David Westfall currently is the Senior Director of Decision Support and Innovation, a team working on the next generation of support tools and products at Aon-Hewitt.  Prior to his role at Aon-Hewitt, David has held leadership roles in innovation and business in diverse industries such as online and academic education, healthcare, research and technology.  David’s passion is to approach innovation from an intrepreneurial perspective, leading large and medium sized companies to develop new opportunities within their corporate structure.

Christopher Skroupa:  So many people are talking about innovation today.  Many companies have innovation as part of their various mission statements, etc.  What are your thoughts on this?

David Westfall:  This world is all about changes.  Markets change, grow, and shrink.  Competition changes and is worldwide.  Consumers change and expect more for less.  Technologies change and they are changing at an ever increasing rate (Moore’s Law).  For a company, what may have been a competitive advantage, may over time become a competitive disadvantage.  As a result, companies have come and gone based on their ability to adopt to an ever changing environment.  In the corporate world, most call their strategy to adapt to change “innovation.”  Innovation is not a new concept and you cannot read a company report that does not talk about their investment in innovation.  However, how innovation is leveraged and the pace required for companies to continuously innovate is the difference between growth and decline.

The reality of today is that there is very little, if anything, that does not change as part of a business model.  From the invention of new technologies to the introduction of a new business model – a company’s ability to thrive, if not simply survive, is directly related to how quickly it can adapt to and drive value from change.  This effort is what innovation is all about.  If a company believes this statement reflects their setting, then innovation must be a constant part of its business model.  Leaders must realize this requires a different approach to traditional management and strategy models.

Skroupa:  Many people believe innovation starts at the top.  What are your thoughts about this?

Westfall:  Innovation starts everywhere.  What leaders must realize is that simply mandating innovation does not mean their company is actually able to or even willing to innovate.  The reality is that many company cultures, structures, and overall business models do not support innovation.  In order for innovation to thrive, there needs to be a fundamental acceptance to experimentation, iteration of ideas, and willingness to allow an idea forward that may be contrary to corporate thinking.  The role of corporate leadership should be to set overall goals, support the culture of innovation, and ultimately delegate as much decision making to the lowest levels of the organization as possible.  Leaders should set the overall boundary conditions, or what I like to describe as the “sand-box” of acceptable areas to consider.

The larger a leader allows the sandbox to be, the larger the risks and rewards will be.  Leaders need to balance the risk associated with the value obtained, but should not seek to remove all risk.  Without risk, nothing will ever change and innovation is nothing more than a talking point.  For example, leaders should create a model where barriers and norms can be challenged.  They should provide an environment where questions are encouraged and taking reasonable risks are acceptable.  And most importantly, failure to achieve something new or to test a new idea should not be punished.  If people are afraid to fail, they will never take the risk.

The larger the sand-box leaders are willing to allow, the more their people can learn from their successes and failures.  It is during this iterative experimentation of ideas that new information and value can be obtained.  This is a unique type of information that many leaders fail to realize.

Skroupa:  Information is critical.  But what type of information are you referring to?  There is so much information, where do you even start?

Westfall:  There are all kinds of information, but let me qualify this in simple terms.  There is information that has value and then there is information that does not – which we typically call noise.  I believe this simple approach is misleading.  A different approach to qualifying information is to consider the approach of information theory first introduced by Claude Shannon and later qualified further for economics by George Gilder.  I will summarize these concepts here.  The principle is as follows:  to maximize value, high entropy information must be gathered in or by a low entropy process.

So what does that mean?  In short, the information you are being presented is highest in value when it surprises you the most.  And, in order to maximize that value, it must be processed in a very well understood, low friction, fast manner.  If there is no intrinsic surprise to the information, then I would ask you, are you actually learning or gaining anything new?  And, if it takes your organization weeks, months or even years to filter, assimilate, and compile results into a presentation for leadership, then by the time you are finally surprised as leadership, it is too late to react.

This goes back to why it is critical for innovation to happen at the grass roots level – with minimal process barriers and with the largest sandbox possible.  In that setting, information is not filtered according to corporate “norms” and it can be reacted to quickly to determine how a company will respond – whether it is a change in consumers, markets, competition, technology or whatever.  This is where information can be turned into value – or insight!

Skroupa:  How then do you leverage that information to provide value?

Westfall:  This concept is something I have been working on with Dr. John Kenagy, physician, thought leader and author of “Designed to Adapt” and is a term we call Velocity Management.  At its core is the following:  any process or company structure interested in innovation must incorporate a model where surprising information can be looked at without filters and be acted on quickly in order to maximize the value that this information provides.

Consider this:  most new companies derive value through experimentation and early entrepreneurial efforts.  When a “winner” is found, that company begins to develop processes and procedures to lower costs, increase productivity, and to protect the investment being made.  These are all good things.  However, there must be a balance made between the investments made in process and the investment made in innovation, because both are not naturally compatible unless great care is taken.  In essence, any time process or procedure is introduced, it must be done so with low process barriers.

Skroupa:  You have mentioned low process barriers now a couple of times, what do you mean low process barriers?

Westfall:  Process typically starts out as a way to address an unwanted outcome – to address a production defect or reduce the chance of human mistake.  Those processes are all welcomed and make common sense.  However, as with any system, those processes tend to grow and gain a life of their own.  I think anyone in a corporate setting can give an example of “red-tape” or bureaucracy.  I will leave the debate of the value of bureaucracy to others, my simple point here is that these processes tend to create very high barriers to information flow.  The purpose of most process is not to consider randomness or new options, but rather to filter out anything unexpected from what is considered “normal”.  If you are filtering out anything that would surprise the status-quo, then by definition, you are also removing the most valuable information.

This is why processes must have low barriers.  In other words, there has to be an escape valve or some other way to allow information to flow.  Otherwise, the bureaucracy will continue forward with its blinders on.  How many times have we seen a market shift and the incumbent, dominant players in that market are simply left behind?  I would argue one compelling reason was because their internal process barriers were so high that no information outside of the expected norms was allowed to flow.

Skroupa:  What is the right balance then?

Westfall:  This is the question leaders MUST face.  Here is where the strategy of how much risk, in what areas, and in what form is the company willing to take.  Here is where the balance between internal processes implemented and experimentation to challenge those processes must be determined.  It is a balance between leveraging the current opportunity that the company is optimizing around and the future opportunity that may require a different approach.  It is allowing the surprising information into the system as quickly as possible, without filtering, so that the best decisions can be made quickly.  Ultimately, much depends on the willingness of leaders to let go of the day to day actions of the company and to allow their teams to experiment, win, and fail.  Call this whatever you want – innovation, intrapreneural efforts, change management, etc.  This is where leadership must lead.  Leadership must realize that information, whether internal or external, whether expected or not expected, whether acceptable to their norms or not, must be allowed to be considered and acted upon.  In that setting, regardless of the shock that information provides, at least you are aware of it and can react to it.  The alternative is to have your market, your competition, or your customers tell you later you should have listened!

Serhat Cicekoglu, Director of Loyola University Chicago Quinlan, Center for Risk Management adds: “Outside the boundaries of the organization, change in the industry conditions is a given, even for the industries that are perceived to be mature. They maybe mature in their traditional processes or industry dynamics, but there is always something out there that is brewing to disrupt an industry.  In this disruption there is an opportunity to create economic value through on a business model that has reshaped because of a disruptive technology or event.  When you couple that with the complacency that corporations typically face when they have something good going, it is hard to make a case for change, let alone for experimentation. This may be one of the most dangerous threats to the sustainability of a company. The organizations that have consistently reinvented their business models, even at the peak of their successes, or when facing a threat, are the ones that are still in business. And such an adoptive nature of a company that drives innovation through new business models.  These business models incorporate better processes and products will create long living legacies like IBM, 3M, and GE.”

On January 28th, 2015 , Loyola University Chicago, Quinlan School of Business, Center for Risk Management will host its second Executive Dialogue Series  seminar program on Innovation: Building Company Resilience. Continue the discussion with David Westfall, Serhat Cicekoglu, Director of Quinlan’s Center for Risk Management, and a select group of 25-35 company executives and internationally renowned experts on resilience. To inquire about attending contact cpulliam@skytopstrategies.com.