Risk management in your life…

My goal is to educate (or convince) you all on why risk management matters and, even more boldly, how it can be interesting. The simplest way to explain risk management is to find the right balance between risk and reward. Risk management is weighing the changes of something bad happening against the benefits you could gain. On one end, you could perseverate over every decision and think that everything is a disaster waiting to happen. What if people hate the new product, what if aliens land and we have no strategy for interplanetary trade relations. On the other end, you could also take the YOLO (i.e., You Only Live Once) approach by wearing a Hawaiian shirt to the next Board meeting and stating that risk management is for the weak.

Take purchasing a car as an example for risk management. I’m really challenging myself to make car purchasing and risk management interesting. Let’s say you are at a dealership and you are about to purchase a car. You have the risk of purchasing a lemon (a car that breaks down shortly after purchasing). How do you mitigate against that? Bring a friend who knows about cars. Better yet, bring more than one friend so you can take a cross section of opinions, and if you do end up purchasing a lemon, then you can form a support group when you get stranded on the highway. Another risk is overpaying for the car because your sales person plays mind tricks. To mitigate this one, wear sunglasses and don’t make eye contact. Once you purchase the car (congratulations!) you want to monitor the health of the car by listening for strange new noises and googling what the suspicious dashboard lights mean. Transferring risk is another way to respond to a risk. You can purchase insurance for your car so that if your dashboard lights up like a Christmas tree, then you don’t have to be on the hook to pay for everything.

Breaking down risk management…

We are always making decisions in our lives balancing risk and reward. Some are more obvious, but the more complicated ones are not. The complicated ones start to become more straightforward and transparent when we take a more disciplined approach. In a company, risk management decisions often involve higher stakes. Instead of picking a car, they’re making moves that impact their entire business and the lives of others. I’m going to start explaining risk management from the perspective of a company, but these elements can apply to all of us as individuals, like when we are purchasing a car…and I really think we don’t apply it as much as we should in our own lives. For a company, the reward is the goal or objective defined in their strategy. In other words, what rewards or strategic goals a company wants, and the risk is what would derail the company from achieving those goals.

Let’s say for example, your company’s strategic goal is to sell the more widgets than any other company that sells those same widgets, or put it another way, have the largest market share of widgets. Now how do you achieve that goal? You want to make really good quality widgets, make sure you have all the parts to manufacture those widgets, and have enough skilled employees to sell those widgets. If any one of these goes wrong, then it could prevent you from becoming the largest seller of widgets. We have identified three risks that can prevent us from achieving our strategic objective:

• Risk Identification – we identified 3 risks preventing us from selling the most widgets and having the largest market share:
  • Poor quality widgets
  • Not enough supplies to manufacture widgets
  • Not having enough skilled employees to sell those widgets

Now say we want to focus on one of those risks, and the one we want to focus on is not having enough skilled employees to sell our widgets. One way to prevent that risk from occurring is to hire really good talented people. You want to hire the best person to sell those widgets, or the person with the right knowledge, skillset, and experience. You also don’t want to run out of money by paying way too much to your employees, and then go out of business. There isn’t much strategy to think of when you’re out of business. To strike the right balance between risk and reward, there are some activities you could do to ‘respond’ to the risk of not having enough skilled employees to sell widgets. ‘Risk Response’ is the next step after you identify your risks:

• Risk Response – while each risk needs a risk response plan, we took one as an example:  not having enough skilled employees to sell widgets, and we created a risk response plan:
  • Perform market research to better understand compensation
  • Post job opportunities in the right places
  • Write the job description in an exciting way to encourage people to apply

Once that person is hired, you want to ‘monitor’ things like their performance, competitor salary ranges, and/or others. Usually this is a metric, such as what is the average salary range for this position and how far away are we from that range. Every so often you revisit the metric to understand if you are outside the preferred range. Risk Monitoring is the next step:

• Risk Monitoring – keep tabs on how the risk versus reward environment is changing:
  • Continue to perform market research to understand changes to pay so competitors don’t lure away your good employees with higher pay
  • Conduct performance evaluations for employees to understand whether they are selling enough widgets
  • Perform employee happiness surveys to ensure employees are happy and engaged. if they are not, then determine what adjustments need to happen in the workplace

Once you do all this great work, you want to tell senior management and decision makers on where you struck the balance of risk versus reward and where you may have gaps that management needs to invest resources.

• Risk Reporting – tell people of the amazing work you did above!
  • Taking all this great work and summarizing to senior management and other decisions makers on how you are striking the balance between risk versus reward. The goal of risk reporting is to keep decision-makers informed so they can allocate resources toward solutions—perhaps increasing salaries, adjusting benefits, or improving training programs to retain talent. With clear, concise reporting, you’re helping management understand where the gaps are and make better, more risk informed decisions.

 Wrap up!

We just went through the risk management lifecycle: 1) risk identification, 2) risk response, 3) risk monitoring, and 4) risk reporting:

This post is just the beginning. Next time, I’ll dive deeper into each of these steps and talk about real world scenarios and real-life examples of when things went wrong when poor risk management practices were put into place, or not put into place at all. In the meantime, visit my educational website, riskvision.org, for additional insights on risk management!