Innovation and Risk Relationship Public or Private Sector - Essay Example

? Innovation and Risk relationship Innovation and Risk Relationship –Public/Private sector Innovation: Innovation is an approach that helps a company / sector to progress in a successful manner. It is defined as something that gives the venture the competitive advantage resulting in wealth creation. Innovation may be in any of these forms; the product, service itself, or in the business processes that are used to deliver it. Innovation is to develop and implement new ideas for the purpose of restructuring the organization, for introducing new technology, for cost cutting, or to improve the level of communication within the organization (quickmba, 2013). Innovation in the public sector context: In public sector context, innovation is defined as application of new ideas to produce improved outcomes. It is creating and implementing products, services or methods of delivery to improve the efficiency, the effectiveness and the quality of outcomes (Hargadon, Andrew 2003). Generally the public sector is considered as a passive receiver of innovation taking place in the private sector by the private companies, but the public institutions do innovate as well. Innovation takes place across government’s public sector entities these include policy development, different approaches for using technology, program delivery, also organizational innovation to provide new services. Every public servant should realize and appreciate the importance and diversity of innovation, and find such ways to achieve it that minimizes its risks (Mulgan & Albury 2003). Different forms and dimensions of innovation: Innovation theories show that it can take many forms as some will be transformational, representing s a substantial departure from the past. Others include organizational improvements or emergent technologies. Innovation can be triggered within a sector/institution or by external influences. Different types of innovation in the public sector include the following streams. Firstly shaping policy directions; here the public sector role is to provide consultancy to government’s decision making related to policies and programs by providing objective and reasoned advices. Second type is implementation of policies and programs that is by delivering services to the country’s community efficiently and effectively. Lastly there are administrative innovations that introduce new internal processes and practices aimed at improving productivity and reducing costs (Paul Cunningham). Benefits of Innovation: There are many diverse benefits of innovation. Innovation is crucial for the enhancement of economic performance, welfare of the society, and for the stability of the environment, these benefits of innovation are widely recognized. Innovation can also drive new directions and enable better performance. It can improve an organization’s or a sector’s (public or private) efficiency as innovation would provide not only higher quality but also more timely services to citizens. It will also reduce business transaction costs. One of the major benefits of innovation is that it provides new methods of operation, and it is only innovation that helps moving from the present to future (Reilly 2013). Two Basic Drivers for Innovation: One of the main drivers for innovation specifically in public sector includes new and changing government as well as community expectations, to meet these expectations the public sector needs to innovate. The other driver for innovation in the public sector is the need for coordinated approaches, this is when there are discrepancies in the current approaches and are not sufficient for the new changing system, hence innovation is to come up with new approaches and refined processes that can fulfill the requirements (Boden & Miles 2000). Private and public sector innovation: Both the private and public sector innovation have some differences, commonalities, and synergies. Some aspects of public sector innovations for example innovations like business process improvements and improvements of information and communication technologies are similar to aspects of innovation of private sector. On other hand there are some different public sector innovations for which the government must bear the responsibility specifically those innovations that are related to policy. For example such innovations include counter terrorism and pandemic preparedness, policies related to national security. Public sector decision-making processes are more difficult to manage, time consuming and risk averse than private sector (Ackroyd, 1995). Innovations related to public sector require sound judgment and must be based an excellent understanding of all related factors, and such public servants are highly valued in this sector innovation in this sector is very challenging due to the complexity of the judgment of issues related to national interest. Any innovative plans follow a high degree of accountability by the parliament and also followed by national pay-offs. Hence proper attention is required in this sector for identifying where, when and how innovation can take place reducing all the risks as the national security is at stake. For this purpose the public sector engages the private sector in order to use their expertise, effectively (Mathews 2009). The public sector must ensure appropriate behaviors, accountability and transparency and for that it should develop an extensive legislative framework. Generally public sector legislative frameworks tend to result in risk-averse behavior as they fear to take any risks and innovate (Altshuler & Zegans 1990). For this purpose, public sector agencies should provide confidence and promote the legislation that they are operating under the requirements of the government policy. This can be only done by designing an appropriate risk management framework as history shows that innovation is possible in public sector only if an appropriate risk management framework is designed and followed as innovation comes with some risks which should not only be identified but managed well (Cooke 1996). Examples of innovation are reflected in a range of Australian’s policy measures presented in the annual budget statements. These include Job Services Australia, the reform of the employment services delivery mechanism through the Job Network, Australian Taxation Office’s tax portal and e-tax initiatives where they use of advanced web-based technologies. Through these initiatives, innovation at the public–private sector interface and in the private sector itself was led. Public sector innovation there is supported by various advisory groups, playing different roles to assist departments and agencies adopt best practices and to develop innovative approaches (ANAO 2013). Innovation and Risk Relationship: Risk is defined and measured in terms of the consequences’ of an event and their ‘likelihood’. Risk can also be characterized as ‘uncertainty’, where the ‘consequences’ and/or the ‘likelihood’ is not known. A fundamental feature of the innovation is risk management. Eliminating risks may be a theoretical goal but practically risks can never be eliminated but can be minimized. There are various ways used to manage and mitigate risks. Therefore, for innovation good risk management is fundamental (Jin & Navare 2010). To analyze the relationship of innovation and risk, firstly it is seen that innovation itself involves risk taking. It is a risky job to innovate because it would involve certain types of risks as there are various risks involved with any form of innovation. It is difficult to identify and quantify the ‘consequences’ or ‘likelihood’ of a particular initiative when the degree of risk and uncertainty of an event is higher. Innovation is considered a complex task in public sector because of this factor (Rosenberg, 1995). In classic areas of government activities the likelihood of an event is difficult to ascertain and in these activities the consequences can be severe, for example long-term defense capabilities. Secondly when it is the case of radical innovation where all the possible outcomes and the likelihood of each outcome is not known for example fundamental change in arrangements of social welfare. The public sector innovations differ from the innovations of public sector incremental innovation as their latter risks can be easily identified (Standards Australia International & Standards New Zealand 2004). The public sector innovation risks are different from similar type of private sector commercial activities risk, this is because public sector risks generate from political environment that includes the expectations of community and where quantifying risks in monetary terms is difficult task. An example can be a series of risks surrounding the assessment of a public service department whether legislation is required, other domestic and related international laws, risks related to political and parliament, risks relate to implementation, legal challenges and also includes the behavioral responses. On the other hand, in the private sector, similar legislative risks are translated to the associated compliance costs and compliance risk (Ian & Rannveig). Risk Management: In order to facilitate innovation and for the provision of better processes, products and services, good risk identification and its management is crucial. In order to move from present to future, innovation is a necessity for any sector and risk avoidance acts as a barrier to innovation. To increase the scope and range of risks and in order to increase the beneficial outcomes of innovation, considering a range of options beyond the safe approach is must (Merton, 2013). In order to manage risks, a framework should be designed against which the probability and consequences of an event can be recorded and used to derive a risk rating, not only after but also before mitigation measures are put in place. This rating will provide criteria for follow up plan whether to innovate or not. A higher rating would depict high levels of uncertainty, in such cases professional judgment would be required as the framework should be applied and in some cases it would be even better not to innovate as the risks may be too high. (Kaplan & Mikes 2012) Three Important Principles of Risk-Management: There are three principles that should be followed in order mange innovation- risk successfully. The first principle states that risk management is the essence of innovation and not antithesis of innovation. How innovation is pursued effectively depends largely on how a sector, public or private, conceives of risk. This principle clarifies the common misconception of risk management being a preventative or as the opposite of the risk-taking. Risk management is not a preventive of risk-taking instead it is an organized approach to risk taking. In this view, risk management is to support the vision of innovation with keeping a check to reality, which is taking care of practical implications hence risk management and innovation are not opposed. Risk management is the core competency of the most effective and successful innovators (Gilbert & Eyring 2013). Innovators are able to identify risk, prioritize risks, and then systematically eliminate risks and this is what drives innovation forward. For them risk management is a learning process and not view it as a safety procedure. Even in private sector, innovators know that a new business model is not perfect and so they test its various components and their combinations; its profit formula, customer value proposition, key resources and processes and take controlled experiments in learning as they go and making adjustments to the innovation. Hence managing risk is to make adjustments to innovations (Reilly 2013). Second principle is considering risk management as an accelerator on innovation, and is not a brake. Risk management not only aids innovation but can also speed it up as it is a learning process. An example is a company, maker of handheld power tools Hilti, when saw its premium products were being undercut by their lower priced products, and then innovated a new business model in which they leased and managed fleets of tools for contractors who found tool management a bigger task than tool costs. This required a totally new set of skills by Hilti like contract management, customer relationship management, fleet management and also required an entirely new way of working with clients. All of these challenges and new ways, not only new products but services and processes represented significant risks for success. To manage this risk Hilti tested the business model at an early stage on only eight customers in its home market of Switzerland. They used various accounting metrics, contract parameters, and service models, during this early period the experimented this model to test and refine the assumptions in their new value model. As initially they had believed that only large construction firms would be interested in the leasing option but then after their testing they found out and quickly learned that even small and medium size firms found this option attractive for their own various reasons. Through these tests and by conducting such various small experiments they were able to learn valuable lessons and through which they were able to make important early course corrections. This case study shows that this company took three years only to take its new model from its initiation phase to rollout phase and not only in its homeland market but its markets worldwide. So according to this case study, if a company wants to succeed and speed up its innovation just like Hilti, it needs to understand that right kind of risk management is not just designed for ease and for comfort but it also is designed for speeding up the innovation process (Johnson, W. 2013). Third principle of innovation-risk management is the understanding that risk management means and leads, towards a more relaxed approach to the financials of a business. In general, in business innovation projects, it is critical to release the leaders and convince them that the efforts from the norms and metrics of the core business that will be taken place would be worth the outcomes and will benefit them in the long run. This process although requires immediate spending and investments to test the innovation but it is a slow process in terms of generating profits. The leaders need to understand the patient nature of this process. Unlike tests and experimentation speeds the time to a successful and viable business innovation, it does not necessarily leads to immediate increase in market share or large-scale growth that are usually considered to be the parameters of performance in the core business. Even within a few years, if a new business innovation fails to gain market shares and also to generate large scale growth, there one of two reasons often responsible for that. First reason is that at a premature state the effort is abandoned or to push it forward, more money is thrown at it. In the first reason, in this scenario only a company that is patient only will come along and succeed. In the second scenario only the innovation projects that limp along, continuing to make good money after some time. In this whole process during this stage, the relevant financial measure should be taken place to check whether the new business would be profitable or not in its foothold market. This is needed to be done because the profitability would confirm the strength of the fundamentals of the new model, which allows in a measured way with a scale up to check the patience. The real financial discipline is the unanswered ability to resist applying the wrong types of financial tools and instruments at the wrong time until it reaches full fruition phase (Johnson, W. 2013). Conclusion: Together these three principles suggest that one of the biggest risks in innovation is to view the framework of risk management as a barrier to innovation and to believe that it overlays the new model (Borins 2001). Generally public sector departments, agencies and institutions have risk management frameworks that are well designed and well established which are applied not only on the project level but also to enterprise level. The degree of supervision, oversight and specific mitigation activities need to be proportionate and in line with the value, the sensitivity and the complexity that is associated with a particular innovation cycle. The decision making processes involve an important and necessary procedure of the implementation of risk management and that is why its implementation must always be fit for purpose. Bibliography Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form ACKROYD STEPHEN: ‘From Public administration to Public Sector management International Journal of Public Sector management, Vol. 8 No. 2, 1995. ALTSHULER, ALAN AND ZEGANS, MARC (1990): ‘Innovation and creativity, Comparisons between public management and private enterprise.’Cities February 1990. BODEN, M., & MILES, I. (2000). Services and the knowledge-based economy. London ; New York, Continuum. BORINS, S. (2001). 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