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The Case for Risk Management

In today's tough economic times, companies considering operational innovations can reduce their uncertainty with a solid risk management strategy.

Feb/Mar 09
Where some see challenges others see opportunity. This truth may be one of the only certainties in this otherwise uncertain economic environment. We are seeing it already in the resiliency of innovation.

Despite unpredictable consumer markets and the shifting focus from the top line to the bottom line, innovation lives. It just looks different. Instead of new products and services fueling top line growth, the innovation currently in vogue - operational innovation - allows companies to do more with less. For this reason, bad economic times heighten attention to operational innovation.

We are seeing many forms of operational innovation in the current economic environment that impact site and facility planning. For example, companies are redefining the boundaries between their own organizations and partners' organizations. Operations that were once closely held - such as research and development - are now commonly trusted to others firms. For those operations that remain within companies' control, the focus on achieving cost-effectiveness without sacrificing quality is yielding creative new ideas and solutions. Yet, in the current economic environment, companies face new barriers to operational innovation even though their motivation for efficiency is as high as ever. This point becomes clearer when we look at innovation with an understanding of what is required to achieve it.

One of the most interesting perspectives on achieving innovation comes from Gregory Berns, a neuro-economist at Emory University. Berns looks at innovation through the minds of individuals who accomplished things that others assumed to be impossible. In his book Iconoclast, Berns points out that iconoclasts have three remarkable characteristics: they see the world differently; they have a level of social intelligence that allows them to bring others to their way of thinking; and they tolerate the prospect of failure. Most companies that achieve operational innovation embody these qualities as well. In bad economic times the first two characteristics become easier to acquire, while the last becomes significantly harder.

Seeing the World Differently
Berns describes the brain as a "lazy piece of meat" because it draws on past experiences when possible to make perception easier. In management we call this "patterned thinking." It impedes innovation.
Conversely, when a management team cannot easily rely on past experiences to help them perceive their current environment, innovation is enabled. It is difficult in our current economic environment to rely too heavily on past experiences. After all, the world looks a lot different now than just a year ago.

Operational innovations that impact site and facility planning start with a change in perspective. We witnessed this recently when a client challenged a longstanding staffing strategy. After more than 20 years of hiring only college-educated workers in its customer service operations, this company's customer service centers were located in metropolitan areas with abundant college educated workers. The current economic environment - and this company's diminished margins - changed its perspective on the type of worker required to service its customers. The company hoped that relaxing the required educational attainment of its workers would result in two things. First, it hoped to find no significant decline in customer service. Second, it hoped that the company's labor costs would decrease as it stopped competing for college-educated workers in metropolitan areas.

Bringing Others to Your Way of Thinking
Berns describes iconoclasts' ability to bring others to their way of thinking as "social intelligence." Without this ability, iconoclasts cannot effect change in any meaningful way. Similarly, company managers who cannot bring members of their organization to a new way of thinking will not achieve operational innovation.

Operational innovation is broad-reaching within a company. Many departments, business units, and individual employees are impacted, sometimes negatively. The negative impact on individuals results from an effort to positively impact the organization as a whole. In good economic environments, where operational innovation is not critical, the motivation for change is often outweighed by the desire to avoid negatively impacting parts of the organization. In bad economic environments, operational innovation is often required. In these cases, the good of the whole company generally outweighs the good of its parts. Indeed, collectivism surrounds us in this economic environment in the form of layoffs, pay reductions, and offshoring.

For our client determined to move out of expensive metropolitan areas by challenging its hiring strategy, operational innovation would sacrifice many individual employees. In better economic times, this sacrifice may not have been worth the reduction in costs. In today's economic environment, however, where the survival of the company was uncertain, management felt the sacrifice was warranted.

Tolerating the Prospect of Failure
Fear of failure can be paralyzing. For managers, fear of failure often stems from the uncertainty brought on by change. In unpredictable environments, the level of uncertainty for managers can lead to inaction. Such is the state of many companies in our current economic environment.

This can be readily seen in the large number of site and facility planning projects cancelled or put on hold in recent months. With the chaos of uncertainty diverting the managers' attentions, the prospect of increasing uncertainty through changes in companies' site and facilities strategies is often too much to bear. This makes operational innovation extremely difficult.

For our client attempting to reduce costs through operational innovation, the risk of failure nearly kept the company from implementing its new strategy. While the company could reduce its long-term costs by moving away from metropolitan areas, its short-term implementation costs would increase. This, coupled with an uncertainty about the effect on employee morale, customer service levels, and corporate image, created a mountain of doubt and fear. Managers needed some way of seeing into the future to determine whether their operational innovation would bring them relief or additional pain.

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