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Cartoon: idea insurance pay out

Idea Insurance

By Jeffrey Baumgartner

I have an idea! Why not set up in your organisation an insurance fund that pays out when ideas fail? I believe it would both encourage and mitigate risk at the same time. Let me explain why.

The first time I was hired to lead a creativity workshop in the USA, the client sent a list of vendor requirements, one of which was to have liability insurance for at least US$1 million. I told the administrative person, who sent me the list, that surely such insurance was unnecessary as my workshops have a 98% survival rate. Oddly, this did not reassure her. She insisted I still needed insurance. So, I asked my insurers to write me up a policy. Fortunately, creativity workshops are relatively low risk − I did not share the survival rate remark with my agent as he takes the oddest things seriously − and I am now liability insured for €2 million for a rather small annual premium.

In truth, this has been a good thing. My professional activities are relatively harmless, aside from damaging the odd assumption and hurting the feelings of brainstorm facilitators. Nevertheless, there is a tiny risk that something could go wrong − a chainsaw juggling exercise might not work to plan, for example − and I could be liable for substantial damages. I could lose my house. I could find myself seriously in debt and unable to provide for my children. I can prevent that scenario and worry by paying less than €200 per year.

Why not do the same thing with crazy ideas? Let's see how it would work.

Ideas Are Risky Too

Crazy, potentially innovative ideas are a financial risk. Indeed, it is this risk that so often prevents them from being implemented. If a crazy idea works, your company could rake in loads of money. If it does not work, there could be considerable costs. This is why most of the implemented ideas that come out of the typical innovation initiative are mediocre. They are low risk, but also low reward.

To illustrate the difference, let us imagine, for example, that your company makes electronic back-scratchers. You decide to run an ideas campaign to capture ideas to improve the product. One idea is to offer the product in different colours. Today, it is only available in dark grey. Another idea is to completely re-engineer the product from a hand-held device to a small, autonomous robot that moves around your back, scratching it, applying lotion and caressing it all over. The first idea costs little to implement. So, if it does not work out, there is no great loss. Moreover, incremental improvement ideas have a rather high success rate. Some people will surely buy the coloured back scratchers.

The robot idea, on the other hand, is high risk and expensive. You need to design it, test it, improve it and then manufacture it. Manufacturing will require new tooling. Marketing people will then need to promote the new robotic back scratcher and sales people will need to sell it. All of these activities require financial investment and, if the idea fails, that investment will be lost. Sure, we can praise the concept of celebrating failure. But, let's be honest, we would all rather celebrate success. Moreover, the loss of hundreds of thousands of Euro is not nice, even if it is your company's money.

So, what if you could insure ideas? Set aside a budget to create an idea insurance fund. Then, when a team has a crazy idea, they can insure it for a cost commensurate with the risk of the idea. If the idea fails, the insurance pays the losses according to the terms of the insurance.

When budgeting idea implementation, the team simply negotiates an insurance quote and includes it in the project budget.

Quantification of Risk

I believe that idea insurance would have several big advantages beyond compensation if an idea fails. Firstly, and most importantly, it would require that financial people actually quantify the risk of an idea. That does not happen today. For the most part, financial people laugh dismissively at potentially risky ideas and then reject them without further thought. Financial risk analysis would help better evaluate an idea as well as realistically identify the points of potential risk of implementing an idea. These points could be addressed by the team to reduce the cost of insurance and the likelihood of catastrophic failure.

Contract

Idea insurance would be based on a contractual agreement between the insurers and the idea development team. That contract should be modifiable − if both parties agree, of course. After all, as an idea is developed, the team will learn and discover ways to improve upon it and further reduce risk. Such a contract that addresses risk also reassures managers that the team is well prepared.

The contract would identify evaluation milestones. If the idea development fails at a milestone, the development team and the insurers would need to determine whether the problem is solvable or not. If not, the project is closed, the insurance pays out and the team moves onto something new. Moreover, they have the budget to do something new.

This is important. In a risk-averse organisation, teams tend to be reluctant to give up on projects that are not succeeding. To give up would be to acknowledge failure and failure could have career consequences. Better to throw money at a project and hope that things will somehow work out in the future. The result of this philosophy is that when the project does fail, it is catastrophic and expensive.

Risk insurance avoids that. If milestones are not met and viable alternatives do not exist, the project is cancelled, insurance pays out and everyone moves on. Sure, there is some embarrassment, just as there might be if you backed your car into a police car. But, it's not a big deal if no one is hurt.

Development Team Awareness

Risk insurance ensures the development team are aware of the financial risks of the project and that they bear those risks in mind as the idea is developed. Without this awareness, a team of enthusiastic engineers, designers and marketers are likely to get caught up in the excitement of a bold new project and not think about the financial risks. However, if they are aware of those risks, they can act to minimise them and find creative ways to deal with each.

Knowledge

Each of these advantages of idea insurance reduces the risk of the idea, making it less costly to insure and more likely to succeed. Over time, the risk insurance division of the company would also become a treasure trove of knowledge. The division would have data on what kind of ideas are more likely to succeed, which are more likely to fail and, importantly, why. They could identify solutions to commonplace problems and share those solutions with development teams, further reducing risk and increasing the likelihood that potential innovations become successful innovations.

Try it

Why not try setting up a risk insurance team as part of the innovation team in your company? Give them a budget and encourage them to become profitable − otherwise, they will have little motivation to evaluate and insure ideas. It could be the last uninsured idea your company develops into an innovation!

 

Want to Discuss This With Me?

If so, get in touch. I'd love to chat about it with you!



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Jeffrey Baumgartner
Bwiti bvba

Erps-Kwerps (near Leuven & Brussels) Belgium