Disruption: The Risks of Business Innovation

Michael Schrage tells CIOs and other business leaders why risk is not innovation's ugly stepchild, why innovation priorities are crucial, and how companies are like alcoholics.

Innovation is a mandatory task of today's IT shops. But that doesn't make it easy. How to innovate well is a problem that leaders must repeatedly face. For some (lucky) organizations, that's where Michael Schrage comes in. Co-director of the MIT Media Lab's e-Markets Initiative, senior adviser to MIT's Security Studies Program and former CIO columnist, he is well-known as a thought leader on the subject of innovation. He sat down with CIO.com's Editor-in-Chief Brian Carlson to talk about corporations' aversion to change, why risk is an inherent part of innovation, and how rapid prototyping can help companies better manage the risk of innovation.

CIO: How do you get corporations to embrace the need for change?

Schrage: Frankly, I think it's impossible to get organizations to embrace the need for change. Organizations are a bit like alcoholics in that regard, and there's this wonderful line from Gregory Bateson, is that two things are required for somebody to decide to take the step. The first is they have to acknowledge they're an alcoholic, and the second is that they have to wake up in the gutter. And I think for organizations, they have to acknowledge that they're not willing to change, and the second is that they have to go through some sort of crisis that really prompts that kind of action.

CIO: How do you evaluate what kind of changes an organization needs to make?

Schrage: When an organization brings me in and they talk about change and about innovation, I spend a lot of time listening to what they say, but I'm more interested in the tone than the content. I pay a lot of attention to, what's the level of frustration in people's voices when they complain, when they talk? And then I kind of ignore the content and start paying attention to how people actually behave. I'm a very strong believer that actions speak louder than words. And I think the only way an organization can really take constructive steps to change or improve or innovate is not to examine the words they use but to examine the actions they take and the behaviors they manifest.

CIO: How can you balance the need to innovate and create positive lasting change with the need to manage risks and avoid the wrong kind of changes?

Schrage: Well, it's very interesting when one talks about innovation and risk: Much like Milton Friedman was fond of saying there's no such thing as a free lunch, there's no such thing as a risk-less innovation. And I think one of the great con jobs that have been perpetrated on organizations around the world is the need to innovate, the need for renewable sustainable innovation, and risk is treated like the ugly bastard stepchild to that, when in fact innovation that makes a difference obviously is going to create risks. More importantly, not only is innovation going to create risks, it's going to create new risks because it's innovative, so it's probably a risk you really haven't dealt with much before.

So the way you deal with these sorts of things is to decide, okay, this is an interesting innovation, how do I identify and manage the risks associated with that? And the approach that I strongly, strongly, strongly recommend is not, let's do better, sharper and more in-depth analysis, it's more along the lines of [rapid prototyping]: How do we build models, prototypes, and simulations, and how do we run experiments with those models, prototypes, and simulations so we see the trade-off between the benefits of the innovation and the potential costs of the risks.

CIO: How can rapid prototyping and digital experimentation be a cost-effective method for innovation risk management?

Schrage: I am astonished by how few organizations have effectively managed to appreciate the gift that Moore's Law and Metcalfe's Law have given them in terms of integrating innovation and risk management. Things that used to cost hundreds of thousands of dollars just six or seven years ago can now be done for thousands of dollars. Remember back in the '80s and the '90s and the turn of the millennium, organizations would have these direct mail campaigns that would cost hundreds of thousands--when you finally added the soft dollar cost, millions of dollars to run--it would take a year to do the evaluation. [Now] between Facebook, e-mail, and SurveyMonkey, you can get 80 percent of that value for not even 1 percent of the cost.

And I think that there's been not just disruptive innovation in the Clay Christensen sense, there's been disruptive economics. Moore's Law and Metcalfe's Law has made digital experimentation and rapid prototyping faster, better, and cheaper, not by 15 percent, not by 50 percent, not by 80 percent, but by two or three or four orders of magnitude.

CIO: How can leaders cultivate the culture of innovation at their organization, and what examples have you seen of successful organizations that innovate?

Schrage: You take the word leader or leadership and substitute the word dad, father, or fatherhood. Because I think--I take that back, I don't think, I observe that a lot of this quest for leadership is a cry for dad. It's a cry for, oh, top management doesn't approve it. Oh, that means daddy doesn't like it. My notion of what effective leadership is, you create an environment that gives people the opportunity to display the best of themselves, and if you're doing a halfway decent job—not even a great job, a halfway decent job—of hiring people and creating an environment for them, you're going to discover that you're going to have more good ideas, more good hypotheses and more good experiments than you know what to do with.

The real challenge of top management should not be to create a culture of innovation, it should be to create a culture where people understand the innovation priorities. Top management should manifest and display the judgment, i.e., , these are all terrific innovations, but for the purposes of this organization, we're selecting these kinds, and here's why. And that clarity of communication, combined with that empowering environment, creates a lovely innovation flow. It shouldn't be, oh, we need to innovate, we need to innovate. That shouldn't be top management's problem. Top management's problem should be, geez, these ideas are so good, these proposals are so good, how do we prioritize them? That's the kind of problem an editor should want with their publication, that's the kind of problem a CEO should want with his or hers.

As for organizations that actually do these things well, forgive rounding up the usual suspects. I think that Google is a very good example of this. Some of the organizations that I've worked with—NASDAQ and Mars and Siemens—are definitely making commitments to facilitating not necessarily bottom-up innovation but middle-up innovation. There's the recognition that we have these enormous resources. How do we facilitate collaboration that leads to innovation? It used to be specialization that leads to innovation. Now it's, how do we create interoperability between specializations to facilitate new genres of innovation?

CIO: Should innovation be done for its own sake, or should there be an ultimate goal of the innovative organization?

Schrage: Innovation should be done for its own sake in universities. If you're a business, if you have shareholders investing in that business, innovation for the sake of innovation is waste, just like experimentation for the sake of experimentation. Or as all too many organizations discover to their great horror, sales for the sake of sales can lead to disaster. It looks great for 18 months or two years, and then you discover the crap in quality of the receivables and the customers and the total dilution of your brand equity and brand message as you were chasing after sales. No, innovation should be a means to an end, and it is the mission and the purpose of senior management and the board of directors that governs that senior management to define that strategic intent and do oversight on that strategic intent so that the innovation investments make sense.

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