Negotiating innovation with compliance

September 23, 2016 Focus area: Continuous Innovation

Innovation requires experimentation. Developing a proof of concept to show that a certain technology works, or testing a value proposition with a small sample of customers are both simple ways of generating insights with a modest investment. Such experimentation comes naturally for companies that are in R&D intensive industries. Experimentation could be viewed as a form of risk management: you want make sure that something works before you invest scarce resources.

In a public company, the business model is completely geared towards generating predictable returns at the lowest possible risk. How seriously executives take risk mitigation is expressed in an array of corporate gate keepers such as compliance, legal, control, and risk management departments. Gate keepers set boundaries, and make sure that they are respected. Their existence is not a surprise, because in corporate finance there is direct relationship between risk and the valuation of company shares.

Experimentation and boundaries set by gatekeepers may be conflicting, despite the fact that they serve the same purpose: mitigating risks. The use of certain data, approaching target groups, or using the company name and logo may be prohibited. Simply remaining restrictive is not a good idea for gate keepers, because that would undermine their high level objective. For the same reason, "Just loosening up" to facilitate innovation is not a good idea either. Therefore, conversations between innovation departments and gatekeepers are often difficult.

In my opinion, such conversations should revolve around two types of value: hypothetical value, and validated value. Hypothetical value is the "on-paper" expected return of a new product, technology or initiative. It is uncertain, because it is still an idea. However, the hypothetical value should be large enough for gatekeepers to allow controlled experiments beyond their boundaries. Experiments can be controlled by sizing, restricted environments, etc.

The goal of the experiments is to turn hypothetical value into validated value. Validated value means that the return potential has been realistically determined. Once value is not hypothetical anymore, it is possible to have fact based discussion on permanently moving boundaries, because risk and return can be judged objectively.