Reframing Risk, Part One
“The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.”
Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk
Risk has been beaten up within a pathological market structure that privatized reward and socialized the downside, resulting in an overall meltdown that eliminated trillions of dollars in wealth. We have been foolish stewards of risk. Risk, per se, is as important to us as the above quote says, and it behooves us to put together a more adaptive concept of it. This is an attempt to get that going. Might as well swing for the cheap seats!
Let’s take a moment for a fresh look at risk and the context around risk – opportunity, failure, problems/challenges tackled to mitigate risk, the components of risk, etc. What if we swapped out some common and perhaps worn-out associations tied to the words in the list below?
Lest you be concerned that this author is making a quick pivot into Pollyannalandia, rest assured that we’re just playing with this for a moment to see where we might go with it.
Let’s take a few different runs at reframing risk. In Part One, we’ll consider:
Balancing Risks of Commission with Risks of Omission
The Risk-Opportunity Equation
Balancing Risks of Commission and Omission
It’s pretty easy to quantify the downside of Risks of Commission – when things go wrong we know what happened (or at least enough of what happened): how much it all cost and then didn’t pay back, who’s to blame, what we’ll never do again, etc. We have language for this, and as much as I love gallows humor, calling after-action reviews “post-mortems” may not be the most helpful mindset. Death and blame are fun for a little while, but may not be serving us well as a productive approach to learning.
“Not everything that counts can be measured. Not everything that can be measured counts.”
Play this out within a business culture that too often rewards inaction in the name of being prudent, throw in the pressures of market-analyst scrutiny that, all pleasant corporate affirmations to the contrary aside, will still punish Risks of Commission while ignoring those of Omission until it’s too late, and hey, look what we’ve created.
Risks of Omission are tricky to quantify – we have few tools for thinking through the impact of what we didn’t do, while we have an impressive armamentarium of analytical tools to dial in the detail of errors of Commission. But shouldn’t we at least acknowledge that risks of inaction have their costs? And that those costs often have a more detrimental effect on a company than those of their quantifiable brothers?
Although impossible to calculate at the individual-project level, the accumulation of paths not taken is ultimately what takes many companies down, often more so than the total of errors of commission. Let’s talk about what is, sadly, the Kodak Moment for the 2011-2012 period – Kodak had at least a 25-year heads-up on Digital Photography and did not do nearly enough to translate their leadership in silver halide photography to winning in digital. Winning? Kodak didn’t even place or, ultimately, show. Kodak had advantages that most other companies didn’t, including the strongest, top-of-mind consumer associations that Kodak meant photography, and the deep emotional resonance that Kodak Moments were precisely the ones that we all cherish most. The drug of unimaginable success for 111 years (introduced in 1888, with stock peaking in 1999 – yes, only 13 years ago!) lulled Kodak into inaction, and Risks of Omission took it out. What a sad example of “The Innovator’s Dilemma.” Too predictable. Clearly, Risks of Omission are also key operands in the fate equations of Research in Motion, Nokia, AOL, Gateway Computer, and MySpace (to name just a few).
So then, why are we all but ignoring Risks of Omission? The difficulty in quantifying them shouldn’t result in not accounting for them at all. This leads us in the direction of being precisely wrong and dismissing any value of being vaguely right were we to take even baby steps in factoring in Risks of Omission. The ability to capture the detail of Risks of Commission shouldn’t give them the only place in the risk discussion. Can we start moving a little beyond a ratio of 100:0 Commission to Omission and get to something that looks at least a little like 70:30? Can we make sure we talk about the deadliness of inaction before we’re satisfied that the risk analysis is complete?
How about starting early in the process to raise the stakes on action? Given that the cost of an error early on costs 100x – 100,000x less than it does later, why not spend a little more time and money on things like:
Broad Opportunity Areas Considered – Triple this early on so you can be even choosier about where you focus ideation and the creation of specific product possibilities. Make sure that half the Broad Opportunity Areas considered are defined differently than anyone else in your industry would define them – don’t go only for the obvious. Pushing yourself here gives you a great start on distinctive competitive advantage.
Total Number of Product Possibilities Generated – Double this. The next time after that, add another 50% just to see where it takes you. Give yourself many more possibilities than you had before so you can then really start setting up an even higher bar on what moves forward.
Total Number of "Big Ideas"/"Proto-Concepts"/Rough-Draft Concepts – Again, shoot for at least doubling this. Take up to 10 minutes on each, pulling together a rough product description, compelling customer insight/need, benefit articulation, etc. Don’t make these too pretty too early – just get them half-baked and get a lot more of them to this stage. Let the specter of premature settling for “The Answer” (one of the top sources of Omission Risk) haunt and bother you. Try much more stuff here.
This is where spending a little more time and money pays off. Slow down here to hurry up through the rest of the NPD process. These are a few steps toward fighting Risks of Omission.
With actions like this, it’s time to frame up a more complete risk picture with language we can wrap our heads around – how about Balanced Risk, Comprehensive Risk, and Smart Risk? The Risks of Omission Debutante Ball is overdue. Get it on your calendar now.
The Risk-Opportunity Equation
Now let’s consider another way of balancing the risk discussion by bringing in the thoughts around risk – opportunity, failure, problems/challenges tackled to mitigate risk, the components of risk, etc. Let’s bring back the notion from above of Risk being indispensable and attractive. Here are a few takes on an equation tying these together to consider their impact on Risk Attractiveness:
Risk Attractiveness = Opportunity/Threat
Risk Attractiveness = Benefit/Danger
Risk Attractiveness = Possibilities/Problems
Risk Attractiveness = Our Future/Adhesion to Our Past
With this, we can be thoughtful about the risk discussion.
For example, raise the “n” of Opportunities given a good sense of Threat and see that taking on that risk becomes more compelling. Suppose that when you first see a specific product possibility you get (this admittedly oversimplified) equation:
A Possibility Value of 4 divided by Identified-Problem Value of 3 for a Risk Attractiveness score of 1.33.
Consider what it would take to drive the Possibility Value up 10% and the Identified-Problem Value down 10%, and you get a gain in Risk Attractiveness of 22%.
We’re not doing hard quant modeling here. We’re just doing some fast back-of-the-napkin cipherin’ to reduce vague fears and see if we can just get a little momentum going. We’re no longer allowing Risk to exist in a vacuum. We’re taking back its megaphone and insisting that other important players have a place in the conversation.
A wise former colleague of mine, Mike Webster, extended the NPD funnel metaphor, suggesting that by throwing more smart opportunities in at the front end of the NPD funnel, we might create more back-pressure to speed things forward through the funnel. Whether through the identification of more and better (or both more and better) ideas at the front end of innovation, the risks have to be placed in a more helpful context. The denominator (and yes, in this I keep hearing “lowest common” even though that’s not mathematically correct) doesn’t drive the entire discussion now. Raise the numerator! Assemble the case for Opportunity, Benefit, Possibilities, and Our Future so we can get to work on Threat, Danger, and Problems and be more conscious of what we choose to bring forward from Our Past.
“Choose the right problem of having too many great possibilities, not too many obstacles.”
Create a sufficiently compelling picture of What Could Be, and the work to get there starts to make some sense. Center your fate on just a few “not-bad” possibilities (cue Simon Cowell) and it’s no wonder that it becomes easier to work on them half-heartedly. Choose the right problem of having too many great possibilities, not too many obstacles.
And the great news is that, when placed in an empowering context, even the denominator downers – Threat, Danger, Problems/Obstacles – become our task list. Problems Are Jobs! Obstacles aren’t the end of the conversation – they’re just the beginning of something interesting. Some amount of danger is enlivening when handled intelligently and with a compelling vision of the right opportunity. We do get paid to do work on this stuff, right? Say “no” to more non-productive meetings so you can get on it. Fortunate are the folks who assemble the right set of interesting problems to take on.
Situate risk in the right context to drive up its attractiveness, drive down the fear of it, and drive forward more productive work. Use the numerator levers like Broad Opportunity and Specific Possibilities to place even unmovable Risk quantities in a more valuable equation for your company.
Later in Reframing Risk, Part Two, I'll take a look at:
The Logic of Risk by Development Stage
Steps Forward