Innovation and risk management seem to be the enemies of each other. Many people think a typical start-up – highly independent and empowered teams, agile development, minimal controls and executives who need to gain market share and have less to lose – is the ideal incubator for innovation. The opposite seems to be true for credit unions with a carefully structured risk management function.
Increasingly, innovation and risk management are being viewed as partners.
These two disciplines can help credit unions pursue opportunities that a risk-averse culture might disregard immediately. Risk management can help a credit union’s innovation agenda by revealing blind spots that threaten the future of your institution.
Credit unions can apply three key principles to their work to achieve a balance of risk and innovation:
Flexibility. Rather than placing all their bets on one or two experiments, credit unions may want to consider building a portfolio of early innovation investments that act as options. Advanced analytics and other sophisticated risk management tools can help guide such complicated decisions by regularly assessing value against multiple variables and scenarios. This risk management support can include risk methodologies and tools designed to measure both positive and negative uncertainty and provide realistic estimates of results.
Speed. Successful innovation requires speed. Credit unions can use rapid experimentation and agile development to increase their chances of filling their innovation portfolios with new products and extensions. An iterative approach closely linked to members can draw attention to risks and integrate them into decision-making. In a high-speed environment, effective risk management often encourages risk-taking within the bounds of a credit union’s risk appetite.
Control. Credit unions can create a safe ground for experiments – “safe” because risks are controlled, managed and measured. This requires bringing together the finance and operating sides of the credit union. To the finance side, risk is often something to avoid or mitigate, while operations often sees risk as inherent and necessary for growth. Effective risk governance can bridge these two viewpoints, translating strategic challenges into specific risks to take and providing rules, parameters and measurements to guide both the investments and the process.
Programs designed to accelerate innovation are becoming more common, in part, because successful innovation can be a cure for many of the risks credit unions face. Risk management adds a level of discipline and transparency to the innovation process, while supporting desired risk culture and appetite. Marrying risk management and innovation can boost innovation efforts by creating confidence that innovation bets are well-placed and that innovation risks are well-managed.
Finding the right balance between risk management and innovation is one of our main topics at THINK 13. We hope to see you there – but if you cannot attend, visit this blog regularly the week of April 29 for updates on an almost hourly basis.