Interesting times we live in.
In some circles, the scapegoat for the financial crisis is risk-taking run amok. Too many people made too much money for too long, and they thought they were indestructible. So they pushed a little further, and a little further, and a little further. Along the way, they did some really dumb things, lost sight of their morals, then watched helplessly as the walls came down.
The result? We're all a little wary of risk these days, and that's too bad, because paradoxically, taking risks is what turns good companies into great ones.
In an earlier post, corporate finance veteran Bob Tarola explained the nuts and bolts of risk management. In doing so, he offered some interesting insight. The answers to risk management, he said, lie as much in doing the right thing as in preventing the wrong thing.
That concept seems to be at the heart of a recent article from Ron Rael, CPA, who writes, “Risk management is a difficult balance. Fear of risk leads to stagnation. Taking on too much risk, as we’ve been reminded lately, has dire consequences. A well-considered, carefully calibrated risk management strategy may be more important now than it has ever been before.”
Rael's article outlines the three types of global risks (strategic, operational and innovation) and offers suggestions for managing each. I'll let you read those suggestions at your leisure.
What I want to focus on are Rael's 10½ rules for successful business risk taking:
- Focus on trouble and you will get trouble. Focus on success and you will get success.
- Trust that your people know what a risk is.
- Recognize that your people may not know how to recover from the negative effects of a risk.
- Know that no risk is worth undertaking when proper planning or analyzing cannot be completed beforehand.
- Know that no risk is worth undertaking when a “lessons learned” cannot be completed afterward.
- Recognize that every plan of action and strategy must have a feedback instrument built into it.
- Understand the costs of your risk tolerance and your risk avoidance.
- Know that no one is exempt from making errors in judgment.
- Tell the truth about the risk and its implications. Accept the truth about the risk and its implications.
- Be willing to live with the negative results of each risk undertaken.
And 10½, says Rael, is this: “Want more rewards? Take more risks! Want more success! Reward risk taking!”
That last one is priceless. In today's economic environment, the natural inclination is to avoid risk, to hunker down, focus on the core and leave innovation to the other guys. And you wouldn't be alone if you chose that route.
But you wouldn't be leading the pack, either. Rael seems to be saying that the most successful companies after the recession will be those that continue to innovate during the recession. And yes, with innovation comes risk. If you're afraid to fail … well, you don't really want to lead, do you?
The people who got us into this mess were recklessly taking risks. They weren't managing their risks. Combine a solid risk management strategy with a healthy dose of innovation, and you've got the makings of a juggernaut.
How are you managing your risks these days?