Can You Risk Not Knowing About Risk?
Walking outside alone in the night playing Pokemon Go; having a round of
Monopoly with your friends; trying the spiciest Korean instant noodles; all three
might seem unrelated at first sight, but share a common trait amongst each
activity – each entails a certain degree of risk.
Staying out alone makes you an easy target for those with criminal
intentions; board game politics has the potential to create petty arguments
between the best of buddies; the intensity of spiciness could give you severe
bowel issues. What differs is the severity of risk involved in each situation,
ranging from life-threatening to temporary tussles.
Similarly, change management projects incur unavoidable risks as well, since
change involves (but is not limited to) financial, social, logistical, and
managerial aspects of an organisation. Organisational leaders should be
well-equipped with skills in identifying and managing these risks, as they are
an imperative aspect for successful and sustainable change.
Recognising the potential risks faced when undergoing change is the
initial step in ensuring successful change projects. Leaders need to be
informed about what’s at stake before following through with any form of
initiation. However unsubstantial they might seem to be, failure in identifying
possible risks can result in the most insignificant of risk factors ultimately
jeopardising the overall change.
After identifying potential avenues of risk, organisations should then
be prepared to respond appropriately should they encounter any of the initial
risk factors which were diagnosed. For instance, if an organisation is aware of
possible financial issues which could arise from the change management project,
contingency plans have to be established to relieve the organisation from any
consequential setbacks.
In order for change management projects to have the desired outcome,
organisational leaders must be able to pinpoint potential risk factors which may
adversely affect organisational change. Leaders should be exposed to
appropriate training methods, not only on how to identify risk, but also on
their capability to respond to risks which have materialised.
Leadership training in recognising and managing risk is imperative for
successful change. The article below provides in detail examples of how
situations spiral downwards when organisations / leaders are unprepared in
realising existing risk factors, and how successful risk-managing approaches
can salvage projects from irreversible damage.
________________________________________
Risk
is unavoidable. Whether we’re driving in fast-moving traffic, arguing with a
colleague in a meeting, or investing our hard-earned money, we are engaging in
risk taking. As an investor, I think about financial risk a lot, and I’ve
become interested in using the tools of the investor’s trade in managing the large
and small risks we face regularly. Those are:
·
Right-sizing
·
Right-timing
·
Relying on
knowledge and experience
·
Maintaining
skepticism about predictions and promises
Let’s see how the tenets might apply to three very different cases, each containing substantial risk.
Sara
Campbell, a talented dress designer, sold the majority of her apparel as a
private label supplier to national chains. When both Talbots and Laura Ashley
collapsed in the financial crisis of 2008, Sara suddenly lost the vast majority
of her revenues. Making matters worse, she was bound to fulfill contracts with
manufacturers and suppliers despite the drop-off in client orders.
Steve
Starr, the owner of Starr Real Estate in Austin, Texas, was worried that Eve,
his commercial leasing manager, was becoming a problem. Eve was causing
conflict with colleagues, taking excessively long lunches (from which she
returned tipsy), and missing client appointments. When Steve took her to
lunch near the office to discuss how things were going, he found out it was
even worse than he thought: The restaurant manager called him into a back room
to tell him he had good reason to believe Eve was selling cocaine out of his
restaurant.
Christine,
one of our clients at my asset management firm, wrote to Nicole, our director
of customer service, saying that she was overseas and had found some
fantastic antiques for which she needed us to wire a fairly large sum of money.
Nicole assured her over email that we would transfer the funds immediately. Two
minutes later Nicole received a new email from “Christine,” asking for an even
larger amount to be transferred for other “purchases.” Nicole realized with
horror that she had been duped. Christine’s Gmail account had been hacked and
we had been conned by a pro.
I
interviewed Sara, Steve, and Nicole for my book, Even the Odds:
Sensible Risk Taking in Business, Investing, and Life. How they responded
to these risk-filled situations shows the power of right-sizing, right-timing,
relying on knowledge and experience, and staying skeptical. Even if you can’t
control all four of these variables, controlling a couple of them can sometimes
be enough.
For
example, Sara had not recognized that she was violating the tenet of
right-sizing by depending mostly on two customers. In addition, Sara and her
partner, Peter Wheeler, had no control over the timing — the economy was
terrible, but there was no way they could wait for a better macro environment.
They needed to act immediately to counter the triple threat of plunging sales,
commitment to production capacity they didn’t need, and very limited liquidity.
Relying
on their knowledge and experience, they came up with a brilliant idea: Given
the economic crash, commercial space could be leased relatively cheaply. They’d
lease inexpensive space for Sara Campbell–branded boutiques to sell the
clothing they were committed to producing. Although their advisers were
suggesting bankruptcy, Sara and Peter borrowed from family and friends to
fund the expansion. Their bet paid off. Today they have 13 Sara Campbell
LTD stores up and down the East Coast and the business is more profitable than
when they were primarily third-party providers. They used knowledge and
experience to turn the terrible economic timing into a benefit.
Steve’s
case was a bit different. Sara and Peter had no control over the timing and no
choice but to risk their whole business — not ideal conditions — but
Steve had a flourishing business to protect. He used right-sizing and
right-timing to mitigate the risk Eve posed.
When
it sunk in that he had a big problem on his hands — a dysfunctional and
combative employee who was selling cocaine on the side — he moved quickly. He
told his attorney about the situation, and they agreed that Steve needed to
dismiss Eve immediately. But there was potentially significant risk to Steve’s
reputation and his relationship with his clients if the whole messy story
emerged.
They
decided that because Steve could quantify several lapses in her work — the
combativeness, the missed appointments, and the absenteeism — he could
fire her without mentioning anything about her outside activities. Still, there
was a risk she would try to sue. Steve and his lawyer decided it was a
risk worth taking, since it was a smaller risk than either continuing to employ
Eve or exposing the messy truth about her involvement with illegal drugs. And,
indeed, when Steve fired her, Eve did sue for dismissal without cause and
gender discrimination, but the attorneys settled the case quietly and without
much pain.
In
the case of my own business, there was no way to recoup the money. We contacted
the FBI just in case, but they confirmed our fears: The money was gone. After I
fully grasped that the money sent from Christine’s account was gone, probably
forever, it only took me a minute to decide what we should do. The reputational
risk to our firm was very high. We knew we had to tell Christine right away and
reimburse her the money, which was a meaningful amount. Despite that cost, it
would have been both unethical and bad business policy to follow any other
path.
I
called Christine, filled her in, told her we were making her account whole, and
apologized. She was extremely grateful that we acted so quickly, and she’s
continued to recommend us to other people. We’ve since changed our financial
transfer policy to reflect a healthy amount of skepticism: We require a
phone confirmation of any unusual transfer over $5,000, which is now typical
across the financial services industry.
The
tenets of sensible risk taking, right-sizing, right-timing, relying on
knowledge, and remaining skeptical are useful as tools we can apply across
business, investing, and life. Applying them mindfully will improve our
risk-taking ability and lead to better outcomes, no matter what kind of mess we
find ourselves facing. - Karen Firestone,
President & CEO of Aureus Asset Management
Image Souce:
(1) pennythots.com
(2) blog.soton.ac.uk
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