.