Risk Aversion or Poor Governance?

It’s a common cry that organisations, particularly big ones, don’t innovate because they are risk averse.  A fear of taking on risk, and a fear of being held accountable for those risks, prevents managers from advocating innovations.

Many people argue that the way around risk aversion is to create a “safe to fail” environment for innovation.  The idea gained popularity when Bob Sutton wrote about it over a decade ago.  He, along with many since, told how Thomas Watson Jr promoted a man who had lost millions of dollars, rather than firing him, because IBM had spent a fortune training him.

There are a few problems with this.  Not least, we don’t work for IBM and certainly not in 1960.  The “safe to fail” environment in many organisations often exists principally as a promise and a platitude from senior management.  The unfortunate reality is that in many workplaces, innovation is really risky.  If a project is successful, they may get a small amount of the credit, though it is more likely that someone more politically astute will steal it.  If the project fails, they’ll be tarred with it, even if not in an obvious way.  The problem is that a psychological phenomenon known as the fundamental attribution error means that managers are likely to see people as the sources of bad events, even when the causes were beyond their control.

Furthermore, if organisations can bypass the platitudes and really make it “safe to fail”, they throw away their ability to manage their innovation risks.  If it is truly safe to fail, then no one is accountable. If no one is accountable, then innovation will not be delivered cost effectively.  If, as is more likely the case, people are held accountable in covert ways, the innovation projects that really matter – the ones that will fundamentally change the business, but where there is no burning problem to drive them – are often avoided.

So, senior managers and boards face a paradox

How do they engender two opposites?  How do they create freedom to fail but accountability for failures? How do they create an environment in which people are free to create, learn, try things, fail, and so forth while still keeping an overall focus on strategy delivery, and the careful stewardship of resources?

They can do this in a number ways.  Some of them have to do with how individual projects are managed, but many of them come under the title of innovation governance.  Innovation governance is essentially about what goes on around a project – how the organisation decides about stopping and starting, speeding up or slowing down, resources and rewards, accountability and accolades, and so forth.

One part of an effective governance system is a “safe to fail” environment that does not throw away accountability.  One way to achieve that is to explicitly align accountability with decision rights.  That is, move responsibility for the success or failure of a project to the people who govern it, rather than the people who execute it.  If someone comes to the governance group with a great idea, and executes it conscientiously, they should be congratulated for doing good work, irrespective of the outcome.  If the project fails for a reason that could not be anticipated, or that was anticipated but the risk was decreed acceptable, then they should not be blamed for that.  If it fails for a reason that could have been anticipated, and the governance group still funded it, then they should take responsibility for their error, or for not providing the support needed for it to succeed.   That is, the people who control the funding should also be responsible for thinking through and making sure they understand and mitigate the risks.  The people doing the work should only be held accountable for the things they can control.

Of course, this is not enough to create an effective governance system.  This prescription just makes project leaders and their teams safe to fail by holding their bosses accountable.  Implemented by itself, it is guaranteed to shut down all innovation efforts.  Why would anyone take that on?  Why participate in a system where you carry all the risk and none of the rewards?  Of course, no one would.  To make the system work, you also need a countervailing driver to action.  In addition to holding managers accountable for the downside of projects, the governance system also needs to hold them accountable for delivering the upside.  That is, the risk of failure needs to be balanced by the risk of not succeeding – a topic I’ll address in a future post.

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