Brands and agencies must accept that innovation cannot be credibly preached inside their organisations without a better understanding and adoption of risk theory, says Tim Williams.

One of the most fundamental dimensions of success in business is an understanding of the cardinal role of risk. Peter Drucker put it succinctly: “All profit is derived from risk.” Drucker’s point is that risk and profit are directly related. Risk is not always to be avoided, but rather effectively managed or optimised.

It doesn’t require much imagination to see the correlation between today’s risk-averse culture of brand organisations and declining profits and brand growth. If there’s one observable lesson from the annals of business, it’s that the growth companies are the risk takers. These are the organisations that see risk as an economic positive.

Legendary creative director Lee Clow tells the story of working with Steve Jobs on the creation of perhaps the most iconic campaign in Apple’s history: ‘Here’s to the Crazy Ones’. The company’s entire corporate ethos of ‘Think Different’ is distilled into a remarkably compelling 30 seconds.

To innovate, by definition, means to risk. In his provocative book, Against the Gods, Peter Bernstein argues that there are five responses when confronted with risk: avoid it, reduce it, transfer it, accept it, or increase it. Avoiding risk altogether would be the demise of any company. Signing a lease and turning the lights on every morning is a risk. The idea, observes my colleague Ron Baker, is to “take calculated risks and choose them wisely”. Ron cites a basic economic theory named after Austrian economist Eugen von Böhm-Bawerk which states: “Existing means of production can yield greater economic performance only through greater uncertainty; through taking greater risk.”

Today’s brand managers instead are attempting to grow their share through spreadsheets. But these numbers tell us only what has happened, not what will happen. For that, brands (and their agencies) need what Drucker calls ‘a theory of the business’ – a hypothesis regarding the future of the industry. Moreover, the financial data on spreadsheets is focused on the wrong kind of capital. Today’s corporations are awash in financial capital. Cash reserves are at an all-time high. What they lack is the intellectual capital needed to forge altogether new, more effective marketing initiatives.

Indeed, most organisations have sophisticated means of measuring the effects of risks – that is, after the risks have been taken. But there are no financial instruments that gauge the costs of not taking a risk. And it’s the risk not taken that costs businesses the most. As DDB founder Bill Bernbach once remarked, “Playing it safe can be the most costly thing in the world.”

In an interview at a recent trade conference, Anomaly co-founder Carl Johnson remarked, “Most people are scared about protecting the downside – they’re trying really hard to minimise risk. We are more about seeking a higher upside; and to that extent, we will gamble. We will bet a larger percentage for a larger return.” His agency partner, Jason DeLand, credits the firm’s appetite for risk with earning above average margins. “The key to our success”, says Deland, “has been to place a series of small bets on ourselves.”

Jon Bond of Kirshenbaum & Bond (KBS) fame believes that agencies should not just be in the ideas business but also the insurance business, helping to actively mitigate the risk of ineffective marketing spend. Bond maintains that this paradigm can help agencies win more business and secure better remuneration in the same way that the best insurance companies attract the most customers and command the highest premiums.

Brands and agencies alike must accept that ‘innovation’ cannot be credibly preached inside their organisations without a better understanding and adoption of risk theory. The aim of marketing is not to be streamlined and efficient, but rather enterprising and effective. As American author and professor John Shedd observed, “A ship in harbor is safe; that is not what ships are for.”