I am in the midst of exploring other facets of innovation in compliance and why many claim it is so hard. Yesterday, I paid honor to Southwest Airlines co-founder Herb Kelleher who brought innovation to the formerly staid airline industry. Over the next couple of blog posts, I want to consider an article in the most recent Harvard Business Review by Gary P. Pisano, entitled “The Hard Truth About Innovative Cultures”. Pisano says the conventional wisdom is innovative cultures are generally depicted as pretty fun, being psychologically safe, highly collaborative, and nonhierarchical. But his research found that they are hard to create and sustain because the easy-to-like behaviors that get so much attention are only one side of the coin. They must be counterbalanced by some tougher and, frankly, less fun behaviors… “Unless the tensions created by this paradox are carefully managed, attempts to create an innovative culture will fail.”

In this piece Pisano’s thesis is that fostering innovation is very misunderstood. Many corporate leaders believe it is about having a speak up culture where there is a tolerance for failure and there is collaboration. His research found that these elements are only table stakes to get into the innovation game. Corporate attributes must be tempered with “intolerance for incompetence, rigorous discipline, brutal candor, a high level of individual accountability and strong leadership.” As a Chief Compliance Officer (CCO), your role is to manage these tensions, addressing uncertainty and confusion with decisiveness and transparency. If you do not, the innovation you seek will likely fail.

Tolerance for Failure ≠ Tolerance for Incompetence

As innovation involves the exploration of uncertain and unknown terrains, it is not surprising that a tolerance for failure is an important characteristic of innovative cultures. It would appear that bringing rigor to any project would be deemed mandatory. Yet, as Pisano notes, many organizations fall short on this requirement. The primary reason is that “a tolerance for failure requires having extremely competent people. Attempts to create novel technological or business models are fraught with uncertainty. You often don’t know what you don’t know, and you have to learn as you go. “Failures” under these circumstances provide valuable lessons about paths forward. But failure can also result from poorly thought-out designs, flawed analyses, lack of transparency, and bad management.”

While a badly engineered innovation project can certainly bear a high financial cost, such a failure in the compliance realm can have more catastrophic results. As a project leader, a CCO should be able to “articulate clearly the difference between productive and unproductive failures: Productive failures yield valuable information relative to their cost. A failure should be celebrated only if it results in learning. (The cliché “celebrating failure” misses the point—we should be celebrating learning, not failure.) A simple prototype that fails to perform as expected because of a previously unknown technical issue is a failure worth celebrating if that new knowledge can be applied to future designs.”

This further requires a CCO, as the project leader, to set expectations of performance. While the failures of team members in this area should not necessarily lead to termination, it may warrant reassignment from the innovation project. This can be particularly true of those compliance professionals skilled in qualitative analysis. If the project requires a quantitative bend, they might not be the right person for the project, yet that does not diminish their worth in the compliance function.

Highly disciplined experimentation

Any innovation will require some experimentation but as Pisano writes, “Discipline-oriented cultures select experiments carefully on the basis of their potential learning value, and they design them rigorously to yield as much information as possible relative to the costs. They establish clear criteria at the outset for deciding whether to move forward with, modify, or kill an idea. And they face the facts generated by experiments. This may mean admitting that an initial hypothesis was wrong and that a project that once seemed promising must be killed or significantly redirected. Being more disciplined about killing losing projects makes it less risky to try new things.”

He points to the example of the company Flagship Pioneering for four key insights around experimentation in the innovation process. First, do not run experiments to validate ideas but rather use experiments to uncover flaws in your innovation ideas. Second, take a lean approach both in funding and length of time for experiments so that it is easier to walk away from those which fail. Third, the data derived from the experiment is sacrosanct. Fourth, be disciplined so that if the data derived from the experiment shows the innovation idea will not work, move on.

The author cautions that “experimentation is a balancing act.” You certainly want to encourage employees to test the envelope. Yet even with data, the answer may not always appear as straight black and white. Judgments will be required to determine which ideas to move forward with. As the CCO, you will need to marshal a wide array of factors to decide which ideas you proceed with and which ones you walk away from.

Tune in tomorrow when we continue this exploration.

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