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Modern risk management must factor in the risk of not innovating

CAMBRIDGE, Mass. -- Modern risk management emphasizes the importance of IT security and fraud detection, but it often doesn't include another serious risk for today's enterprises: the danger of playing it safe.

An enterprise strategy that precludes experimentation and innovation will seriously handicap a company's ability to compete in the digital economy, according to Bill Kracunas, a management consultant at RSM US LLP in Boston, Mass.

We interviewed Kracunas at the recent MIT Sloan CIO Symposium where he talked about some of the organizational barriers to digital transformation, starting with confusion about who should be driving change. He also explained why modern risk management must factor in the dangers of playing it safe and why building an internal digital venture capital group can help companies take risks, embrace failure -- and succeed.

How do you help companies get their arms around digital transformation?

Bill Kracunas: As you look at digital, and as you look at digital transformation across clients and companies I work with, you get varying degrees of adoption that's going on out there. When we work with clients, we help provide clarity. What I find is that there's almost this digital jump ball going on. Who is in charge of digital? Is it the CIO? Is it the CMO (chief marketing officer), the CFO, the COO? It is up to those leaders to help in their own neck of the woods. But who is really driving digital strategy? More times than not, it's the CIO.

A lot of companies are confused by it, especially around data, because for marketing and what I call the front-end of the business, data is important. But reporting, data and analytics are also important to the back end of the business. So, digital is an area where you've got the CMO and the COO and the CFO all in the mix around data and analytics.

What we do is help provide clarity around who is doing what and get a little bit more formal around digital.

Digital's funny because it almost has two halves: You've got a formal half, where companies really need definition around analytics, around making life better for employees and for customer, around knowing them better. And I think with that stuff, you can get more formalized. But then there's this other side of digital. I call it the experimentation side, where we don't really know what the return on investment will be.

So, it's this world of fail fast. You want to experiment quickly; you want to fail quickly if the idea is not a good idea. But if it is, you want to double down and maybe move it over to that formal side. So, you need a kind of digital venture capital group and then a formalized innovation, digital strategy group. And you want to work both of those.

Who should be a part of the digital venture capital group?

Kracunas: The people doing the work -- field-level people. The people who use the systems and the data and the information and the apps -- those are the people you want to bring in to understand what's going on.

And I think millennials are crucial. Millennials have used technology differently from the day they were born. They see things very simply, in many ways. And they ask simple questions that will make organizations rethink things. So, I think eliminating some of that formalized management and letting a venture capital team come up with their own ideas can be really powerful.

I have a construction company client that did this, and the next thing you know, [the construction workers] are wearing GoPros on their helmets because the [company] realized when there's a problem at the top of a high structure, the construction folks are fine going up there, but the engineers aren't.

So, the [digital venture capital group] came up with a simple solution to video conference and troubleshoot problems from the top of high rises. That same committee came up with the idea of using drones to fly around buildings [and] Bluetooth in helmets to track things. Not all of the ideas got adopted, but the top ideas did, and they became projects and they've been successful.

What role does management play in the digital venture capital group?

Kracunas: You don't really want management involved. They need to let this thing work. As they see ideas come out of it, they need to have faith and let it run a little bit. And when they see ideas turn into real successes and wins, that's when they'll realize there's a return on this overall strategy versus a single investment. It's kind of like a mutual fund. It's in aggregate if this thing is working or not.

How do you convince executives to spend money on experiments that aren't tied to a hard ROI?

Kracunas: In modern risk management today, people think of IT security, fraud -- traditional risk. But I'd say there's a new risk today and it's the risk of not innovating.

A lot of times when I talk to executives, I talk to them about that risk. If you're not innovating and your competitors are, you'll fall behind a plateau. Yeah, you can catch up, but you may lose customers. I love seeing it like banking. All of a sudden, you can take a picture of a check and deposit it. All the banks needed to scramble to get there. And then there's another innovation.

Small innovations like that, it's OK to fall behind. But major innovations, you can get your clock cleaned. You don't want to all of a sudden become outmoded by another firm or competitor. So, there is a risk to doing nothing. That's how you get it going -- talking about that.

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