Finding the Perfect Risk Ratio in a Risk-Averse Organization
Risk is oftentimes associated with negative concepts. “It’s a gamble”, or “there's a lot to lose” are sayings that accompany a new idea that is not mainstream. However, risk is a huge factor in business. Without it, there would be far less inventions, startups, or groundbreaking companies, and the world would look a lot different.
Many organizations are satisfied by taking the safe route and limiting risk as much as possible. However, this may be a losing strategy, as change and risk are an inherent part of the business world. Knowing how and when to take on risk is the hard part, and this is what separates the good from the best.
The pandemic may have exacerbated the issue of “playing it safe” as it added an element of double risk. Not only are there regular everyday business risks involved, but now there are additional outside factors that add an extra element of uncontrollable influences to an already volatile market.
This has forced many organizations to become more conservative in areas such as capital allocation and fixed asset investments. But knowing when to take risks when you are ahead is key, because once you are in the red and backed into a corner, there are far less options available. Knowing when and how to make the transition from risk-avoider to risk-taker is not an easy task.
Downsides of playing it safe
1) There’s an immense irony in constantly playing it safe. Executives think that consistently taking the safe route will ensure a longer existence by reducing the risk of something going wrong along the way. However, the opposite is true.
The safe outlook causes the company to give up on opportunities, new ideas, and growth, some of which may be the deciding factor in ensuring its long term existence by changing with the times. The most extreme example of this is Blockbuster staying on the safe route and doing what works- until the outside influences were so strong that it was backed far into a corner and left with no options.
2) In addition, being overly focused on avoiding risk (even in times when it's needed) can be influenced profusely by outside factors- namely stakeholders and investors. In a time when investors want quick and big results, taking risks not only makes investors feel uncertain, but it also “damages” short term results in favor of long term planning.
Therefore, ignoring risky changes that are needed in the long run in favor of “satisfying” investors by producing quarterly results that they want to see, can be a big mistake. In the end, both the organization and investors lose out, as the full potential isn’t reached, while the value goes down in the long run.
3) The process of decision making when mixed with a high level of risk, is oftentimes done with gut feelings and emotions. While the human mind is an important part of decision making (otherwise AI would just make every business calculation), too much qualitative information and emotions is not a good recipe for an ideal outcome.
Rather, quantitative analysis needs to play a bigger role in risk analysis. This requires a more in depth and objective view of the situation- which is hard to do when the future of the business is in question. However, taking this approach allows companies to take on more strategic, and often more needed risks such as entering a new market or changing the branding of a product- all while reducing risk exposure as much as possible.
Taking on Risk
There is no black and white answer for taking on risk. Some companies are forced into it after being left with no other options, while some embrace it and initiate risk constantly. One thing is certain: the ones that shy away and are too risk-averse almost always end up as a case study for what not to do in future business ventures.
The answer to the 3 downsides of playing risk safely, is to use all of the tools involved in the organization:
People- If there are only a handful of people involved in the decision making process- whether to take on risk, how much, when, etc.- then chances are it will be quite subjective and biased. Relying on a few decision makers alone provides too much of a platform for feelings and qualitative analysis and not enough room for quantitative decision making. Involving all of the teams and additional help will provide a sweeping perspective of all the company needs- both short and long term- and provide the best possible scenario for the right decisions.
Technology- As mentioned above, relying completely on technology will create robotic decisions that can’t always be the best; and relying completely on human decisions will produce biased and inefficiently slow results. The perfect solution is both. FP&A solution technology will automate the financial data and provide a more accurate and complete picture of budgeting and scenario influences in the short and long term. In addition, the immense amount of time saved from the manual processes can be spent by the financial team to provide input and analyze the risks, being that they are one of the most important factors in risk management.
Outside help- When faced with biased decisions or heavily invested executives, it is very hard to be objective. Another tool that can be helpful is outside influences. This can be 3rd parties such as risk consultants, valuations, or even working with stakeholders to better understand the long term goal in order to translate that into being more open to risk.
Staying Ahead of the Game
Finding the perfect risk medium is very difficult and individual based for each company- depending on the product, time period, and other influences. For a company that historically stays away from risk, it has to develop the right tools in order to create a capacity to change its habits.
All or nothing startups, or those that are left with no other choice have it “easy”, as taking risks, and sometimes big ones, are a no brainer. For more established and mature companies, reducing the risk of failure, while simultaneously increasing the risk of success, is all about strategic planning. Planning ahead to implement automation, preparing the different people involved in the company for change, and taking all of the steps necessary in order to make the most calculated and profitable decisions, is what it takes to turn risk into success.
The list of failures from risky ventures is quite large, but the organizations that have a track record of calculated risks, in which all the tools were used, are the ones that stick around and thrive. The long list of unrealized potential that was left in the conference room or the back of people’s minds is endless, and those that always take the safe route are in fact the ones who are the most at risk due to one constant business truth: change.