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FACT Update Sept emb er 2 01 1 Vo lu me 3 Issue 1Contact us at:firstname.lastname@example.org INSIDE THIS ISSUE Innovation Metrics for Risk Managers 1 Demystifying the Concept of Risk By Leslie Riley 1 Innovation Metrics for Risk Innovation is risky business and managing risk requires measurement. Someone Managers once said that you can‟t manage what you can‟t measure. Perhaps we can 1 Upcoming Events in 2011 manage for a while, but how will we know when we get there or even if we are headed in the right direction? Innovation requires leadership and most of us 2 Demystifying Risk (cont‟d) hate following a leader who doesn‟t know where he or she is headed. 3 Innovation Metrics (cont‟d) Traditional measures of corporate success and even compensation for individual achievement depend on lagging indicators, but that assumes prior success to be a good predictor of future success. This too seems like risky business. Continued page 3 – Innovation MetricsDemystifying the Concept of RiskBy Shira Yoskovitch Our UpcomingWhen you consider the variety and complexity of changes that the typical C-suite must Events in 2011:contend with, they all ultimately wrap around the idea of the risk/reward payoff.Rewards are easiest for most to understand, as they‟re generally a direct tie to the P&L. FACT CalgaryIt‟s the „risk‟ part of the discussion that will most commonly strike fear into leaders, and inaugural event:perhaps more significantly impacting, the employee base. Why? Because for most October 21st, 2011people, there‟s no clear-cut definition of risk to anchor to. For traditionalists, discussions Calgary, ABof risk focus on the pure finance. However, in an economy where the service-based or Globe and Mail’ssocial media company has as much pull (and dare we say it, valuation) as physical Small Businessgoods-based organizations, there‟s a rapid ascent of real-time communications Summit:technology, and geographic borders are blurring ever-more, risk doesn‟t simply exist in November 8th, 2011the end finances. To successfully lead, we need to look for risk sources and solutions in Toronto, ONthe systems, processes and people that comprise the business itself.Defining the concept of “Risk” For more info go to www.factnetwork.orgThe Oxford English Dictionary cites the earliest definition of risk in English, from 1621: or email us. “(Exposure to) the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility” Continued page 2 – Demystifying risk
FACT Update Page 2 Demystifying Risk (continued from page 1) Taking this definition one step further, modern descriptions of risk may look like: Regardless of industry orfunction, common threads exist ISO31000 (2009) /ISO Guide 73: the effect of uncertainty on objectives in defining risk: Factor Analysis of Information Risk1: “the probable frequency and probable Magnitude of impact magnitude of future loss. Likelihood of occurrence Occupational Health & Safety Advisory Services:” the product of the probability of a hazard resulting in an adverse event times the severity of the event”. Positive and negative impacts Financial risk: “the unexpected variability or volatility of returns”. need to be considered So what? While no doubt an industry or function may highlight a different aspect of Risks aren’t just financial, what is considered to be risky, there are common threads in every definition of risk.although they’re the most visible The difference between “Uncertainty” and “Risk” Even once a definition of risk is established, organization teams are challenged by the use of “risk” and “uncertainty” as interchangeable terms. The difference? “Uncertainty” represents the likelihood that something positive or negative will occur. There‟s no true formulaic measure, most times sounding like “X-% probability that this will happen in Y years”, and there‟s a potential for more than one outcome. 2 It is experiential, informed by history and its interpretation, and is made current by considering current environmental factors (people, process, systems). A discussion of Risk and uncertainty are not „uncertainty‟ tends to veer to the subjective, and alone does not allow leaders to make interchangeable terms. decisions, nor does it inspire confidence by teams to continue to create and innovate. Uncertainty is a component of risk. Risk is not a part of “Risk” is more objective and considers the combination of the likelihood of an uncertainty. The key- risk can occurrence of a hazardous event or exposure(s) and the severity of injury, ill health or be objectively measured. loss that can be caused by the event or exposure(s). Most importantly, it can be measured3. Importantly, any risk formula or definition measurement is a moment-in- time worst case scenario, presuming that no further action is taken. Distinguishing risk and uncertainty is critical. A concept that can‟t be measured will, by its very existence, cause stress on an organization, affecting its ability to focus and align on promoting innovations. By interchanging these terms, organizations diminish their power to influence, shape and insulate their innovations and teams. As we know as leaders, if it can be measured, it can be managed, leading us to the concept of risk management. As organization responds to a risk, the measure can be recalculated to understand success or ongoing change required. The Creativity-Invention-Innovation cycle and risk management Consider the Creativity-Invention-Innovation cycle4, and that an innovation exists only once it has yielded market benefit. The very nature of creativity says the idea has never been sought out, and that subjective, unfulfilled, needs and wants of customers and suppliers inform the designers. Continued page 3 – Demystifying Risk www.factnetwork.org email@example.com
FACT Update Page 3Demystifying Risk (continued from page 2)Moving towards invention and innovation, the practicality of resource managementkicks in, coupled with its requirement to measure in order to progress. You can argue,therefore, what defines a change of state from creativity -> invention -> innovation is theorganization‟s ability to morph the uncertainty into risk, and consequently be able tomore concretely manage its impact.So what exactly is „risk management’? Like many terms that get floated around thebusiness environment, it‟s a phrase that many leaders say they know and understand,but can‟t necessarily put their finger on its definition. Simply saying „it‟s the managingof risk‟ doesn‟t really capture its intent... it also moves leaders into a more passiveapproach because just like metrics if you can‟t define it, you can‟t action it. And, morecritically, you can‟t affect it.The concept of risk management relies on the existence of two critical processes oncethe risk is identified.1. The risk is prioritized in context of other risks and requirements in the organization, particularly in relation to its impact on key performance indicators, and2. The prioritized risk is acted upon to mitigate or resolve.Note that there‟s no discussion here about „avoidance‟. Risk is, by its nature, ever-present. Organizations that successfully navigate their way through innovations aren‟tdoing so because they‟ve avoided risk. Rather, they have acknowledged it, planned forit, and harnessed it into a series of ongoing activities and philosophies.Innovation Metrics (continued from page 1)Arthur D. Little5 suggests adding real-time indicators and learning indicators to theleading and lagging indicators, in order to keep your innovation priorities on trackand to ensure long term sustainability. Each of the indicators in this model has aspecific purpose. Lagging indicators help us to understand how well we did in the past. Real-time indicators shed light about how well we are doing right now. Leading indicators indicate how successful we are likely to be in the future. Learning indicators provide information on the agility of a company - the ability to learn from the past, to adapt, and to improve future long term performance.As a leading indicator, employee satisfaction has been proven to be a reliableindicator of future success and profitability. Therefore, the Innovation Culture of anorganization should also a reliable indicator of commitment to innovation and futureinnovation success; it‟s certainly a good place to start. Employee surveys often Continued page 4 – Innovation Metrics www.factnetwork.org firstname.lastname@example.org
FACT Update Page 4 Innovation Metrics (continued from page 3) contain many questions related to Innovation Culture and many companies already Strategy is generally driven have data from prior surveys that can serve as a benchmark to help gauge from the top down in an improvements in the short and long term. The chart below [Exhibit 1: Employee organization while innovation Survey Questions] provides sample questions that probably already appear on your is generally a bottom up employee surveys and what they tell you about Innovation Culture at yourprocess – this makes Innovation organization. Employees look to their leaders for cues on what is important in the Culture an important leading organization and it sets the tone for how they respond to new opportunities and indicator of sustainability. challenges. Exhibit 1: Employee Survey Questions Relevance Does your department place a HIGH Do employee responses match what executives believe are the importance on: important drivers? Do employees in the same business unit share the same insight Faster new product development? about priorities? Faster payback from innovation? If not, then both the message and its communication need to be Increasing the number of new clarified so teams are working together and departments don‟t products developed? waste time by acting in opposition to one another. A competitive Reducing costs/investment related spirit is fine, but you don‟t need open hostility or even sabotage at to innovation? work. Ask the most senior person you can find about the organization‟s I have a clear sense of the vision and future direction. If it‟s not the same as what you hear organizations vision & direction for from the front line, your company‟s ability to respond and to learn is the future. at stake. It‟s a tremendous impediment to corporate success but quite easy to fix. Since most creativity and innovation starts at the bottom, then the My views & participation are valued perception of being valued is important; if responses to this question by the organization. are not good, your innovation goals are at risk. Managing innovation risk is all about leadership. If you think it‟s risky business, how do you think everyone in your business unit I have confidence in my company‟s feels? Employees take their cues from senior and executive leadership. leadership when deciding on priorities. They won‟t offer new (risky) ideas or suggestions if they don‟t trust their leaders. Sometimes we send out mixed signals. We say that we value creativity and an innovative spirit but what happens when someone My organizations culture encourages 1 "An Introduction to Factor Analysis of Information Risk (FAIR)", Risk Management Insight LLC, November 2006 act of risk-taking valued or does tries something new? Is the mere me to work in innovative ways. 2 How to Measure Anything: Finding the Value of Intangibles in Business, Doug Hubbard (2007) their breath waiting to see what punishment awaits everyone suck in 3 Risk, Uncertainty, and Profit, Frank Knight (1921) he who dares to stray from the tried and true? Be aware of how you define failure and its consequences. 4 FACT 2010- Many Facets of Innovation, Shira Yoskovitch and Leslie Riley (2010) 5 Innovation Metrics Framework and Representative Metrics model Shira Yoskovitch- Co-founder, The FACT Network | Shira is a global supply chain expert with over sixteen years of experience in developing, implementing and improving procedures and controls that drive superior operational performance. She has worked globally for such leading brands as Arrow Electronics, Virgin Mobile and XM Satellite Radio. In 2008 Shira founded Supply Chain (R)Evolution, a boutique consulting firm focused on enabling organizations to successfully implement business transformation strategies in a “total value chain” approach. | Shira has an MSc in International Accounting and Finance from the London School of Economics and Political Science, a B.Comm. from McGill University and is a certified Project Management Professional (PMP). Leslie Riley- Co-founder, The FACT Network | Leslie is a strategic planning & corporate communications professional with over 20 years experience in both corporate and not-for-profit sectors. An experienced relationship manager, she employs a collaborative approach to obtain commitment on tactical objectives and implementation from internal and external stakeholders at all levels in an organization. Her corporate experience includes marketing and selling services to Canadian & multinational companies. | Leslie earned an MBA from University of Toronto’s Rotman School and a B.Sc. in Industrial Management from Purdue University. www.factnetwork.org email@example.com