business risk

Innovative benefits versus innovative risks

Adam Boughton | Transport, Infrastructure & Logistics Lead, Brisbane | 14 June 2019

In part two of this six-part series, Adam Boughton discusses Golden Rule #2, understanding the balance between “Innovative Benefits” vs. “Innovative Risk.” How do you tackle the challenge of knowing when you should choose to be an innovation leader versus an innovation laggard for any given project?

The world as we know it is continuously innovating. Technology reinvents itself so quickly that, in the consumer market, everything we purchase is practically close to obsolescence the day we buy it, with the expected life being only a few years before we upgrade again. This, however, is not the case in heavy industry, where investment of significant capital items is required/expected to last 20+ years. So why be in a rush to introduce the asset with “cutting edge” technology that may impact project risk? If the asset investment is going to be around for at least 20 years, then surely there will be an opportunity within its lifetime to introduce technology upgrades during asset overhaul. At this time a cost benefit analysis of the upgrade and retro-fit to the main asset can be conducted, to assess the future operational benefit.

Innovators vs Laggards

This is where, at the Basis of Design (BoD) stage, it is important to consider the implementation of “Innovated benefits” and “Innovative risk”. Put simply, if the technology is new and not well proven, then you are an Innovation Leader and can inadvertently (or knowingly) be introducing Innovative Risk. If the technology is well- bedded down and proven through the early stages of its lifecycle, then you are at the other end of the scale and an Innovation-Laggard, providing Innovative Benefits (and conversely minimizing Innovative Risk).

Pressure will always come from the asset manufacturers to whom you must introduce the new technology. Typically, their response is “the current design will be obsolete and not supported.” If this is the case you should seriously be questioning the product supplier you are buying from. Your asset is going to be assessed for expenditure based of a long life span (remember, we are talking about major assets with a life span of around 20+ years), and if there are strong indications that they won’t support it, then you are introducing even more risk.

The following table by Everett Rogers and Geoffrey Moore provides more insights on the characteristics of Laggards vs Innovators.

Characteristics – Innovators vs laggards

innovators vs. laggards chart

However, there are many aspects that need to be taken into consideration here. It is very likely that the need for business growth, market perception (being seen as innovative), and basic “survival of the fittest” will come into play. Being a laggard can mean you are too late!

Technology reinvents itself so quickly that, in the consumer market, everything we purchase is practically close to obsolescence the day we buy it, with the expected life being only a few years before we upgrade again. 

I am not recommending that you establish specifications for the asset that prescribe it to become a dinosaur when it is, say, over 10 years old. I am merely suggesting that you can let someone else be the innovator and build in the risk, while you develop a specification that is “a little” behind them- when all the hard yards are taken and improvements built into the product that you are now taking on. This way you have greater feedback and data on the performance of the technology and how to implement it in within your operation. Better yet, you can also assess if the cost of the technology actually provides an asset performance improvement over its life that has a significant improvement in payback compared to sticking with the “good old design”.

This decision takes us to the fundamental “bath-tub curve” (I will explain this in Golden Rule 4). Implementing innovation generally follows the same trend- it is rare that the first model of anything is perfect. There will be teething issues, required patch fixes, and  limited knowledge of exactly what the future holds. Failure rate, routine maintenance schedules, overhaul periods, and failure risk will all be a little on the “unknown” side. Yes, the designer will have undertaken significant design assessments as a counter to this, and yes, they will have (hopefully) undertaken Failure Mode Effect and Consequence Analysis (FMECA), but it’s still going to leave you with an asset that is on the early side (or the wrong side) of the bathtub-curve, rather than a little distance down the slope.

failure rate over time graph

As generations of a product evolve, so too does the potential market, as the second and third generation of a product introduces improvements over the previous, often not interchangeable with one another (iPhone is not alone in this). Thankfully – and more than likely – the innovations you may be considering in the Basis of Design will be a little distance down this path, and the trick then becomes determining when is long enough, good enough? Can you get access to data from other operators on lessons learned? How do you know that the manufacturer has incorporated solutions to existing issues, giving you confidence that enough lag has occurred for you to make the jump?

What about warranty?

That’s when we come to Warranty – will it protect you? It is typical for customers to be uncertain about new product performance; it is here where warranties play a significant role in providing customer assurance. And the notion of post-sale support is becoming an important feature of any product sale. In this context, warranty (and extended warranty) is an element of support and manufacturing that business needs to view as part of the post-sale service strategy. A warranty of any type, since it involves an additional service associated with a product, will lead to potential costs beyond those associated with the design, manufacture, and sale of the product.

It is typical for customers to be uncertain about new product performance; it is here where warranties play a significant role in providing customer assurance. 

The level of protection will obviously be different for each asset supplier, but this is where you need to be a little smarter in the description that sits behind the warranty requirements. Let’s face it, all assets come with a warranty, typically 12-24 months. But this will be for fixing or replacing the component, and, hopefully, should include labor (although likely not). What is does not cover is the asset downtime and the loss in production that being out of service will cost, as it will be very rare for a supplier to accept consequential damages. If they do, then this is a good indication of the faith that they do have in the product. Most likely this will also mean that the technology has been proven by them and well down the “bath tub” further, which is good for you, right?

The asset non-availability, because of new innovation failures and “tweaking”, can be a massive concern to the operator. The early stages of new asset introduction are critical to the success of any organisation, and it is not expected that the purchase of a new asset, at significant capital cost, will introduce operational constraints. Remember the purpose of the procurement in the first place is for the complete opposite.

Read the third part of the series, 'Evaluate solutions on a whole of life value basis'.

Explore all six parts of the 'Creating the Optimal Asset Series'.