CFO Perspective: How to Think About Innovation and Risk

If you’re not willing to take some risks and try new things as a company, you face the potentially greater risk of falling behind competitors who will. That’s fairly common knowledge in the digital era, right? Still, innovation requires companies to step outside of their comfort zone. But some business leaders struggle to find the right balance between risk taking and innovation so they delay decisions, ultimately leading their organizations into stagnation.

I want to focus on four key areas that I find helpful when thinking about how to weigh the risk-versus-reward nature of innovation.

If a company is considering whether to forge a new path with an innovative product or service, for example, one of the questions will be, “How will we measure return on this investment?” And when it comes to ROI, the first thing business leaders think of is how and when the investment will impact profits and revenues.

Those things have to be considered. But in today’s world, where innovation moves fast, the ROI question should be expanded to include other scenarios and their potential outcomes if the investment isn’t made. Would not doing so open the door for competitors to gain more market share or more quickly serve a customer need with their own innovations?Sometimes, the biggest risk to the company is doing absolutely nothing.

Business leaders must empower employees and their managers to not fear failure. Why? Because true disruptors fail quickly, learn their lessons, and then bounce back. The cost of failing fast is much lower than prolonged indecision or the inability to admit failure and move on.

The only way to help others in your organization understand this is to nurture a culture where failure is not a four-letter word. If a team pours its commitment and passion into trying something that ultimately doesn’t work, that has to be okay, as they will have likely learned through failure. Businesses should think about their innovation efforts as a process of continuous learning.

I’vewritten beforeabout the importance of agility and transparency, and I believe if you take small teams and put them on hard problems, that’s potentially a great way to foster innovation.

At Workday, we often put together teams of five or six people and let them loose on finding an innovative solution to a problem. Small teams have the ability to make faster decisions and react in a more agile fashion than large teams.

Trueorganizational agilityrequires that the success of projects are tracked and measured every step of the way. Ideally, your projects will stay on track to meet your goals, but as you track them, you may discover that’s not going to happen. So, it’s important to help those involved remember that since ideas do sometimes fail, they should not to get too emotionally attached to them.

Organizational agility is critical to the ability to not fear failure —businesses have to be able to make the call as early as possible to kill projects that aren’t working. Additionally, killing projects must be viewed broadly as a good thing—an opportunity to invest those resources in other ideas that will have more positive outcomes for the company.

The pace of technology innovation is not going to slow anytime soon, and inertia will not be an excuse in the boardroom when a business is disrupted by its competitors. Organizations that explore all sides of risk and build a culture that doesn’t fear failure are best positioned to thrive in this constantly changing world.