Risk management projects start with describing expectations

Risk management implementation projects are not easy. My own experience (including anecdotal from many professional friends) tells me risk management projects have a great likelihood of failure. Failure, primarily, to live up to expectations … whatever those expectations may be. You can benefit by considering some things to help you get off to a solid start.

A natural temptation might be to name a competent project leader and let them start collecting a list of risks. That, unfortunately, is an excellent way to waste a lot of time and energy. Instead, it’s essential that the three implementation challenges be clarified in at least a preliminary way. That can be done by addressing certain topics prior to rolling out the implementation project. I’ll discuss the first of these in today’s post.

Describe the ultimate deliverable

Most everyone knows what risk management is. Or, at least, they are confident that they know  their view of risk management. To those with an accounting or audit background (like me), risk management can imply an evaluation of internal controls. To investment managers, risk management can imply assuring an acceptable and consistent rate of return. To entrepreneurs, risk management can imply additional insights in order to avoid crippling operating losses. To insurance professionals, risk management can imply assuring sufficient insurance coverage.

Setting agreed-upon expectations is critical. Management should identify what risk management should provide in 1 year and in 5 years. To what extent will it be integrated into the overall management framework? Will risk be a topic that is a natural part of everyday discussions or will be a separate annual review? Who will ‘own’ risk management? How will you assign responsibility for specific risks? To what extent will risk management be analytical and to what extent will it be holistic? How will risk concepts influence business decisions? Is risk management only for executive leadership or is it for everyone?

It may be convenient to think of a risk management environment as consisting of some combination of two essential views. One view is primarily analytical. This view envisions spreadsheets with numeric scales and multiple assessment projects with, perhaps, statistical analysis. A different view envisions a network of interconnectedness – a holistic integration where strategies and risks are tied together in a conceptual model. This model shows how the organization operates and how risks might negatively impact that operation.

In my experience, both types of visions – analytical and holistic – are represented in the senior leadership of virtually every organization. These differing backgrounds and different ways of approaching problems tend to get magnified in a risk management implementation project if they aren’t addressed up-front. Neither vision is wrong. In fact most organizations adopt some combination of these views.

Critical Implementation Requirement #1

Executive leadership must develop and share its initial sense of what risk management will mean to the organization. This must be especially understood by the person who will design and shepherd the actual implementation project. As Stephen Covey said – “Begin with the end in mind.” It is important that executive leadership provides enough vision and guidance so that the project leader and the entire organization have a sense of the ultimate deliverable.

In future posts, I’ll address a few other topics that can help assure that your risk management project starts off on solid footing.

Risk management implementation traps

Risk management isn’t risky … but implementation projects can be.

Risk management concepts can be transformative to an organization. Any organization – whether for-profit or not, whether large or small – can be transformed. When done correctly, risk management concepts can assure that management’s attention is always on the right things, and never on the wrong things. When done correctly, they help assure that everyone has a consistent view of what makes the organization successful and, conversely, where disasters could be lurking. When done correctly, better decisions are made at every level in the organization.

So why hasn’t every organization formally implemented risk management? Here are a few thoughts.

It may not be clear what a risk management project can actually deliver

Projects should not have fuzzy goals. Unfortunately, that’s often exactly the situation for poorly-planned risk management projects. One of the underlying reasons is that risk management, itself, can mean different things to different people. Also, risk management can seem dramatically different from one case study to the next. It is no surprise that most organizations have not invested in risk management considering the difficulty of defining exactly what it can provide.

It may not be clear exactly how to translate risk management theory into practice.

The next stumbling point is implementation. Most people would agree that risk management is, at its core, an essentially intuitive concept. The problem isn’t with the ‘idea’ of risk management. Instead it stems from the supplemental concepts, such as “risk appetite”, that attempt to make risk management more practical. These supplemental concepts might make perfect sense when they are discussed, philosophically, in a meeting room but they often fall apart when they move into the untidy real world. As a result, when organizations take their first stab at risk management, they may get discouraged when the real world creates ambiguities, circular logic, and a notable lack of relevant concrete examples.

It may not be initially clear how risk management can provide long term value.

Thinking forward, how will this initial effort benefit the organization long-term? In some cases executive leadership may initially imagine risk management as a stand-alone activity that’s dusted off and updated every year or two. Understandably, it’s hard to see ongoing value in such an approach. The practical benefit of how it can help the organization achieve its goals better and faster may not be obvious or intuitive. One thing is clear – as long as it’s separate from the normal day-to-day management activity it cannot become transformative.

As you’re considering a risk management implementation project, you must address and resolve these issues to achieve the benefits that risk management can deliver.

There are ways to remove these obstacles. Stay tuned.

Good to Great – “Disciplined Action”

This is the fifth and final post from my recap of Jim Collins’ 2001 book, Good to Great. The focus is on Disciplined Action. It is the last of the three major concepts, joining Disciplined People and Disciplined Thought.

The major image that the book uses for Disciplined Action is the flywheel. For those who aren’t familiar with the concept, it’s a rotating wheel, typically very heavy. Once it has started rotating, its great mass keeps it rotating smoothly. Old-fashioned grinding wheels are an application of the flywheel.

Picture a giant stone wheel, perhaps a dozen feet in diameter. The author creates the idea of people working together putting effort into starting this massive wheel rotating. It can take considerable effort to rotate it a few inches. But, the next bit of effort may rotate it a dozen inches. Then a quarter-turn. Once it is spinning, relatively little effort is required to keep it moving or even speeding up. Most of the effort comes at the beginning.

The obvious analogy is that it takes discipline to keep up the effort at the beginning of a business strategy, knowing that the wheel is barely moving. However, the effort is rewarded if you keep it up. If you are falsely discouraged and give up, the wheel stops and you have to start over again. Organizations that jump from strategy to strategy spend all of their effort starting that flywheel moving, time after time.

The other realization that they drew from their interviews is that the great companies could never point to their “breakthrough” where they became great companies. They always indicated that they just got to work and eventually the success was there. As with the flywheel, there was never a point where the flywheel suddenly started moving on its own. The first inch of movement after a lot of effort doesn’t seem like a breakthrough. Nor does the next 6 inches. Eventually, you simply realize that it’s moving on its own.

The last major idea in the book relates to technology. The book points out that technology is an accelerator to a hedgehog concept … but it can never be the hedgehog concept (see my earlier post describing the hedgehog concept). If technology were the central concept it could be easily leap-frogged by others. Technology should continually reinforce an unchanging hedgehog concept. This means that technology can always be viewed as simply another supporting tool that can be easily swapped out as better tools become available to support the hedgehog concept. The technology is not, itself, the focus.

Thanks for reading these 5 posts recapping Good to Great. I hope you have found them useful. You can benefit from this very easy-to-read book and the simplicity of their ideas.Others have criticized it for its perceived over-simplicity and the fact that a few of its “great” companies have fallen on hard times. Such criticism misses the point entirely. This book delivers ideas to help you become a great company. It’s up to you, once greatness is achieved, to keep these lessons fresh and remain a great company.

Good to Great – “Hedgehog Concept”

This post continues my recap of Jim Collins’s 2001 book Good to Great. In my prior post I introduced the idea of the “hedgehog concept” within the overall idea of Disciplined Thought.

A hedgehog concept is the simplified image of your organization. You and your team develop it. It unifies your team and provides organizational identity and discipline. While others chase new fads and technologies, your hedgehog concept will provide the focus to assure that these new ideas enhance, not detract from, your identity.

One of the prerequisites to developing your hedgehog concept is the need to face the brutal facts impacting your company and industry. However, realize that these brutal facts should help you identify not only where all of the challenges lie, but also help identify your organizational strengths.

To develop a hedgehog concept for your organization, Collins points to three areas that you must understand and be able to articulate:

  1. What is your organization deeply passionate about?
  2. What can your organization be the best in the world at?
  3. What drives your economic engine?

Passion drives commitment. In an earlier post I mentioned that motivation should be an irrelevant concept. If you have motivation problems you haven’t found people who feel passion toward the organization’s goals. So, work to find out what your organization, as a whole, can feel passionate about. This will make it very clear, going forward, who should be part of the team and who shouldn’t.

Becoming the best is far harder than simply being good. To become great you have to excel. What can your organization excel at? Considering your people, your infrastructure, your customer base, your passion – what can you become best in the world at? You don’t have to be best at the moment; you just need to have a realistic chance (facing the brutal facts …) to become the best. Because, let’s face it, if you can’t become the best at something you can still be a good company but you’ll never be great.

Measuring financial performance is critical to any business. This can take some creativity because you don’t have to accept standard industry concepts. You may choose profit per customer visit (retail), total fees per relationship hour (service), or anything else that you can reasonably and simply express as $ per ?. The point is that there is a significant difference between maximizing profit / ($ of retail sales) and profit / (customer visit). This difference can result in a dramatically different hedgehog concept.

If you can articulate these concepts while facing the brutal facts you will develop your focus, your hedgehog concept. Remember that it’s simply a way to focus and articulate the essence of your organization. Then, as new technology and business opportunities come along you can plug them into your organization in a way that’s always consistent with your hedgehog concept. It’s this consistency and discipline that drives long term greatness.