Innovate or die.
The sentiment is trite and clichéd. It’s also imperative to success.
A top-of-mind issue for every credit union leader is how to be innovative. My answer is inconvenient, counterintuitive, and rarely welcomed: “Change your culture!”
Innovation is remarkably simple. Work hard, try something new, fail, learn, and try again. Repeat until you don’t fail.
But innovation is also remarkably difficult. Thomas Edison’s famous description of genius, “1% inspiration, 99% percent perspiration,” understates the challenge when it comes to successful innovation in a business setting. A better quote from the same prolific innovator is, “I have not failed. I've just found 10,000 ways that won't work.”
Sir James Dyson created 5,126 “failed” prototypes before creating the revolutionary vacuum cleaner that made his fortune. In the consumer goods field, approximately one new product idea in 100 selected for development actually makes it to introduction, and only one in 20 of those introduced survives for more than a year.
Failure is not just an unavoidable part of innovation; it’s a necessary element of success — the only way to learn what works. Yet failure of any sort is anathema in most traditional American business, including credit unions.
Success is about efficiency, effectiveness, quality, and continuous improvement. In business, success and failure are polar opposites, so the failure-dependent process of innovation runs counter to the fundamental culture of a well-run business.
The reasons for this are clear enough. In his work on disruptive innovation, Harvard Business School Professor Clayton Christensen documents three self-evident truths that in combination ensure most established companies will struggle with the innovation needed for responding to emerging threats and opportunities:
The best ideas — the most market or consumer sensitive, the most innovative — come from people on the front lines.
Everything flows through middle management. Middle management determines what executives see from the front line and how the front line experiences executive decision-making.
Middle management is the most conservative and risk-averse cohort in any company.
In other words, an organization’s capacity to be innovative depends on those in the company most afraid of failure.
To get around this conflict, many companies hold annual innovation contests or ongoing programs run by executive champions, but these efforts are almost always disappointments. This is where the role of culture, and the scope of the challenge, become clearer.
Culture is defined by the values leaders practice, not the values they pronounce. Even the healthiest, most progressive credit unions value risk minimization and failure avoidance. As a result, innovation contests and programs, as creatures of organizational culture, tend to end up being just as risk-averse and process-driven as everything else in a well-run company.
You can’t incentivize people to defy culture. Fear of failure and its consequences is a far more powerful motivator than any incentive for success. Since failure is necessary for innovation AND unacceptable in most credit unions, it should hardly be surprising that the industry struggles with innovation. The question is what to do about it.
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What differentiates companies that are successful innovators is their organizational perspective of failure and how and why it occurs. Most companies reward outcomes, not actions. Most managers and employees know this and respond accordingly. The result is a risk-averse culture where employees are afraid to take chances unless they are sure of success.
Successful innovators have been able to change this dynamic through an explicit bias toward process over outcome and a proven record of management walking that talk. They focus on doing the right thing the right way for the right reasons and rewarding that as success, regardless of outcome. By changing what they reward, they also change how incentives work and how employees respond to them.
When middle managers see their leaders making decisions that encourage responsible risk-taking and rewarding the right behavior regardless of outcomes, they adopt the same practices and change the culture where it’s felt — on the front lines of the organization. This frees the inherent creative nature of front-line employees from the fear of taking risks and thereby starts to open a pipeline of innovation-driving insights.
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But that doesn’t happen overnight.
So, what should your credit union be doing in 2017 to become more innovative? Three things:
Start redefining failure by rewarding process rather than outcome. As this works through your culture, it will start encouraging the responsible risk-taking critical to successful innovation.
Consider realigning basic performance metrics to make them more strategic, mission-oriented, and engagement-focused. No margin still means no mission, but bigger-picture targets give more room for the experimentation and learning needed for successful innovation.
Work with your board. As long as a board is more concerned about monthly delinquency rates and missing budget numbers, it’s tough for any management team to look beyond the next reporting date toward strategy and innovation.