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“…small wages; bitter cold; long months of complete darkness; constant danger; safe return doubtful; honor & recognition in case of success” (London Times 1907). This was the ad placed by Sir Ernest Shackleford, the explorer who was searching for people to accompany him on the expedition to the South Pole.
He summarizes the basic elements of a business (ad) venture nicely: an endeavour that is challenging, the outcome is uncertain, great rewards are possible but not guaranteed, and the costs can be high with risk, hard work...and sometimes danger.
So the ultimate business question is, "How do we maximize our rewards (desired business outcomes) while improving the probability we will be around (survive) to enjoy the benefits?" There are several ways. One is to manage the risks, uncertainties, and dangers...risk management.
Risk management has been around in some form for thousands of years. It hasn't changed much over the last several decades, but recently it has more prominence in organizations throughout the private and public sectors. Risk management is a key element in the way organizations make important decisions; many have a major impact on you and me. It is time we start taking a more critical view of risk management and seriously reassess the methods.
The recent credit crisis, terrorism, Hurricane Sandy, Hurricane Katrina, hackers, outsourcing overseas, investment irregularities, and air travel disasters all have something in common: the methods used to assess risks are often flawed. There are some serious problems with our risk management methods, especially those revolving around risk analysis.
This presents an interesting dilemma. If risks are not properly evaluated then the risk management itself is a risk. Ineffective risk management methods are frequently described as best practices. And the problems are rarely apparent until it’s too late.
Studies show that risk management is rarley based on actual measurements and it is uncommon for methods to be measured and validated. Also, many methods comprise components that are known not to work. While there are a variety schemes to assess risk, few have any real basis in statistics or decision science. In his books “Fooled by Randomness” and “The Black Swan”, Nassim Taleb highlights these problems but doesn't provide much practical guidance for risk managers.
So what are risk managers to do? It is time to step back and reevaluate the situation. It is time to take a critical view of the methods we have accepted as best practice and determine if they really lead to better decision making in our organizations. This means we need to find better ways to measure and analyze the effectiveness of risk management methods. We can begin by frequently asking three powerful questions, about our risk management methods:
1) Does the method really work?
2) How would you know if it didn't work?
3) What are the consequences if it didn't work?
In cases where studies have been conducted and data is available, the answers are not good. We will describe these problems and discuss solutions in future blogs.
Like Shackledord's South Pole expedition, business is an adventure. You only have two real ways to approach any adventure. One is to merely survive by avoiding all the risks and just getting by, or you engage in the hard work and embrace the uncertainties, risks, and dangers completely…near the edge where the real rewards unfold. Risk management is an essential tool for survival. Make sure you know you have one that works