Options Thinking and Innovation in the Public Sector

One of the things we aim to do with the blog is to share insights and information that help us understand the process and nature of public sector innovation.

This week members of the Public Sector Innovation Network in Canberra had the opportunity to hear Dr John Steen from the University of Queensland speak about how a real options approach might assist innovation in the public sector.

John outlined that traditional planning techniques can break down under conditions of uncertainty, and even become dangerous, and this risk is exacerbated by longer timeframes. If your assumptions are wrong and inflexible, a plan can lead to significant misallocation of resources and wrong priorities.

So how can organisations successfully plan in an uncertain environment and undertake risky innovations?

John described that in options thinking, uncertainty and longer time frames actually increase the value of options. In an uncertain future, you want to have a stake in a range of options, as any one of them could turn out to be highly valuable whereas your current approaches may not be.

John discussed that under a more traditional return-on-investment perspective the best case scenario for an initiative is one of big gains and no risk – but innovative projects are inherently risky.

So for innovation, a real options approach can be very valuable. A staged approach, where you can choose to continue or discontinue a real option over a long time frame, provides a more flexible approach. It allows you to repeatedly revisit a particular innovation before it is fully committed to.

John went over the results of some recent research where he and his research partners had looked at whether an options style of management correlated with innovation performance. This research was based on a survey of Australian biotechnology firms.

They found that an options approach did correlate significantly with innovation. They also found that a net present value/traditional management approach actually correlated negatively with innovation.

John speculated that options based decision-making rules and decision styles, rather than ones based on return-on-investment/net present value, would assist innovation in the public sector.

John asked the audience what they thought a real option might look like in the public sector. What do you think? Would this sort of approach help in supporting innovation in the public sector?

Dr Steen is an academic from the University of Queensland’s Business School and looks at issues surrounding strategy and innovation. You can read further about his research in this area in his post “How Accountants Kill Innovation”. The slides of his presentation are available in PowerPoint (June2010RealOptionsPublicSectorPresentationPPT) and in PDF (June2010RealOptionsPublicSectorPresentationPDF). [1. Please note that the presentation is not covered by the Creative Commons licence or Commonwealth Copyright.]. If you require another format, please psi [at] innovation.gov.au (email us).