Risk Aversion: The Biggest Innovation Obstacle Fear of risk is the biggest factor holding financial services organizations back from innovating.
There are numerous obstacles that banks face when trying to innovate. There are things such as funding, people resources, the right ideas, customer needs, and the list goes on … All of these are important, but there is one underlying obstacle that must be overcome while taking on the other issues, and that obstacle is risk aversion.
Risk, by its nature, is something that large companies avoid. Risk is especially critical in banking. Most of my clients have some sort of major initiative launched around risk mitigation. Yet, contrarily, they also usually have some sort of innovation program that introduces risk. Risk and innovation go hand in hand, so banks need to be aware of how they manage and react to innovation risk.
Generally speaking, risk is even harder to overcome if certain factors are present. I’ve found that there are five major determinants of risk aversion that I can use before I even work with a company in order to know how strongly the company will resist risk (and hence resist change and innovation). Those factors are:
- Size of the company
- Age of the company
- Organizational structure
- Customers
- Market
The size and age of the company are usually good indicators of risk aversion. The larger and older the organization, the more risk averse it usually is. Large and old companies develop formal ways to identify and avoid risk so that risk aversion actually becomes embedded in the culture.
The organizational structure of a company also influences its ability to assume risk. The more hierarchical and formal the organizational structure is, the more likely it is to reduce risk at each level of the hierarchy. There were numerous innovations that I led for a major bank that started off as potential game-changers. However, these innovations became filtered and watered down by various levels of bureaucratic risk reduction into very mediocre, incremental innovations.
Comparatively speaking, I sometimes work with smaller organizations with flatter organizational structures that are more agile and less risk averse due to their structure. Hierarchy and formality in an organizational structure tends to increase risk aversion
