Part 5 Risk: To Seek, Manage, Minimize, or Avoid Risks – Innoliteracy

PART 5

Risk: To Seek, Manage, Minimize, or Avoid Risks

There is a Norwegian animation movie from the 1970s, called “The Pinchcliff Grand Prix,” boasting as one of its main characters the eternal pessimist, Ludvig. He has a standard response to virtually all situations he encounters: “Det er farli’, det . . .” – which translates directly into “That must be dangerous, I’d say . . . .” Lots of people are Ludvigs, rarely contributing to improvements or change, and most certainly not to anything resembling breakthrough innovation. Innovation, in itself, is not necessarily risky business, but one has to be open to enter into unknown territory if innovative solutions are one’s objective.

We all run risks every single day – all day – even while at sleep and not actively doing anything risk-invoking, there is a certain risk that something unfortunate will happen. Obviously, and as a rule of thumb, there is a correlation between one’s actions and the choices we make on the one hand, and the extent to which we expose ourselves to risks, both as private individuals and our choice of relations, activities, and the challenges we pursue in our daily lives. We also run risks as part of a community, where decisions are made as a group, whether that group is one’s own family or friends, the football team, or local constituency. And we run risks in our professional lives, whether employee without formal influence, as part of a team, or as someone with a dedicated management role. Regardless of our position, the extent to which we tend to perceive something as dangerous or risky depends on a number of factors: one’s personality, previous experiences with running risks, and not least, depending on which consequences, running risks and then failure entails.

Regardless of whether we discuss risk taking in a private or professional context, the amount of risks taken, and the consequences our risk taking potentially imply, depends on the choices we make and the decisions we make or have influence on. Some people seek risks as a source of energy, however more often seen in people’s private rather than their professional lives, ranging from extreme sports via gambling – beyond the weekly lotto coupon – to more colorful and outright unmentionable activities jeopardizing long-lasting relations. Others see dangers everywhere and build their lives on a narrative, which neither encourages “unnecessary” risk taking nor exposes them to situations, where risk taking is an option. To a great extent, we manage the degree to which we want to be exposed to risks and the nature and magnitude of the risks we take. For the same reason, the concept of risk is given quite a lot of attention, both as a theoretical field, and not least, as a deadly serious field of professional focus, often referred to as risk management.

In principle, risk management is a professional discipline devoted to identify, assess, and prioritize real or potential risks. A crucial element of risk management is being able to forecast what may possibly go wrong, a prerequisite to the subsequent elements of assessment and prioritization.

Another term which I’d rather prefer that we do not dwell on, as I see it as the enemy of all things good, is risk aversion – the endeavors to avoid risks of any kind and for any price. When I have to deal with it, however briefly, it is simply because a great number of organizations both in the private, and perhaps in particular in the public sector, practice it big-scale. They often invest more resources in making sure that nothing can possibly go wrong than in creating better and more meaningful solutions to problems, which could actually and sometimes easily be solved. However, all development processes incur an element of risk. Often, that risk is limited to the new development not actually solving the problem at stake, leaving the ROI on level zero or negative, corresponding to the cost invested in the venture. Other times, the risk can be significantly higher than “merely” having wasted the resources invested in the project itself, and such projects in particular require a prudent and professional way of managing such risks. But the solution is never to let the risks stand in the way of needed change and improvements, renewal, and innovation.

For some, it may appear almost meaningless to lecture the leaders of today or tomorrow on risk management. After all, it is possibly the most significant individual factor determining which decisions are made across sectors and industries, and unfortunately, the management part of it often tends to be practiced as aversion. Sometimes, I sense a great deal of suppressed fear of taking risks, even among the most conscious and reflected leaders, most probably because the concept of fear, and admitting to it rarely is seen as a career booster.

But it’s there, and it’s a dominant factor influencing the choices and decisions of many leaders. And, it has its price. Fear prohibits many organizations at attracting competences and profiles, which do not resemble or even duplicate those they have in advance, because how should they go about making sure that they get the most out of a staff member whose competences are different than one’s own, and whose contribution they do not fully understand? Fear prohibits organizations at innovating; at embarking on projects which could ensure competitiveness and relevance in a changing market, out of fear of not succeeding. What if we fail? What if we waste our shareholders’ money? What if we just stay clear of risking anything instead? As an anecdote, some years ago, I decided to take a 3-day course at project management, offered by a leading provider of post-educational courses, now part of the international group Mannaz; somewhat paradoxically the Old Norse word for “human being.” The by far most significant focus over the 3 days was devoted to risk management, to working with mathematical models and variables, costs of time units, and other metrics. To me, it came as a surprise, as I never really considered the risk as a critical factor in the projects I managed. While I always thought, as well as practiced by the principle that project management was all about motivating people to work together, somewhat naïvely, I learned – inspired by a “you win some, you lose some” attitude – that project management more or less equalled risk management, with or without contingency for what former vice president Al Gore always added, “and then there’s that little-known third category.” That’s just not how things are done any longer, which is probably good for all, as long as risks are managed sensibly, but when risk is managed in a manner which discourages, or even suffocates the energy and courage needed to foster innovation, and which encourages the fear of failure to win over and over again, it is a losing game not only for the organization, but for society at large.

What might be even worse than a conservative, but honest attitude toward risk management when new paths are being trod is the constant emergence of new phenomena – often in disguise as being progressive – are new approaches to minimizing risks disguised as novel concepts of governance or compliance. My postulate would be that many companies’ investments in and flagging of CSR (Corporate Social Responsibility) in reality are purebred risk management measures. Instead of being “outed” as an organization without soul and heart and consideration for those in need or for the local community, or simply to comply with legislative demands or industry standards, prescribing social responsibility to be accounted for in annual reports, it seems like a sound investment to support a worthy cause – just in case. None of that, in my opinion has very much to do with responsibility. If it’s all a question of not breaking the law, “Corporate Social Liability” would be more precise and much more overtly a risk management measure. I’m often thinking about what the world would look like if we called things by their rightly deserved names, but that, I guess, could fill an entire book on its own.

The bottom line, unfortunately, seems to be that what, more than any other individual factor, drives decisions in both the private and the public sector is avoiding and managing unavoidable risk.

In the increasingly emotional and regulated business environment, effective risk and opportunity management has become a basic necessity for every organization, as has the ability to communicate effectively with external stakeholders about risk. The potential costs of poor communication with stakeholders during this process are enormous but the potential benefits of effective consultation are even greater.1

One of the most effective forms of risk management is to listen to and benefit from the insights of trusted employees and colleagues, engage users and other stakeholders in meaningful dialogue, and to listen to one’s own common sense and intuition – take time for reflection and processing of the information harvested, and make the decision you, as a trusted and responsible leader, have to make. Which, in a way, is the process that I have taken you through, step by step, supplemented by the necessary competences and external expertise, an approach that research over the last couple of decades has documented as being the most effective both to foster innovation and to minimize risks.

A Few Cases from the Real World

An overriding ambition with this book is to cast some light over the correlation between reflection, reframing, and risk reduction. One way of doing so is to present – however briefly – some “real-life” examples of how the choice of process and methodology, emphasizing the stakeholder engagement components, on the one hand, and the project outcome on the other.

Some years back, while the ideas of collaborative processes, cocreation, and stakeholder engagement were still young, the Danish government granted a substantial amount of money over a 4-year period, dedicated to an initiative called “Programme for User Driven Innovation.” Consortia consisting of organizations, universities, and companies could apply for funds from the program to undertake development and demonstration projects focusing on the then rather novel and politically captivating concepts of user-driven and user-centered innovation. One of the projects in which I had the pleasure to partake – DESINOVA – was a collaboration between the Danish Chamber of Commerce, Danish Designers, and a university innovation unit. Moreover, a dozen independent designers, design agencies, and innovation professionals were actively engaged in the project, which focused on applying and further developing the said methods to foster innovation in service-providing companies – from insurance companies and pension funds to private hospitals and retail operations.

The companies came with an assignment, or rather, a problem they wanted to see solved, and the idea of the project was to address the problem with other means and methods than what the company itself would otherwise have done. This is, and ought to be, a principle for public funding of development projects – a so-called market failure – to avoid unfair competition and to make sure that new knowledge is actually generated.

In several of the “cases” worked with over the course of the 2 years that the project lasted, applying a user-centered approach revealed quite early on in the project that the challenge raised – the “thesis” – was misconceived, and that other, unrecognized factors were much more instrumental to what was seen as a problem. One of the “testimonials” captured after the project had ended was from a senior director of a large Danish pension fund. He admitted that the most important and highly valuable learning on their side was to invest much more patiently in identifying what the real problem is. Until then, they had worked with user engagement in the form of focus groups and other means of user confrontation to validate new product ideas, but now, it seemed obvious that the users needed to be engaged from the very outset of the project to help prioritize which initiatives to take. Adding to that, they bluntly admitted that they did not have enough knowledge and understanding of especially young people and of their motives and needs in relation to take out a private pension.

A nation-wide retail chain within home electronics had also identified a problem; they hadn’t been able to attract female customers to their outlets. However, they also had a clear-cut idea of the reason for it – being their inability to attract female staff with whom female customers could identify. So, the problem they wanted solved was how to attract female staff. However, by challenging the thesis and by engaging both male and female customers as well as existing staff members and group management in a reframing process, it proved that it had nothing to do with the gender of staff members. In fact, most female customers actually preferred being advised by a male member of staff, as their general perception was that men know more about technical issues and electronic product information. The problem was actually much simpler than originally perceived; female customers simply did not feel attracted by the extremely product-focused environment, exclusively focusing on the newest technologies and bits and bytes and technical specifications – not on the most important buying criteria among female customers: energy consumption, the user experience, and how the product would fit into their home environments. They simply just wanted more attractive outlets, which made them feel welcome instead of alienated, and some guidance resonating with their criteria for purchase – not from a staff member, but through better shop layout and atmosphere, signage, and product presentation. Then, after having taken the first moves on their own, they were more than happy to be served by a male member of staff.

Moving beyond the confines of my own home turf, Denmark, there are oceans of good cases underpinning the sensibility of investing in the front end, in the very early phases of a development process. One such case is the development of London’s Heathrow Terminal 5. The renowned design management specialist, Raymond Turner was responsible for design development, just as he was for Heathrow Express and numerous complex infrastructure design projects. He has also advised a number of global companies on their strategic use of design. In his recent book, Design Leadership – Securing the Strategic Value of Design,2 he writes that the reason for the massive investment, both financially and in terms of time, in a creative explorative process before actually commencing on the actual planning of the terminal building, was a great deal of focus on and consciousness of how to understand and manage the risk factors of the project. He says that “the risk of creating the wrong solution and for the long-term cost of making the wrong choices were at least as important for our early stage assessments as was the ambition of creating the optimal solution.” Hence, the development was organized according to an entirely new principle, spread out on three equally important teams: one for incoming passengers, one for outgoing passengers, and on for transfers. And instead of defining the project as “designing a new airport terminal,” it was defined as designing “the world’s most refreshing interchange” – regardless of whether that transfer was from one aircraft to another, from train, bus, or car to catch a flight or from arrival by aircraft to onwards transport by train, bus, or car. Because that’s what an airport is for – to facilitate an interchange.

By adopting such a mind-set, the project owner, British Airport Authorities, realized that they had been frighteningly close to making the wrong decision, to embarking upon the wrong project – a multibillion pound investment, without strengthening Heathrow’s position as an interchange. They might have increased the flow of passengers by a couple of million passengers a year, but neither its owner, BAA nor its largest user, British Airways, would have been able to use it as an argument to fly via London instead of via Frankfurt or Schiphol or Paris de Gaulle, because the only thing that matters in the airport industry, at the end of the day, is the traveler’s experience – something which is monitored and measured almost day by day, an entire industry whose competitiveness is entirely based on one thing: the differences between excellent, good, mediocre, and lousy design.

For a couple of decades, now, an interesting concept has attracted quite some attention – globally, and in the United States in particular: the concept of “family-centered care.” The background for it is quite simple. In pursuit of a more effective hospital sector, and after having wrung the effects possible out of medical staff, nurses, and caretakers, one started looking at whether some of the more banal operations performed by staff could actually be performed by family members and other visitors instead. The list of such activities grew quite long, but it didn’t really help, as the real problem was that visitors stayed for as short as possible. There were no facilities making it possible to combine a visit to the hospital with the pursuit of other activities, such as working, and the atmosphere did not invite longer stays, where the visitor could read a book or see a movie. In fact, the hospital was not a very attractive place to spend time at all. However, dialogue with family members showed quite a few would actually spend substantial time with their sick family member, if only such facilities existed. By taking the consequence of these new insights, and in close dialogue with user representatives, the wards were furnished with comfortable chairs for reclining, a more homely atmosphere, and an actual work station, as well as better catering facilities, internet connections, and whatever else it took for family members to feel comfortable. As an immediate response, family members and friends stayed for hours and whole days with their loved ones instead of the mandatory 15 minutes, automatically taking on chores such as fetching a glass of water, accompanying the patient to the restroom, and fluffing the pillow – and even more importantly, just being good company for the patient, which in itself can have a significant therapeutic effect. And just as immediately, the same chores were removed from the to-do list of staff members, who had suddenly more time to cater for those who didn’t benefit from family and friends, and to allocate more time for professional care and nursing. In some cases, capacity has been released to an extent, which allows for more flexible working hours and engaging in development work, instead of constantly being stressed by lagging behind. An unexpected effect has proved to be of even greater importance, as patients are, in average, being dismissed earlier than before – in part explained by the more inspiring and healing atmosphere, and in part by the attention from and help by their peers.

Juncture

So far, so good – you may think. It all seems wonderful that organizations solve their problems successfully with the help of reflection and applying design thinking and methodologies to make sure that they solve the right problem. But what exactly does that have to do with risk management?

The greatest risk of all those an organization can run into is that its investments are not sufficiently capitalized, eroding long-term ROI and solidity, which in turn, is the fastest route into marginalization and eventually closure. Unless, of course, and hopefully in due time, the management is changed as is the direction.

The greatest risk of all those a public sector can run into is to manage our joint resources in a manner which turns civic society against the system, questioning the competencies and priorities of its leadership, and whether the ratio between taxes paid and benefits returned is reasonable. A long time ago, it didn’t really matter – the public sector was a protected reserve – but today, the consequences increasingly resemble those that we know from the private sector: changes in management, with or without golden parachutes, and new directives from the political environment, the public sector parallel to the executive board.

The risk of the pension fund was that it could have wasted substantial amounts on a campaign directed at young people without actually understanding the background for their tepid interest in their products, unless the senior management had discovered the value of engaging their audience at a very early stage; by engaging them in the development of the products themselves, rather than just trying to understand what kind of advertising young people respond to. In any case, no matter how successful the campaign would be, the effect would most probably be limited if the product itself were not perceived as relevant.

The risk of the home electronics retailers would be to hire female staff, thus challenging their strong position vis-à-vis their core target group, men, while the wanted effect of attracting and communicating better with female customers most probably would have been slim or nonexistent.

The risk that the growing gap between the perceived patient experience and available resources would increase stress symptoms and sick leave among hospital staff was a decisive factor for why American health care professionals in the 1990s started focusing on family and peers as a resource. Interestingly enough, the significant results recorded in the United States over two decades do not seem to have impressed their European colleagues. Searching for knowledge about family-centered care or healing reveals only few signs of interest in its potential. I was able to find only few signs of interest in the concept in Europe, and what I found seemed to focus on trends for treating alcoholism-related mental illnesses, referring to the importance of engaging family members actively in the therapy. Perhaps Europe is losing out on a massive, however complex and challenging potential for increased effectiveness as well as enhanced user experiences.

Having both the obligation to, but also the privilege to make decisions on the behalf of others entails a great deal of responsibility, but alas, also great risks. This probably explains the conservatism seen in many strategies, corporate as well as of public sector origin. The problem is only that by being overly conservative and prudent, and by averting risks for any price, new risks emerge by themselves – risks of often much greater potential impact.

When recruiting new staff, the prevailing criteria are certificates and metrics. Why? Obviously, they are important sources of information about a candidate, but the underlying reason is clearly that if someone is hired and proves not to fit in, nobody wants to run the risk of being confronted with an “of course it couldn’t work, we could have told you – he didn’t even have a certificate.” Along the same lines, we tend to hire people who resemble ourselves, as hiring someone whose competences we do not understand fully is perceived as risky. How do we know whether we get value for money . . .? The result, of course, is an endless row of homogenous professional environments, where the lack of diversity in itself may prove to be the largest singular barrier for innovation to happen.

We apply the same risk avert “logics” when choosing suppliers; we choose well reputed and well-established advertising agencies and suppliers of copy paper and catering, just to be “on the safe side.” And among them, price takes over as the most common decisive factor. The result is that we become stale and complacent, and we lose touch with the novel and invigorating thoughts, and of losing out on creative, often better and probably cheaper solutions than the current, a high price to pay for lack of courage and of the fear of being challenged. To be constantly challenged, also through our choice of staff members, suppliers, and partners, even clients, is in itself a fantastic opportunity for reframing the way we see ourselves as an organization.

Risk is, as previously mentioned, closely linked to responsibility, and I do not for 1 second underestimate the significance of the fact that acting responsibly often entails a certain degree of conservatism. This is only natural, and in particular, where much is at stage, then certificates and documented metric can be decisive, and reasonably so. On the other hand, though, I would claim that most organizations cheat themselves of both valuable competences and of the opportunity of being perceived as an attractive employer by focusing more on avoiding risks than on working with risk as a resource and a natural ingredient of being a dynamic outfit.

Adopting a more dynamic approach on the one hand implies that one has to take more risks than many organizations do today, but it also means that one learns to work methodically with assessing risks and opportunities and to turn risks into opportunities; risks, which are inevitable, and which are often overlooked if not embraced and related to in a proactive manner.

Every time a new process is started, there is a certain risk of failure; whether failure means that the product or service never reaches the marketplace, perhaps it cannot be produced at a competitive price or because the need in the market has been misread or misinterpreted, or perhaps it does reach the market, but will enter the annals of veritable flops. Most companies defend such failures by documenting their processes and project management procedures, including risk management calculations, and their staff members’ formal competencies. Actually, and quite thought-provokingly, many companies have a certain percentage of failed development activities written into their strategies and budgets, often based on statistics showing that 20 to 30 percent of all products and services launched in some categories, and up to 80 to 90 percent in others, such as groceries, fail to capture a reasonable market share, thus disappear from the shelves within the first year of existence.

Which, one may argue, is managing risks realistically, but perhaps not in the most constructive way possible.

What if we took another approach and said,

let’s raise the bar from the beginning – allow some more ambition, paired with some more space for play and frivolity when embarking in new projects. And, what if we made our own lives more interesting by hiring more diversely and by adding more angles and perspectives on what we do and how we improve, without giving up on structured and well-managed processes, making sure that we sort the good ideas from the bad as early as possible, that we exploit the often tacit knowledge that we have access to among staff members, partners and suppliers, customers and passers-by.

That would be a much more effective way of ensuring that the products and services in which we invest our heart-blood, as well as substantial amounts of money to develop, quite actually resonate with the marketplace. And it would be a much more constructive approach to working with risk management, and with improving the bottom-line.

The logics are simple, as seen by a simple mind like mine. By investing more in the early phases of the development process, one ensures that the problem is the most relevant to solve; some would call it the most fiercely burning platform. By working with stakeholder engagement, iterations, and development cycles, systematically through one phase of the development process at the time, one opens up for more angles and more experiences, adding precision to the analysis. By engaging users and other experts on their own lives to the extent possible, you create ownership and access knowledge, which would otherwise have remained tacit, and by working with gradually more advanced prototypes throughout the process, the chances of naughty surprises at the costly end of the process – or even worse – after the product or service has been launched, are reduced to a minimum. And at the end of the day, we minimize the risks of burdening both the marketplace and the environment with product and services, which are fundamentally superfluous or obsolete.

A final example could be a publically funded web universe, which was developed and launched in 2010, aiming at raising the interest in reading among younger kids. Since then, it has primarily collected dust – just like books not being read. Kids, it appears, don’t really use it – as was the intention, simply because it doesn’t appeal to them and is perceived as less user-friendly and accessible than other, commercial sites, and in particular than the social media they use. As a group of librarians from a municipal children’s library writes in a blog posting at their own organization’s website, “The question is whether the web platform in its current format is the solution. Despite a quite long introductory period, we do not encounter any enthusiasm among the kids.” Why is that so, would be my first question. Perhaps one explanation could be lack of engagement of the users – the kids themselves – in the development process. It has primarily been made by librarians and web developers, and by an otherwise fantastic and well-known comic illustrator. So, you may say OK, you win some, you lose some, and no big harm has been done, just because a website doesn’t work as intended. And no – no big harm has been done, except wasting an initial investment of one and a half million euros, and an annual cost of keeping it alive at almost half of that. Obviously, the funding has been granted after careful consideration and on the assumption that it would encourage the desire to read among 8- to 12-year-olds, and facilitate their access to quality children’s literature. The risk from the very beginning was that it wouldn’t be used, and I’m quite certain that that risk must have been acknowledged from the start. Today, we see that the risk was real, but it could have been managed quite differently by focusing on, understanding, and engaging the users from early on in the process, so that the understanding the right problem would had guided the developers to the right solution. Kids want access to the knowledge and inspiration they search where they are already, and they are present at social media platforms, at the platforms, where they play computer games and on the platforms they use while doing their homework. They don’t want more platforms or new accesses; they want to find what they’re looking for or be triggered by provocations where they already meet virtually. I am quite convinced that more than three million euros until now could have been used more wisely, and I’m convinced that the user could have contributed to it, instead of using a quite substantial sum, after all, on something, which might end up as more of an embarrassment than a modern approach to cultural policy implementation.

There are countless examples of investments in products and services, which never responded to a real need, and the quite arbitrarily chosen specimens above are by no means there to mock or ridicule anyone.

These examples are a rather random selection that I have come across either as a team member, an observer, or as consumer of the daily news, and are exclusively illustrative of situations where I believe that a design methodological approach and a reallocation of resources to the very early phases either would have – or actually did – contribute to a better end result.

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1M. Loosemore. and F.T.T. Phua. (2010). “Stakeholder Engagement in Managing Risk” Proceedings of the 18th CIB World Building Congress.

2R. Turner. (2013). Design Leadership – Securing the future of Design (London, UK: Ashgate).