The essence of operational risk and reward

This post continues my “essence of ERM” series. The goal of this series is to address all manner of risk management topics in small sensible components. I’m writing this series to help make risk management a practical tool for organizations of all types.

This post is about operational risk and reward.

It’s a common understanding that you need to take on more risk in order to get greater rewards. The common context for this risk/reward tradeoff is when you’re managing a financial portfolio of investments. Highly conservative investments tend to deliver lower returns over the long run when compared to those investments that might have more risk. However, risk/reward also applies in other ways. It impacts how you manage your organization and deliver operational results.

Imagine a common operational scenario. You’re assigned a goal and you need to develop an appropriate strategy to deliver that goal. If you choose a conservative strategy you’ll get highly predictable results. It’s tried-and-true. If your assigned goal falls into the predictable results that your conservative strategy will deliver, by all means use that conservative strategy and pat yourself on the back for being eminently practical.

Conversely, if you’re handed a stretch goal then that tried-and-true strategy will not deliver it. In that situation, you need a new or revised strategy that has, at least, the potential to deliver the desired results because the conservative strategy absolutely has no chance. You must select a strategy that takes on some uncertainty; you must take on more risk. To be clear – simply taking on more risk does not in any way imply that you will automatically get greater rewards. It only means greater uncertainty. But without that uncertainty you may stand no chance of delivering desired results.

The essence is that risk and reward are definitely related. Conservative strategies deliver predictable results. If you need to provide more aggressive results, you need a less conservative strategy that has the potential to deliver those results.

You can read more about my view of risk management (which I call Performance Risk Management) at Risk Leader (rskldr.com).

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s