Sunday Email: Innovative Culture / Ambiguity

Read time: ~6.35 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

Imagine a game involving a bucket of 90 balls.

Participants can win $100 by accurately predicting the color of a randomly selected ball.

The catch? They know 30 are red, but the rest are yellow or black.

Invariably, most choose red—the known quantity—even when a different strategy might better serve their chances.

This choice epitomizes the 'ambiguity effect,' a prevalent decision-making bias that extends into wealth management.

Doctors fall into this trap quite often, as well.

Despite the fast pace of medical advancements, many doctors continue to prescribe older, well-tested treatments over newer, potentially better ones.

The underlying motive is a well-intentioned adherence to the Hippocratic Oath, which emphasizes 'do no harm' and reinforces conservative choices.

In wealth management, this manifests as a reluctance to stray from traditional methods and tested strategies, even when innovative approaches might yield better outcomes for clients.

Innovation continues to be a buzzword rather than a way of life for many industries, including wealth management.

McKinsey has noted that innovation is the ability to conceive, develop, deliver, and scale new products, services, processes, and business models for customers.

The definition deliberately omits 'technology' to underscore that innovation is fundamentally about embracing and leading change across all aspects of business.

In our company's internal innovation lab, dubbed RiSE, we categorize innovation into three distinct realms:

• Risk-Averse Innovation: These involve minor tweaks and improvements that are relatively safe to implement because they are proven in other contexts. While they improve efficiency or customer satisfaction, they don't drastically change the business landscape.

• Speculative Innovation: These innovations carry a higher risk and more significant uncertainty. They are often pioneering within the industry and involve substantial changes to existing practices. The ambiguity surrounding their outcomes makes them less appealing to conservative firms.

• Exponential Innovation: These are the transformative changes that redefine entire functions or industries. Examples include the disruption caused by social media in marketing or by robo-advisors in financial trading. These innovations are often met with resistance initially but can lead to substantial long-term benefits.

We tend to live in risk-averse innovation. We don't want to be first, so we let others step into the realms of speculative and exponential innovation, and then we hop on the bus after we get greater clarity.

Innovation is a building of ideas stacked on top of each other. This means we must be consistently innovating to move up the RiSE curve.

Building an innovative firm can be done without hiring a bunch of creative folks. It's a matter of finding a bunch of curious folks. Some of the most innovative firms have individuals who are incredible at harnessing their networks.

Three attributes characterize those who effectively harness their network to generate innovative ideas:

• Generosity—This is about being a giver, not just a taker. Great networkers dismiss the fear that sharing ideas will lead to someone stealing them. They openly share their ideas, creating a collaborative relationship where each side feels comfortable sharing ideas.

• Deep, diverse ties—This is about going deeper and not wider. Focus on establishing relationships with people who have differing skill sets and perspectives. It's about building relationships in health care, e-commerce, and retail and learning from them.

• Passion for unusual ideas—The most innovative leaders I know have a thirst for the crazy. This doesn't mean they pursue each of these crazy ideas, but they love to hear about the unusual as opposed to the mainstream.

Building a culture that genuinely embraces innovation involves more than aspirational statements; it requires concrete changes in the operational model and organizational culture.

An innovative operating system covers three main elements:

• Values

• Psychological Safety

• Limiting fears

Values that encourage questioning and experimentation are at the core of an innovative culture. For instance, a core value in one of our wealth management firms, Wela Strategies, is "challenge everything," which pushes our team to rethink established practices and propose new solutions, driving innovation from the grassroots.

A culture that rewards risk-taking and views failures as learning opportunities is essential. Leaders must model this by sharing their challenges and vulnerabilities, thus normalizing setbacks as part of the innovation process. This creates psychological safety within the firm.

Finally, leaders of innovative firms limit three main fears:

• Fear of criticism: We naturally desire to be part of a tribe. When we fail, we fear criticism and loss of acceptance within the tribe. So, we avoid we avoid risks.

• Fear of uncertainty: We do not like ambiguity and uncertainty. Taking a risk involves both, so we avoid it at all costs.

• Fear of Negative Career Impact: Our job and salary feed our family and create savings. We don't like to put this at risk. Taking on something with a high potential of failure puts our livelihood at risk. So, we avoid it.

Innovative firms understand that true innovation often comes from the process rather than the outcome. They focus on rewarding the behaviors that lead to innovation, such as:

• Experimentation: Encouraging team members to conduct experiments and learn from the outcomes, regardless of success, helps build a foundation of knowledge that can lead to breakthroughs.

• Collaboration: Rewarding collaboration and sharing ideas across departments and disciplines can spur creative solutions that only some teams might have developed alone.

To initiate and sustain innovation, firms can adopt several practical strategies:

• Set up innovation days: Empower a team member to plan a day similar to school field days. Encourage them to bring innovations from all industries and let the team interact with them. Identify speakers from local companies doing unique things and get them in to speak. Find ways to make the day interactive. Learning through doing is the most impactful.

• Create an innovation lab: Create a 3-hour session where you identify a problem statement or a challenge in the business. Bring in 6 - 9 individuals in your business and run a brainstorming session that includes creating ideas and building solutions. Processes like design thinking and Sprint can help shape the day.

• Celebrate failures: Set up quarterly "FailCons." This is a fireside chat with leaders and others in the business who discuss their biggest failures. It is an opportunity to humanize failure and show that people can push through failure and still find success.

• Network: Find 3 - 5 people in different industries and at various levels who are doing something exciting. Have a virtual coffee with them, share your challenges and findings, and learn about what they are doing. Develop a relationship and learn about trending items in their world.

• Follow trend reports: TrendHunter and Trend-Watching are interesting because they share global trends. Some may be irrelevant, but they could help you develop an idea within your company.

• Ritualize innovation: Whichever strategies you choose, incorporate them into your work and make them consistent. The key to something new like this is to ritualize it over a sustainable period.

Innovation is inherently ambiguous.

And this makes us uncomfortable, especially in a world where clients hire us to keep from losing their money.

Yet, the world is changing faster than ever before. And our ability to serve more families and provide more services to these families hinges on our ability to innovate.

Innovation doesn't mean losing sight and executing what is needed today. Instead, the most innovative and successful companies will be ambidextrous. They can disrupt their business through innovation while continuing to serve the core business today.

In today's world, innovation is not an elective; it is the core of our work.

A Thought To Ponder This Week

A safety net creates comfort when tackling an uncomfortable task.

We yearn for the opportunity to take “hedged” risk.

As humans, we are on a constant search for unlimited upside and limited downside returns.

When put in a position to achieve an elevated return or experience a new opportunity, we revert to the known.

Our primal ancestors avoided change as ambiguity was a true life-or-death situation.

The unknown could result in the end of life as we know it.

This has translated into our world today.

By choosing the known, we find ourselves in a predicament. We are more comfortable. But we are more conservative.

And maybe this isn’t a bad thing.

But it limits the speed and breadth of innovation within our lives and our industry.

Creating a mentality and philosophy around getting comfortable with small-scale, iterative uncertainties can build massive innovations.

As an industry, we are always changing. And we can change faster and provide more for more families.

So, in the coming week, take a moment to think about one uncertain process improvement you have avoided. Then identify a small step you can take to push it forward.

The best is ahead!

-Matt