Risk management is a performance tool.

Risk management, when done correctly, creates a more effective performance management environment. Let’s look at one example of how it can help.

Our example – Strategy setting

When setting a strategy, there are always several strategies that could deliver the needed results. One very common approach is to accept the first strategy that seems reasonable. In fact, people do that very regularly. That’s typically a very cost-effective approach.

However, sometimes the stakes are big enough you need to do more. You must move beyond simply selecting the first strategy that could deliver the results. You need to know which is most likely to actually deliver the results. It’s important to understand the often-hidden assumptions that may exist within a particular recommended strategy.

You are now stepping into the practical world of risk management.

How risk management helps support strategy setting

Risk management is primarily an exercise in comparison. It helps focus the decision on which strategy is the best one. That implies that you need multiple alternatives … always a good first step.

Let’s take an example of a new sales expansion strategy. Your goal is to increase sales by 35% through expansion. One strategy (Strategy A) could be to ask half of the existing sales team to relocate to a new territory in order to move into that market. Another strategy (Strategy B) could be to hire a small number of sales staff who already reside in the new territory and train them on your products.

The first step is to examine the range of possible results from each strategy.

Strategy A might deliver results that range from:

WORST:  -50% (net sales will decline because the sales people relocate from existing territory)
BEST:  +75% (sales team will hit the ground running with great success)

Strategy B might deliver results that range from:

WORST:  0% (newly hired sales team is totally ineffective)
BEST:  +40% (this is the best that anyone can reasonably imagine)

So, you have now developed a reasonable belief that either strategy could deliver the needed results.

Now let’s move beyond that. Risk management helps identify specific issues that could impact the ability for each strategy to actually deliver results that will actually meet the goal (35% growth).

Risks for Strategy A

Sufficient sales people will refuse to relocate (your team believes this has a 25% likelihood)

The challenge of developing a new territory will cause sales people to leave the company (25% likelihood)

And so on …

Risks for Strategy B

Unable to find sufficient qualified sales people within required time frames (50% likelihood)

Unproven new hires will fail to execute sales strategies (30% likelihood)

And so on …

This process helps on several levels. This might point out to management that some combination of strategies eliminates the weaknesses found in each one individually. Perhaps one strategy has a potential catastrophic risk that the other does not possess … and you need to avoid at all costs. Perhaps it becomes clearer that several strategies could deliver good results, but none of the strategies is actually likely to deliver the required results; this implies the need to come up with a more realistic goal.

Summary

This shows one example of how risk management helps an organization become more effective. I’ll explore this further in my next post.

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The business of risk management

“The business of business is business.”

This quote is often attributed to Milton Friedman, Alfred P. Sloan, and others. It is frequently interpreted as conveying a cynicism that business people are intentionally uninterested in larger issues that impact society. The inference, then, is that business is often harmful to society through this neglect.

For this article, I am uninterested in this debate. Maybe I’ll take that on another time. Instead, I want to turn this around a little bit with the following aphorism – feel free to attribute this to me.

“The business of risk management is business.”

Many people, especially those who have not invested 1000’s of hours working with risk management concepts, want to attribute high and lofty goals to the ideas behind risk management. Risk management, though, has no goals. Risk management is simply a tool. It’s a hammer, a wrench. Tools have no philosophy or agenda. Tools are an invention of those persons who want to accomplish more with less effort.

Similarly, risk management exists solely to help a leader (of any enterprise — not just a for-profit business) accomplish more with less effort. That is, the goal of risk management is to help a business be a better business – no matter what that business is.

Before a craftperson picks up a tool, they already know the larger result that they have in mind and select the tool to help achieve it. This is an exercise in practicality. They do not select a wood plane because the world is fascinated with the concept of wood planes. They select it because it will help them accomplish more with less effort.

So, too, should a business person select the tool of risk management – that is, when it’s the right tool for the job at hand. So, that raises the obvious question. When is risk management the right tool?

I’ll start to address that in my next post.