In Volatile Times, the Riskiest Strategy Is to Take Too Little Risk
The world is always changing, but lately the changes have felt faster and more extreme. In times like these, your ability to manage risk and uncertainty can give you a huge competitive advantage.
To put this another way, in volatile times, taking on too little risk is dangerous. You may be left in the dust as competitors invest in new arenas that you considered too uncertain.
Some of my most successful clients encourage their teams to swing for the fences AND to have a systematic plan to manage risk. They break the risks into distinct pieces and assign someone to manage each specific risk, such as the risk that suppliers will not be able to perform, or the risk that customers won’t understand the product.
They’re also very clear about the risks that they are willing to take that other companies will not. For example, an organization may choose to self-insure, because they better understand the risks they’re taking than insurers do.
To accept more risk in a responsible manner, it pays to break the risk down into smaller pieces. Then, manage each of these pieces. Set clear goals for what you need to learn in order to mitigate each risk.
For example, a B2B company I know set out to create an entirely new system for managing customer orders. If all went as hoped, the project would provide an attractive pay-back, but there were many risks. Would employee productivity improve as expected? Would customers quickly adapt to the new way of managing their orders? Would the new system create any unexpected problems for the order fulfillment and logistics teams? The company was successful because they conducted mini-experiments to test multiple alternatives. These experiments taught them how to minimize each of the risks, and a few early tweaks to the system made all the difference.
Consider partnering with others who are willing to accept a portion of the risk, either because they can manage those risks better than you can, or because they have much to gain from a successful outcome. For example, customers may be willing to share risk with you when you introduce a new service which (if all goes well) will favorably affect their operating costs.
Another technique for managing risk is to keep your options open as long as possible. Martha Amram and Nalin Kulatilaka explain in their book Real Options that “an option is the opportunity to make a decision after you see how events unfold.”
As they explain, sometimes accepting a small amount of initial risk can preserve a very large upside, creating all sorts of potential advantages for you. For example, rather than giving the go-ahead on a $30 million new plant, you might invest a modest amount in architectural drawings and obtaining zoning approvals, to keep the project moving along for another nine months without committing to the entire cost.
If you’re contemplating the best way to tackle an attractive but potentially risky new initiative, please don’t hesitate to reach out to me.
