The ‘Risk hai toh Ishq hai’ line from the Indian web series Scam 1992-The Harshad Mehta is a reminder—of the age old belief that risk and return go hand in hand. The level of risk is usually proportional to the potential level of return available if that risk pays off. Therefore, if we try to avoid all risks then we will probably obtain low (or zero) rewards. This might be acceptable in our personal lives but not to our stakeholders or shareholders if we lead an enterprise, department, project or organization.
In fact, if we calculate properly not taking risks in life is the biggest risk of all. Consider an extreme scenario wherein you are in a car without brakes that’s headed towards a cliff at high speed. If you jump you will definitely be injured and there is a possibility that you may hit something while jumping and end up having the same tragic fate. You may alternatively choose the path of least resistance, be seated in your car and hope for the best. The latter may feel as the default option and the most appealing to some, but experience proves that the default option is usually the least best one in high risk scenarios.
Short- or Long-Term Approach
In the short term of the risky scenario no option may seem risk free. In the above example the trade-off is between the high possibility of a minor injury (jumping off early) versus the low possibility of death or serious injury (staying on). Having a long term vision and taking calculated decisions is the need of the hour for every entrepreneur and intrapreneur. Some business decisions may result in short term losses but should we take the less treaded path?
There are also two types of risk – elective risk and reactive risk
Elective risk (risks you proactively decide to take) leads us into the important topic of corporate governance. Lack of such governance can result in you betting your organization’s future on the hoped-for outcome of a single decision.
There are 4 Key Components of Elective Risks:
- LEARN about the organization context, culture and key stakeholders to inform objectives, strategy and actions.
- ALIGN strategy with objectives, and actions with strategy, by using effective decision-making that addresses values, opportunities, threats and requirements.
- PERFORM actions that promote and reward things that are desirable, prevent and remediate things that are undesirable, and detect when something happens as soon as possible.
- REVIEW the design and operating effectiveness of the strategy and actions, as well as the ongoing appropriateness of objectives to improve the organization.
Reactive risk leads us directly into the field of Risk Management and it’s components – Identification, Assessment and Mitigation.
The effective management of Risk involves 4 interlocking disciplines:
- Risk Identification
- Risk Analysis
- Risk Mitigation
- Risk Management
The skills needed to effectively handle Risks at work are not some that you can get right at your first attempt or learn it on the job. All businesses involve people and money, two of the most precious components today. It is like an airline pilot learning on the job with a real airplane, live crew and fare-paying passengers! Not a pilot most people would knowingly fly with! Thus, gathering such skills is ideally suited for learning experientially through computer-based Business Simulations. The closer these scenarios reflect the type of risks your managers are likely to encounter the better. You would not train a Boeing 747 pilot in a Spitfire Simulator!