RISK Is the New Four-Letter Word
The greatest cost to our economy in the present recession may not be the evaporation of wealth in the stock market or real estate deeds. It may be the shrinkage, violet-like, of any willingness to take a risk - any risk - even a good one. No venture in love, intellect, or business carries a guarantee. The difference between occasional smart, calculated failures and the kind we've seen lately in the headlines is the difference between doing one's homework, exercising good judgment based on data, expertise, diverse input, and experience versus jumping into a short-term payoff that simply holds no one accountable for the long run.
If a good idea, properly researched, turns out to have a 92 percent likelihood of success within four quarters with continued predicted success at the three-year point, then it still has an 8 percent chance of failure. Even conservative investors could find that attractive, when presented with a fair and honest predictive model, but it means they must be willing to accept an 8 percent failure rate.
Not taking any risk at all is possible, but deadly to returns, the economy, and likely the morale of a citizenry in a country where the Dream is based on the wild success of businesses started in garages, winning the lottery, and more patents per capita than any other country on earth. While we agree that throwing all consideration of the future out with the bath water is folly, we need to bear in mind that progress, productivity, and indeed success depend on failure - or at least the calculated possibility of it.
Is it the role of the FAA to ensure that all airline passengers - every single one - arrive safely at a destination (which would be possible, if we didn't mind an intolerable cost)? Or does it make sense to keep flyers safer in the air than in any vehicle through any mode of transportation on the ground and still affordable?
Is it the responsible role of a financial services institution to make sure every single loan will be paid back perfectly, or that the great majority will, building in a modest risk to the cost of all the loans?
This is at its heart a philosophical question: Is it better to prevent all possibility of death from a cure of any kind even as some who are sick are allowed to die from lack of treatment, or to encourage the saving of many lives even knowing that a tiny percentage of those who receive a treatment will be adversely affected?
Leaving aside the very few situations where zero tolerance must be the watchword (terrorists on planes, correct surgical procedure), we are generally better off to run a calculated risk in order to prosper than we are to sit tight and bite our fingernails.
During this period of quiet belt-tightening, some companies (and governments) are developing agoraphobia - fear of venturing forth - afraid to take any chance at all. While it's good that we've learned some painful lessons from Bernie Madoff and AIG and Ameriquest, we need to watch for signs that some companies will emerge from the Bear Period stronger than their competitors for several key reasons:
- They will take this opportunity to build stronger relationships with customers by deliberately understanding and helping their own customers through the downturn.
- They will build trust by doing the exact best thing for customers. (We'd like to see a cell phone company that sends notices to all their customers telling each one which of the company's subscription plans would be best for each, and offering to switch them.)
- They understand that no business has a 100 percent guarantee, but use careful predictive modeling to minimize risk by focusing on customers who are the most valuable now and in the future (high actual and potential value customers) and meeting each of their needs better and better.
- They balance the short-term revenue that provides cash flow with the long-term equity creation that ensures future success for shareholders, customers, and employees - and they build that balance into the metrics and management of the organization.
Related Entries
- Guest Blogger Joseph Jaffe: It's Better to Be S.A.F.E. Than Sorry
- Guest Blogger Ralph Heath: What Has Happened to Customer Service in America?
- Preventing a Customer Experience from Going Downhill
I believe this downturn offers companies an opportunity to take bold action and position themselves for growth.
I see three reasons:
1) Rainmakers -- real experts -- they could never get in good markets are available today -- even for consulting.
2) Competitors are weakened and pulling back. In good markets they are strong and aggressive.
3) Potential customers are looking for fresh ideas to survive. They need bold action.
I wrote a great article for my blog called Nothing to Fear: http://blog.jeffreyogden.com/2009/01/28/the-only-thing-we-have-to-fear-is-fear-itself/. I invite you to take a look and comment.
I like the article, Martha. Even so I'm going to disagree with you in a couple of places. You say:
"Leaving aside the very few situations where zero tolerance must be the watchword (terrorists on planes, correct surgical procedure), we are generally better off to run a calculated risk in order to prosper than we are to sit tight and bite our fingernails."
I disagree. It is impossible to have zero risk in either case.
A terrorist looks just like you or me until they commit their act. Zero tolerance is impossible here. Whatever cash sum one forks out, recognising a terrorist and eliminating the risk means that flying becomes impossible, since the terrorist cannot be spotted.
A surgeon takes risks every day. The better the surgeon the higher grade of risk is able to be taken with a probability of a good outcome. A run of the mill surgeon takes little risk and is ineffective except by serendipity in difficult situations. While I;d rather that any surgery performed on me is risk free, I accept that even surgery on an ingrowing toenail caries a finite risk of my death.
It's even risky taking no risk at all, because one risks being fired for incompetence. Even rigorous safety programmes accept elements of risk. Airline pilots are paid to take risks. Even on a railway, where one doesn't need to steer the vehicle carries the risk of some sort of failure which will disrupt matters, sometimes fatally.
Folk may become risk-averse, especially in a recession, but the very nature of a recession also generates risk takers - the folk who absolutely have to take a risk or they will fail to feed their family. This why fringe areas like Multi-Level Marketing start to appear strongly in a recession; some organisations have started to run expensive courses to show the gullible newly unemployed how to become consultants (some will even make it, even though impoverished by a substantial course fee!)
Soon we'll see crazy high yield investment schemes. Ponzi scheme flourish when folk are desperate for money. We take pretty much any risk in order to feed our families. Recession actually increases the risk we are willing to take, simply out of desperation.
What we do not risk while still employed is our salary. Or we think we don't risk it. But acting risk-averse we risk ours and our colleagues' salary. Our role needs to be to define the level of risk we are willing to take, and then to take that risk with a good heart, knowing and influencing the probability of success.
And one area to risk now is to stop running into the bunker of "let's sell to our customers"
You hear me right.
Sure, service the customer well, but go out and get new ones. Use the cash cows to finance the expedition to gain new customers. We need them. Our current customer base is shrinking. They are taking the wrong risks and will fail because they are in the bunker and are fooling themselves that selling only to customers will save them. How can it? Customers are going bust!