Does Concern for Risk Inhibit Performance?

Norman Marks, CRMA, CPA, is a vice president for SAP and has been a chief audit executive and chief risk officer at major global corporations for more than 20 years.

 

Another interesting piece from the consulting firm, McKinsey & Company, raises the issue of people’s unwillingness to take risks, their risk aversion, preventing organization’s from optimizing performance.

Overcoming a bias against risk makes a number of excellent points.

The most important point is that they needed to write this! We are so concerned about the potential adverse effect of uncertainty on the achievement of objectives that we fail to take the right risks — the whole point of effective risk management!

Here are some interesting excerpts:

  • We frequently run across CEOs stymied by their company’s struggle with risk; decisions that may be in the best interest of individual executives, minimizing the risk of failure, are actually harmful for their companies. As the CEO at a manufacturing company observed, his company’s business unit–level leaders gravitate toward relatively safe, straightforward strategies with earnings goals that seem reachable, even if these strategies mean slower growth and lower investment along the way. We have also heard from many nonexecutive board members that their companies are not taking enough risks.
  • Executives should require that project plans include a range of scenarios or outcomes that include both failure and dramatic success. Doing so will enable project evaluators to better understand their potential value and their sources of risk.
  • For example, when evaluating the introduction of a new consumer-goods product, managers should explicitly consider what a “home run” scenario would look like — one with high market share or high realized unit prices. They should also look at a scenario or two that captures the typical experience of product introductions, as well as one scenario where it flops. By forcing this analysis, executives can ensure that the likelihood of a home run is factored into the analysis when the project is evaluated — and they are better able to thoughtfully reshape projects to capture the upside and avoid the downside.
  • Companies need to better understand whether the causes of particular successes and failures were controllable or uncontrollable and eliminate the role of luck, good or bad, in structuring rewards for project managers. They should be willing to reward those who execute projects well, even if they fail due to anticipated factors outside their control, and also to discipline those who manage projects poorly, even if they succeed due to luck. Although not always easy to do, such an approach is worth the effort.

I welcome your comments:

  1. Do you agree with the themes expressed in the piece and summarized here?
  2. Is your organization overly risk-averse?
  3. Are you willing to explore and then take enough risk?

Posted on Sep 5, 2012 by Norman Marks

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