Wednesday, March 6, 2013

Innovation, Risk-taking, Incentives, and Trust

What tools can most organizations, which exist in the spectrum between the Fox and the Hedgehog, leverage to build success through trust *and* risk-taking?

Executive Summary: How does an organization balance the pressures of building trust through, and incentivizing, sustained successful execution, with the need for some form of risk-taking (with positive outcomes). Are common control structures like bonuses enough? Does innovation have a role to play here? From the desk of They-May-Be-Buzzwords-But-You-Still-Have-To-Make-Hard-Decisions-About-Them.

Overview
Anyone involved with a business- from a startup to a Fortune 10 company- has dealt with the trade-offs involved in building trust across decision makers in the organization, managing levels of risk-taking (high, or low, as required), and structuring organizational incentives. In the middle of all this is the need for transparency, which is fulfilled via measurements and reporting as an accounting function.

The key here is is risk-taking for positive outcomes. This could be an imperative in hypercompetitive markets (Ref. Clayton Christiansen in Innovator's Dilemma). Examples of risk-takers for positive outcomes include Jeff Bezos and Steve Jobs.

What approaches can help us manage these parameters? Does innovation have a role to play?

Kicking off the Thought Process and the Initial Hypothesis
An Accounting researcher***, who I happened to have the pleasure of listening to recently, tackled the topic of business trust and the role of accounting, in which two things stood out:
1. A "laboratory experiment" seemed to indicate that record keeping, as a function of measurement in accounting, helped build trust across multiple transactions between anonymous parties,
2. Bonuses- as a function of incentives, which in turn are a function of organizational control- are better tools than penalties for trust within an organization.

This led me to think about the relationship between trust and risk-taking, and specifically this relationship:
Trust > Bonus Incentives > Risk-Taking

The hypothesis is that bonuses, as a means of control, are not great for some types of risk-taking.

Paradigms from Strategy and from Psychology
The "mom" readers of this post would point out the abundance of literature around child development and types of positive reinforcement. Case in point, this article:
http://www.nytimes.com/2012/08/05/opinion/sunday/raising-successful-children.html?pagewanted=all

Some strategic thinking readers might also frame this as a Fox vs. Hedgehog problem. Their point could be that organization must clearly choose between being a fox and being a hedgehog. If If you want your organization to focus on repeatable execution, then bonuses work well under the hedgehog paradigm.

In reality, most organizations have to do a balancing act between the two. So, how do you solve this problem for most organizations?

Some Pathways Towards Resolution
Here are a couple of thoughts:
1. Personnel:
Jack Welch has stated previously that, at GE, he looked for folks who had some failure under their belt. I take that as a proxy for an appetite of risk taking and an understanding of its potential consequences.
2. Innovation Program:
If bonus incentives are not helping with an organizational desire for risk-taking, then the positive reinforcement incentives need a more refined structuring. Innovation programs fill this gap for a more refined structuring.

Innovation
Several approaches to innovation are available to help make the appropriate trade-offs in the spectrum between the Fox and the Hedgehog. These focus on making innovation flexible and adaptable, and are available commercially, as well as in research literature.

However, structuring an innovation program in an organization is never easy, especially when it pertains to the core activity of a business unit, or even an organization. Enabling risk-taking though innovation requires a level of communication and buy-in across the organization that may take some time and sustained effort to achieve.

Do innovation programs at Google, Yahoo, and Amazon have interesting tales to tell? I have also previously posted about Netflix on this front:
1> Netflix bids for Original Programming: http://insightplusideas.blogspot.com/2011/03/innovation-and-tactics-series-netflix.html
2> Netflix and Organizational Capabilities: http://insightplusideas.blogspot.com/2011/03/netflix-and-organizational-capabilities.html

How would these contrast against innovation at a bank, at a perishable goods supplier and at a metals company?

Would an organizational skeptic call the innovation program old wine in a new bottle? Or is it all about results, and a rose by any other name is still a rose? Amazon has invested in risks for positive outcomes despite negative signals from the stock markets. Jeff Bezos had apparently asked potential CFOs if they had invented anything.

What do you think?


*** Many thanks to Dr. Kristy Towry at Emory.

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