Disruptive Innovation: Obtaining Funding to Set your Company Apart

We take things like electricity, automobiles, and TV for granted today, but in their time, they represented disruptive innovations that transformed work, leisure, and family life. Disruptions like this have not slowed down; in fact, their pace and magnitude continue to grow.

Consider that when telephone was invented in the mid-1870s, it took nearly 70 years for it to reach 100 million users. Facebook accomplished this milestone in just 5 years, while Instagram reached 1 billion users in 8 years.

And in the years ahead, a company could reach this milestone in a year or less. That’s staggering when you stop and think about it.

In the interest of brevity, I’m going to refer you to a previous article that discusses disruptive innovative to learn more about this concept and why it’s important for companies to be thinking about.

You may be wondering what disruptive innovation has to do with risk management.

To explain, I’m going to reference Hans Læssøe and his book Prepare to Dare where he describes different levels of risk management. We’re all well familiar with the lower levels and even the “enhanced” and “advanced” levels that tie different silos of the organization together and examine risks to strategic objectives…something we typically refer to here as enterprise risk management.

The “progressive” level though takes this a bit further by…

…deliberately taking on huge, but managed risks to raise the bar, and change the name of the game in the industry they  are a part of. Being ahead of competitors, they enhance and strengthen their strategic positioning in the market.

Mergers & acquisitions can often be considered disruptive, but one example that Hans points to is Apple leveraging its vast technical capabilities to expand into new industries by creating the iPod, and then iTunes, and then its popular iPhone, and then wearable technology like the Apple Watch. How many people do you know have the entire suite of Apple tech products? (I can raise both hands to this question, even though I personally don’t own any Apple products.)

Companies with the Progressive level of risk management can pursue disruptive innovation in one of two ways:

  1. Ask how current key risks can be leveraged or turned into opportunities.
  2. Systematically look for opportunities to develop business or disrupt the market based, at least in part on, the company’s risk profile.

Doing this in any meaningful way requires capital, and while executives can easily support incremental changes, this level of funding won’t be enough to develop disruptive innovation.

To open up new opportunities and truly transform their industry, companies must allocate a certain portion of their innovation budget into “moonshots”

No one sets out to fail…

Executives and other decision-makers want to disrupt their respective industry and gain a strategic advantage, but many hesitate to commit funding to these transformative ideas. This was the topic of a recent roundtable and subsequent article in Carrier Management that caught my attention. And while the article is written towards one of the primary industries my consulting firm works with, the concepts it put forward are applicable to any organization.

Jeffrey Bohn, chief research and innovation officer at Swiss Re, discusses an interesting way companies can fund what he calls “moonshots” – truly transformative, disruptive innovations. Incremental innovations and commitments are more palpable because they can easily be measured through standard metrics like ROI, IRR, and payback periods. The executive can see how the innovation will pay off.

Many “moonshots” will not always be so clear; it’s likely only 1-in-20 or even 1-in-100 will be successful, which is why Bohn explains…

If you look at something that’s disruptive… then you’re probably talking about something that is experimental. And to use a deterministic financial method for an experimental initiative is just not a match.

Instead, Bohn and moderator Mike Fitzgerald suggest an alternative for helping overcome this challenge to funding experimental moonshot initiatives – taking a portfolio approach, which basically means using net present valuation as opposed to the standard financial metrics mentioned above. Investors frequently use the portfolio approach as a way to determine the value of a securities option.

This portfolio approach involves considering the impact to revenues over a given time should you choose to forego the project or the project doesn’t work out. Once you have this number for each of the years (say 5 or 7 years), you can then calculate the present value of that loss, which can help executives determine if the innovation is worth the investment.

Why use the net present value calculation?

Because the calculation allows you and the executives to see the value of the lost revenue after being adjusted based on the risk associated with the innovative initiative AND to account for the time value of money. The risk adjustment concept requires that a higher risk investment demands a higher discount rate. The time value of money is required due to inflation, interest rates, and opportunity; after all, money is more valuable the sooner you receive it.

Using this method may be a way to get nervous executives to commit to more “experimental,” disruptive innovation, but…

Your company must have a culture that supports disruptive innovation for it to ultimately be successful.

A big part of enabling and empowering employees, managers, and even executives to suggest ideas and pursue potential disruptive innovations is by building a robust risk culture.

In this respect, this means analyzing and celebrating failures, Bohn explains. Instead of just moving on after a particular initiative failed, take time to learn what went wrong and funnel those insights into other moonshot projects. Frequently called “post-mortems” (I know, it sounds so morbid), I like to ask 3 main questions:

  • What went well?
  • What could have gone better?
  • If we knew at the start what we know now, what would we have done differently?

The ability to ask these questions and get honest answers is one of the signs of a positive risk culture.

Part of building this type of risk culture requires the risk professional to make innovation about the executives and the company and not about you…to embrace a “right-side up” model of thinking.

As Hans explains in his book and elsewhere, companies will need to have some sort of disruptive capability in the years ahead to just survive, especially considering that a disruption doesn’t have to come from some big conglomerate. In fact, many disruptive innovations found their start in someone’s basement or garage.  (Think Steve Jobs and Steve Wozniak in Jobs’ garage.)

Don’t hesitate because there are unknowns with an idea. Do the due diligence, conduct research, figure it out, and determine if the organization is willing to invest in the idea. After all, you don’t want to be left in the dust like these companies.

What approaches have you taken to make executives more comfortable with committing resources to transformational experimental initiatives?

Please don’t hesitate to share your thoughts, experiences, or even questions, by leaving a comment below or join the conversation on LinkedIn.

If you’re struggling to understand how your risk management processes and culture and support disruptive innovation, reach out today to discuss your company’s specific needs and situation.

Featured image courtesy of Frank Cone via Pexels.com

Sign Up For Our Newsletter

Sign Up For Our Newsletter

SDS-Logo
about-sidebar-v2

Meet Carol

Helping companies achieve their vision and strategy, and succeeding in today's turbulent world, is something I'm honored to be a part of. Whether you're an occasional blog visitor or a long-term client, thank you for letting us be a part of your journey.

Most Recent Posts

The 12 Days of ERM Christmas

Without a doubt, one of my family’s favorite holidays is Christmas. Part of the fun, especially for our son, is seeing what “Santa” brought, but most importantly, we treasure the spirit of peace and goodwill the season brings. And after what seemed to be a never-ending warm spell, the weather is expected to be good…

Read More

Don’t Let Goals and Initiatives Be Blindsided by External Events

As the end of the year draws near, I think we’d all agree that while it wasn’t without its challenges, this year also wasn’t quite as turbulent as the previous two. While a lot of people are juggling company parties, shopping for friends and family, and special activities for the kids, most companies are putting…

Read More

Going the Distance: Ensuring Successful Execution of Strategic and Annual Initiatives

Strategic planning is a challenge – of all people, I understand… After all the meetings, risk and data analysis, and brainstorming of the preceding months, it’s tempting to think this is the end of the road and you can relax. Contrary to this common perception though, this is exactly not the time to relax, but…

Read More

Avoid Rookie Mistakes and Protect your Internal Reputation

Be honest – have you ever done something that you soon realized was a real rookie mistake? Me raising my hand… Considering the nature of ERM’s role to ask questions and challenge assumptions (often during conversations with executives), it can be argued that, in at least some cases, the expectations bar for risk professionals is…

Read More

ERM at Thanksgiving – An Illustration of Risk Management in Action

On occasion, I like to take some of the concepts we risk professionals think about in our jobs and apply them to different personal situations…take some of the same concepts we use when working with executives to develop corporate strategy and manage risks or uncertainty around that strategy. It’s Thanksgiving week in the U.S. –…

Read More

Why Quantitative Risk Assessment is Not Just the Best But the Only Option – A Conversation

Periodically, I have the pleasure of speaking one-on-one with Hans Læssøe on a variety of topics around ERM, strategic risk, and other issues and trends. As you know from my previous conversations (here, here) and posts featuring his work, Hans was formerly a practitioner at the iconic LEGO Company, but even more notably, is a…

Read More

The Three Lines Model – 3 Reasons Why I Don’t Like It

Everyone likes a clear-cut template that offers an easy way to create or manage something…I mean what’s not to like about a step-by-step process for accomplishing what you want? Sometimes this can work without any issues, such as the case with the Project Management Book of Knowledge (PMBOK), ISO 9001 standard, or a new cooking…

Read More

5 Avenues for Expanding your ERM Knowledge

One thing I was taught to appreciate from a young age was the value of education and knowledge. It didn’t necessarily matter what the subject was, just that I always maintain a learning or growth mindset regardless of my current status in life. This mindset has served me well over the years, and it’s a…

Read More

Storytelling and Risk Management – Developing Skills that Technology Cannot Replace

It’s amazing how technology has developed and changed our working world over time. Imagine trying to run my risk and strategy consulting firm without tools like Zoom, Box, Slack, and other ERM-specific technology tools. There is no way we would be able to serve our clients the way that we do. Just consider how the…

Read More

3 Phases to Creating and Launching an ERM Program Focused on Organizational Success

If you’ve been handed the task of creating an ERM program for your organization, let me first offer my congratulations quickly followed by my empathy for the task ahead of you. I don’t say that to scare you but to provide a small dose of reality. Building, launching, and refining an ERM program that is…

Read More