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Giddy’up

Managing risk requires an ability to analyze the pros and cons of each decision from an objective place. Here are some tips on how to do it.

03 April 2009

As I said yesterday, the challenge of business leadership is often the demand to choose between very difficult options and managing risks. I promised a second example from my experience with a slightly different angle.

The example that comes to mind is a company that was doing a large website launch. This website required shopping carts, security, a catalog of products, services, and informational content (no GoDaddy template for them . . . ). The company had only recently implemented operations that would enable them to be on the internet, which caused them to be behind the curve in terms of website marketing. Of course, this is one of the oldest stories in the book. Company finds itself behind the 8-ball on a product or service, company panics and wants to figure out how to make up for lost time, company then has to choose between A) launch quickly with a substandard offering, or B) launch later with a brand befitting option.

In this example the owner wanted to launch fast, anything, even just a portion of the product offering, just to get out there and start getting orders on the web. He wasn't interested in managing risk. He wanted to go after immediate gratification and short-term gain. The potential downside was that the customers who depended on the company for a variety of services and products would be completely dissatisfied with the limited appeal of the website, leading to rushing the additional development to respond to customer activism.

The alternative was to stay off the net while completing the development without the additional customer dissatisfaction and pressure, but potentially losing out on lower-cost sales that could have been realized in the interim, and losing some respect due to the perception that the company was falling behind its competitors in web marketing.

Once again, deciding which option is “right” is very difficult. Both have significant upsides and downsides. I can share how I analyzed the situation, but as with all business-case scenarios, the devil is in the details and in the quality of the analysis – so the suggestions I made on this scenario may not apply to something that on the surface looks remarkably similar. 

If a company in this position was known for highly unique, hard-to-compete-against products, and could put those products on the internet quickly, that may represent a good argument for rushing the web services. If that company was also unable to hire sales staff and desperately needed to offload orders to the web to offset customer dissatisfaction related to long wait times or poor sales/service support, that may also have made a rushed web presence more desirable than the existing alternative. So the benefits of easy access to superior/unique products and a better sales experience on those products would outweigh the downside of a partial response to overall customer requirements.

On the other hand, if a company in this position was known for offering a broad range of easily competed against products, if current sales and service performance was satisfactory or highly satisfactory, and if they had a brand which needed to be protected against erosion, they would be better off waiting to release a more desirable and functional website – even if it meant staying “behind” the rest of their competitors for a bit longer than they desired. 

Obviously, neither option is perfect. And that is my point. Business owners often feel completely thwarted when they can’t have it all. Why is that? In our personal lives we are prepared to make compromises and sacrifices (or we don’t have healthy relationships), in our social life we make concessions to accommodate many different people and situations. But in business we don’t like the idea that sometimes we must make difficult choices (my favorite is the expectation that a computer can do anything, so why is the IT department intentionally thwarting them? Perhaps more on that another day).

After yesterday’s blog I heard from a customer who was faced with making a terribly difficult choice between two options. In this case, she had two excellent opportunities but was only able to pursue one. She had an inkling of how she wanted to proceed, but was nervous about making the final commitment – so nervous that she had simply avoided making a decision for nearly four weeks.

We dissected her business similarly to what I described above. We considered:

  • Business strategy
  • Business brand (i.e., what customers expect from the business)
  • Current operational capabilities and weaknesses
  • Cash flow
  • Core business problems that must be solved

We looked at the upsides and downsides of each option compared to those business considerations, and rated each projection (negative and positive) on a “likelihood of happening” scale. The decision that emerged as superior (but still not a sure bet) was the one she was instinctually prepared to make.

In some cases, the decision one wants to make and the decision that one should make are different. When I encounter a customer in that state of mind I always look for an underlying motivation. It usually comes back to three things: ego (I have some aspect of my identity wrapped up in this option – even if it’s not the best option), fear (I fear the potential downside of one option much more than I fear the potential downside of the other – even though the one I fear the most has the least likelihood of occurring), and short-sightedness (I want the option that will give me the greatest short-term gratification).

Of course, sometimes demonstrating even a slight superiority of one option over another is not possible. Then we’re back to the conclusion of yesterday’s column. Who the hell knows. Have the guts to make a decision, take the reins, and ride. And what if you fail? Well, if you literally bet the bank, you could be out of business. I don’t recommend taking risks like that (though sometimes they seem inevitable – more on that in a moment).

Warren Buffet offers investing advice that can provide insight for those unsure how to avoid taking business-killing risks. He says to never risk anything you do have and do need for something you don’t have and don’t need. The more you think about this statement, the more sense it makes. Even if your investment style is considerably more open to risk, this guidance is important.

Now, what about when you absolutely have to bet the bank? This is the favorite theoretical curve ball that people arguing about this topic love to throw. So let’s address it. 

The only time you absolutely have to bet the bank occurs when your back is against the wall, and you’re going to fail if you don’t. Hmm. I guess that means you’ve bet the bank already, doesn’t it. In that case . . . you’ve got it . . . break it down. Compare the relative risks of not acting to the relative risks of your alternative option or options. Consider your strategy, brand, operational capabilities, and cash flow. Then make a decision, take the reins, and ride. Business case studies in every industry will demonstrate the following truth: Not making a decision – even when your back is up against the wall – is the surest way to bring your company down. 

© 2009. Andrea M. Hill

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