We All Do Risk Assessments
We All Do Risk Assessments
Richard H. (Dick) Kosa
Decision making is a crucial element of any business. It is a key point in the difference between success and failure. So how do we improve the success rate of our decision making? One way to do this is by improving and/or expanding our ability to do risk assessments. We all do risk assessments. This is a skill that we learned as children; to size up a situation and make a choice.
If you have, or know someone who has, small children, I am certain that you can relate to this story or one very similar to it.
Mother walked into the kitchen one day to find four year old Little Johnny standing on a chair with a cookie from the cookie jar. “Put that cookie back!” Mother says. Johnny froze, didn’t move a muscle, and stared at his Mother. Mother says in her stern voice, “Put that cookie back or you will get a spanking.” She looks into her son’s eyes and she can see the wheels in Johnny’s brain just a churning. What could he be thinking?
It is simple. Johnny is doing a risk assessment. He sizes up the situation. “If I eat this cookie, I may get a spanking” he thinks. Johnny has defined the risk event. “But Mother is always threatening to spank me and she only actually does it about half of the time” thinks Johnny. He has assessed the frequency or probability of the event occurring. He continues to think “And if she does spank me, it will only hurt for a little while. She won’t hurt me badly. She loves me.” Now Johnny has assessed the severity of the risk occurrence and is ready to complete his analysis.
Johnny looks at the cookie; then looks at his Mother; and then looks at the cookie. And in a flash Johnny crams the cookie into his mouth and gobbles it down. Has this ever happened to you? Little Johnny sized up the risk against the reward and determined that the cookie was worth it. After all, it was a chocolate chip.
Even as children we learn to do risk assessments and these lessons stick with us throughout our lives and into our businesses; even when we don’t think about it. It’s just as we get older the risks and the opportunities become bigger, more complex, and the consequences more severe. Thus they require a more formalized and a deeper thought process that can be communicated, tracked, and measured.
Let’s fast forward thirty years. Little Johnny is now Big John and the leader of his own, highly successful business. He is known in the business community for his ability to make good, sound, and timely decisions. He seems to always know when to move into a situation and when to withdraw. His peers envy his skill at avoiding the bad deals.
One morning while having coffee, John suddenly realized that he had not thought about one of the biggest risks facing his business. His company has grown quickly from John himself to twenty employees and they are scattered across a geographic area such that John cannot see everyone everyday; or at times, they do not even have the time to talk. But each one of John’s employees in out there in the market every day talking with clients and potential clients and making decisions.
John thinks to himself “How do I know that they are making good decisions? How do I know that they are analyzing the risk and only selecting the good opportunities? How do I know that they are making decisions as I would make them? What do I do when we grow to 200 employees? Or 2,000 employees? How do I keep everyone together and making decisions as I would?”
Being the good risk analyst that he is, John makes a three point action plan. First, I must document the thinking process that I use when I make my decisions. Second, I must teach my employees how to use the decision making process that I have written. Third, I must follow up with my employees to insure that they understand and are using the process and help them become consistently successful at decision making. “If I don’t have to back check or fix all of the decisions, I will have more time to grow my business even bigger” thinks Big John. This could be a great opportunity in addition to solving a big risk.
As you can see we all make risk assessments; sometimes informally; sometimes sub-consciously; and sometimes in an open, easy to communicate, and teach fashion. How do you do your risk assessments?