How to manage risk (but don’t stifle innovation)

January 11, 2008 at 9:46 am | In Business | Leave a Comment
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My years of working in large mining organisations allowed me to see great risk management techniques and tools that can be applied to any size business.

Mining is a capital intensive industry and a lot of money is spent to reduce the risk of making wrong decisions on investments and to reduce the risk of investments not delivering what was promised to shareholders. The same principle applies to any sized business. Every business wants to make the right investment decision and increase the likelihood of the business of delivering what is expected. When evaluating a new business good risk management tools and techniques can assist the decision making process and increase the likelihood of business success.

Before outlining some of the tools and techniques I will outline a principle that my Engineer friends tell me is crucial. The principle is that the ability to influence a project or business or contract negotiation is at it’s greatest during the feasibility stage. That is it is during the time when you are analysing an opportunity that you have the greatest power in influencing the outcome. Once a contract has commenced or a new business has started it gets costly to make significant changes. This suggests that the most efficient time to do risk management is during the feasibility stage.

For the purposes of risk management, risk is defined as an event that could prevent you from achieving your objective.

The risk management process for evaluating a new business opportunity is:

1. Identify Risks

2. Analyse Risks

3. Evaluate Risks

4. Treat Risks

The type of risks will depend on the business being evaluated but once identified a good tool to assist with the analysis of the risk is the likelihood and consequence matrix. The matrix is

Likelihood

Consequence

1 Insignificant

2 Minor

3 Moderate

4 Major

5 Catastrophic

5 Certain

4 Likely

3 Possible

2 Unlikely

1 Rare

Each risk event is analysed as to its likelihood of occurring (from certain to rare) and the consequence of it occurring (from catastrophic to insignificant). The event is then categorised in the appropriate section of the matrix.

The definition of the consequence categories will depend on the business opportunity and whether a dollar impact can be measured. For example it may not be possible or appropriate to have a dollar impact of a safety or environmental risk event occurring.

One way of defining the likelihood categories is to analyse how often the event is likely to occur. For example if an event occurs daily it would be classified as certain and if an event has never happened but is possible it would be classified as rare.

The risks have now been analyzed and, to an extent, evaluated by using the likelihood and consequence tool. To complete the evaluation of the risk events a decision needs to be made on whether the risk is acceptable or not. You may decide that all risks that fall within the yellow and green sections of the matrix are acceptable but those in the red section are not.

Finally for those risk events that are not acceptable a decision needs to be made on how to treat the risk. The three main treatments are to:

1. Reduce the likelihood

2. Reduce the consequence

3. Transfer the risk via insurance

If none of these treatments are possible or are too costly to implement you may decide not to proceed with the business opportunity.

Managing and mitigating risks will increase the likelihood of business success.

How to trust yourself

January 11, 2008 at 9:45 am | In Life | 1 Comment
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“Trust yourself. Create the kind of self that you will be happy to live with all your life. Make the most of yourself by fanning the tiny, inner sparks of possibility into flames of achievement.” – Golda Meir

Is there a “right” way to live and how do we know when we are successful? Is it based on our personal definition of success or our perception of our local society’s definition? In society there is a definition of success that, in the past, I have grasped to supplement my own limited ideas about what I wanted to do. The main components of this definition for me were:

ü Doing well at school (i.e. Staying to year 12 and getting high marks)

ü Going to university

ü Getting a stable job (preferably high paying)

ü Moving up the corporate ladder at a rapid pace

How much better would it have been if I was taught as a kid what I individually had to offer the world and given some guidelines on how to make that happen?

There are also plenty of sources to help us determine the “right” way to live. The major ones are advertising, the general media and our peer group. This advice can tell us the right:

ü Clothes to wear

ü School to send the kids

ü Location to live

ü Holiday locations

The major issues with accepting these definitions of “success” and “right” is they are not necessarily our own. It gets really strange when we start to get distressed and depressed about not achieving this “success” or being able to afford to live the “right” way. The depression and distress are strange because they are driven by things that we may not really want anyway.

The World Health Organisation figures on suicide rates show that this is not only sad but also tragic. Australian men suicide rates are the 26th highest in a ranking of 100 countries. This is despite Australia being the 25th richest nation of 206 as measured by the World Bank.

Another potential factor driving self doubt is our conditioning. Susan Jeffers in her book “Feel the Fear…& Do it Anyway” states that we are more likely to ask our kids to “Be Careful” rather than “Take some risks today”. She suggest that the “Be careful” carries a double message. The messages are that the world is dangerous and that you will not be able to cope with it.

This combination of not being taught what we individually have to offer the world (and not being able to define what success means personally) and believing that we will not be able to handle it even if we did know is lethal.

I propose two steps to start believing in you and trusting yourself.

1. Look for the opportunities in “failures” and “wrongs” and use them as a catalyst to change. I was once accused of being overly optimistic (it helps as a Richmond Tigers supporter). For example a failed exam is a catalyst to discovering a new study method or possibly a new course and

2. Recognise that your current life is a sum of your past actions and experiences. If this is accepted the natural is that the future is also going to be a result of your actions and experiences and you have the power to define what those future actions and experiences will be.

Follow the advice of Golda Meir in the opening quote and fan the tiny, inner sparks of possibility into flames of achievement.

“You must do the thing that you think you cannot do!” – Eleanor Roosevelt

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