How Your Organization Can Nurture Innovation While Balancing Risk

April 1, 2021 |
4 minute read
|

The theme for Commonfund Forum 2021 was “Transformation.” The objective of the agenda was to deliver timely, useful content on core subjects related to nonprofit endowment and financial management and governance. Beyond this, however, the “Transformation” agenda was designed to present attendees (all of whom were virtual) with thought-provoking insights that challenge conventional thinking and expand awareness. One such Forum session was entitled “Loonshots: How to Nurture Crazy Ideas that Win Wars, Cure Diseases and Transform Industries.” The presenter was Safi Bahcall, physicist, entrepreneur and author of the best-selling book with the same title as the Forum session. At Forum, Dr. Bahcall discussed his thinking with Geoff Colvin, Fortune Magazine Editor-at-Large and the author of several widely-read business books.

In his discussion, Dr. Bahcall revealed new ways of thinking about innovation and group dynamics, one that challenges conventional wisdom about achieving radical breakthroughs in organizations small and large. He is a summa cum laude graduate of Harvard University and holds a PhD in physics from Stanford. Dr. Bahcall was a consultant at McKinsey & Company before founding a biotech company focused on developing cancer drugs. Key takeaways from his comments follow.

Managing Risk without Thwarting Innovation

“How do you nurture new ideas without betting the ranch? Some new ideas are incremental—promising, but not too far from your core mission or business. If these ideas work, it’s fine. If not, you haven’t suffered a major setback. Other ideas are a little farther from your core, or what we could call medium-risk projects and they may be 50 to 70 percent likely to succeed. Still others are the ones that can really move the needle but are only 10 percent likely to succeed. If you don’t attempt these from time to time you may be taking too little risk. You want a lot of risk-taking in what I call your loonshot bucket—projects that push the envelope. But it’s important to isolate them from threatening your core mission.”

When to Pull the Plug

“How do I know when to pull the plug on my fabulous new idea? I get asked that all the time. One person with whom I used to work was the head surgeon at a children’s hospital. He came up with this new way to treat cancer by blocking tumor blood flow. He was dismissed as crazy for almost two decades before the idea finally panned out. It transformed the treatment of cancer. He used to give this talk about the difference between persistence and stubbornness. How do we tell the difference? I have a kind of a simple thermometer. If, when someone criticizes your idea—and that's very normal, especially if you're pursuing a kind of crazy idea—you react with hostility, you might have crossed the line into stubbornness. It’s because if you're putting your heart and soul into some wild, crazy new idea, you want reassurance that you're on the right track. The secret is curiosity—asking why it's even it's hard to hear your baby. It's ugly, it's even harder to keep asking why. Instead of getting defensive, when a customer rejects a product or a partner pulls out or an investor walks away, ask, hey, help me understand. What was it that they saw or didn't see? It’s like pulling on a thread: At the end, there could be a gold nugget.”

Motivation and Innovation

“Many of the people listening to us are affiliated with universities one way or another, and it's striking that a lot of crazy ideas that become very significant originate in the work of professors and researchers and even students. At the same time, universities as institutions are not often regarded as really being enthusiastic about crazy ideas. Are there ways institutions have made themselves more friendly toward crazy ideas? In part, the answer is an incentive system. What's your incentive to try something new? Do you understand the personal incentives of the people involved? Their goal is to do what the person before them did, maybe just a little bit better, not to create risk and try something new. But if you don’t push the envelope, you'll be the organization surprised by a breakthrough from some other institution that is truly innovating.”

Making it Happen

“How many crazy loonshot ideas should your organization be exploring? Universities are full of experimenters—in biology, chemistry, physics, engineering, even the humanities. Are people taking risks? What about in the administration? A friend was the number two at a very well-known consumer company that prided itself on being very innovative. The executive team sent around BuzzFeed articles and such about how to be innovative. That may be fine, but that’s not innovation. So, my friend did a little matrix exercise among groups in the company and found that 95 percent of their innovation was very safe, very incremental. Four percent pushed the envelope somewhat. Only 1 percent could be called loonshots. That is actually extremely common. If your leadership team says it wants to be in an institution that is 95 percent focused on core and exploring at the 1 percent level then OK, that's your decision. But if you have the discussion about potential threats on the horizon or pushing the bounds of your organization, you may think about taking some risk prospectively. In this case you make it safe to take risks, explore and experiment.”

Incentivizing Innovation

“One of the reactions I get when people talk about business books is that it’s all about culture, culture, culture. What I'm talking about is structure. My book is actually an economics book. It's about understanding the economics of incentives inside an organization and why the incentives people have been creating for years may be the wrong incentives. One example: Let's give everybody equity. That makes a lot of sense if you are a 10- or 50-person company. But imagine you're 100,000-person company. What that behavior encourages is called the free rider problem: If the company does well, my stock options are going to go up; so, what I'm going to do is twiddle my fingers and try to convince my boss that I'm useful. If the stock doesn’t go up, I'll look for another job. That’s the free rider problem. Getting incentives right is very subtle. There are many easy ways to make mistakes and create perverse incentives. There are hard financial incentives, but just as important are the soft ones. What “A” gets motivated by is totally different than what “B” gets motivated by. So, what about creating a chief incentives officer with a fixed compensation budget? An executive who thinks strategically about motivating employees? Which would you rather have: A workforce where everyone had the latest gadgets, i.e., the best-equipped workforce in the industry? Or one where everyone was part of the most motivated team in the industry? Organizations have chief technology officers . . . why not chief incentive officers to make sure incentives are aligned properly?”

Click here to find out more or inquire about having Safi Bahcall speak at your conference or event.

Commonfund

Author

Commonfund

Stay connected with the Insights Blog

Popular Blog Posts


Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.