Risk Mitigation Strategies: How Innovation Accounting Helps Investment Planning

The digital age brings a great number of opportunities for business growth and innovation. However, with these opportunities come new risks that require proactive mitigation strategies. Innovation accounting provides a framework for investment planning that helps organizations navigate the risky waters of digital transformation. 

Digital Transformation and Its Risks

The rise of data analytics, machine learning, and product customization has revolutionized business. Companies can now understand customer needs and behaviors better than ever before. They can offer personalized experiences across channels and devices. 

However, this digital shift also introduces new vulnerabilities:

  • Channel security– With customers engaging across web, mobile, and IoT devices, more points of entry are exposed to cyber threats that compromise their security. 
  • Complex customer journeys– Omnichannel strategies connect experiences but can also fragment them. Dropped handoffs become risks.  
  • Device compatibility– Offering consistent experiences across multiple devices with different specifications is an ongoing challenge.

Organizations must balance digital opportunities with good risk management to be successful in the industry. And the perfect way to do that is the innovation training program.

An innovation training program is a tailored training program where the individual or a team fosters a number of skills to develop a creative, problem-solving, out-of-the-box thinking mindset. 

The Changing Landscape of Risk Management  

Traditional vs. Modern Risk Management

Historically, risk managers conducted periodic reviews and audits. This point-in-time approach worked for static business environments. 

Usually in almost every organization, a risk management team conducts audits at a frequent pace to make sure the quality and delivery are on point. But this is more suitable for a more free, static environment. 

But today’s business environment is changing rapidly and becoming more and more dynamic in nature, where risk assessment or management is more important than ever. There are a lot of blind spots when it comes to modern technology. The only way to accommodate efficient risk management/audit is to have an innovative approach toward risk management and that would be an innovative training program.

Today’s dynamic digital landscape requires a continuous risk assessment. As technology and markets rapidly evolve, one-off engagements leave blind spots.

Agile Development and Risk

Digital products now launch through agile methodologies. Cross-functional teams iterate quickly based on user feedback.

While enabling faster innovation, agile can obscure risks. Its decentralized nature makes oversight difficult. Short sprints focus on immediate deliverables rather than long-term risks.

Integrating Startups and Risks 

Accelerating growth, companies frequently acquire or partner with startups. These fledgling organizations inject energy but lack governance.

Integrating startups can jeopardize standards around security, privacy, and ethics. Corporate risk managers must find ways to allow innovation to flourish with appropriate safeguards.

The Three Pillars of Innovation Risk Management

Managing digital risks requires a shift from traditional auditing to integrated oversight across three pillars:

Innovation Risk Appetite

It refers to an organization’s willingness and capacity to embrace and engage in innovative initiatives while acknowledging and managing associated risks. It outlines the level of risk an organization is prepared to accept in pursuit of innovative endeavors. This concept is particularly relevant in the context of risk management, as it helps organizations strike a balance between fostering innovation and maintaining prudent risk controls.

To have an efficient workflow and risk management, risk managers need ongoing dialogue with executives to determine tolerance and boundaries. The questions can vary depending on the type and nature of the business, but the following question can get a general overview of the situation.

  • What risks align with strategic goals? 
  • How much exposure is acceptable?
  • Which emerging technologies show promise versus peril?

With shared context, teams can balance risks and rewards when evaluating initiatives such as:

  • New market creation
  • Competition-driven innovation
  • Strategic mergers, and acquisitions

New Controls for New Risks

It is a fundamental concept in risk management that highlights the need for organizations to develop and implement appropriate control measures in response to emerging or evolving risks. As the business landscape changes and new risks emerge, organizations must proactively identify, assess, and address these risks by designing and implementing effective control mechanisms. 

Digital adoption creates new risk categories:

  • Data privacy– As information collection expands, so do vulnerabilities.
  • System outages– IT systems are now customer-facing business critical points of failure.
  • Technical debt– Shortcuts made for speed catch-up over time.
  • Supply chain disruption– Overly optimized supply chains lack resilience. 

Risk managers must research emerging risk areas and constantly refine policies and controls to address them.

To paint a clear picture, here is the bar chart that explains the digital adoption rate of innovative training programs in various industries (Data taken from McKinsey and Company)

Continuous Engagement 

With development happening continuously, risk management must embed itself into the process:

  • Participate in scrums to spot issues early
  • Align incentives between risk and product teams
  • Maintain standards without bottling up release velocity
  • Monitor risks post-launch and ensure fixes

Regulations like GDPR also require diligence even after deployment.

The Future of Risk Management  

To enable innovation in today’s digital landscape while protecting stakeholders, risk management must transform.

New Tools and Skills

Emerging technologies like AI, blockchain, and analytics provide ways to continuously monitor threats and vulnerabilities. Risk managers will need education to effectively leverage these tools. Implementing the innovative training program can help the employee and the risk management team understand the current scenario and upgrade their skills in the risk framework and techniques.

For more clarity, some specific tools that can change the future of risk management are:

1. Advanced Data Analytics and AI– Risk management is being revolutionized by the use of advanced data analytics and artificial intelligence. These tools can analyze vast amounts of data to identify patterns, trends, and potential risks, enabling more accurate risk assessments and predictions.

2. Blockchain Technology–  Blockchain can enhance transparency, traceability, and security in risk management processes, especially in industries like supply chain management, financial services, and healthcare.

3. Cybersecurity Tools– With the increasing threat of cyberattacks, specialized cybersecurity tools are essential for identifying vulnerabilities, detecting breaches, and responding to cyber risks effectively.

Agile Methods  

By adopting agile practices, risk teams can collaborate seamlessly with business and technology groups. Smaller reviews spread throughout the development lifecycle are more dynamic than big bang audits.

Mindset Shift

If the risk is seen as an inhibitor, it will be circumvented. Positioning risk management as enabling innovation is crucial. When engagement is viewed as collaborative versus combative, better solutions emerge.

Without evolution, risk management will struggle to exert influence. Innovation might proceed without reliable oversight, exposing organizations and customers to preventable harm.

To have a clear picture, the following pie chart helps to understand the priority of risk management. (Data from Deloitte)

Frequently Asked Questions

1. How does the shift to digital delivery impact the vulnerability of customers?

Digital channels can reduce human interactions that build trust and understanding between companies and customers. Online self-service interfaces must carefully balance convenience and comprehensibility. Hidden biases in AI systems can introduce new risks of miscommunication or exclusion.

2. What challenges do risk managers face with agile development methods in innovation? 

Agile teams emphasize velocity and operating autonomously. Traditional compliance practices like rigorous documentation are seen as antithetical. This makes it difficult for risk managers to evaluate projects. Iterative delivery means there is rarely a definitive “end” state to audit. Close collaboration and new evaluative tools are needed to align agile and oversight.

3. How do firms balance the risks and rewards of introducing new digital propositions?

Calculated risks are necessary to stay competitive. However, organizations should ensure proper governance and infrastructure are in place to monitor initiatives. Unexpected issues will arise but can be addressed quickly when detected early. With shared visibility into key metrics and risks, firms can pivot to new offerings to balance risks and rewards over time.

Final Thoughts

Innovation accounting provides a framework to align planning, execution, and measurement. This helps surface risks continuously across the development lifecycle. By adopting its practices of frequent check-ins, progressive elaboration of plans, and evidence-based governance, risk managers can guide organizations to reward risks over reckless ones. In light of accelerating digital change, implementing these techniques is imperative.

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