Although it might sound surprising, a few businesses across the world still think that innovation and risk management do not go hand in hand. Innovation and risk management are increasingly seen as adversaries, rather than being complementary. When appropriately combined, the two can help organizations leverage on opportunities that spring from a risk-averse culture. On the contrary, there are organizations that have understood that risk management fosters innovation by ascertaining the blind spots and areas that threaten the company’s future.
Here are three key principles that bring a better balance of innovation and operational risk management in an organization:
Risk scenario analysis
Advanced analytics and many other refined risk management tools can guide the leadership team to make complicated decisions simpler. The analytics tools help to assess value against manifold variables and circumstances on a regular basis. Risk scenario analysis helps arrive at risk methodologies that determine both positive and negative uncertainty of a situation. It not only provides a pragmatic estimate of results, but also creates results that provide better operational flexibility.
Successful innovation demands speed. It is important for companies to employ rapid experimentation and agile development to boost innovation with new products and additions. In a fast paced setting, effective risk management often supports risk taking within the limits of the company’s risk appetite. Speed in risk management facilitates quicker dialogue across the company to determine acceptable and unacceptable risks, and how advisable risk taking is based on potential returns.
Innovative companies habitually create secure ground for experiments. “Secure”, because risks are controlled, measured and managed. Controls typically bring the finance and operating facets of the business together. With respect to finance, risk is usually avoided or mitigated, while operations often view risks as intrinsic to and essential for growth. Effective risk management bridges the two viewpoints by providing rules, limitations and measurements to guide both, investments and process.
Successful innovation can be the right cure for several risks faced by businesses. The three principles for risk management and innovation can add discipline and lucidity to the operational process in an organization, all while supporting the required risk culture and appetite.
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