Successful business founders, executives, and managers employ different approaches when it comes to risk management.
Only 23% of CEOs believe they have comprehensive information about the risks in their business even if 92% of them agree that having such information is highly critical to the success of their venture.
On Shark Tank’s season 7, Robert Herjavec said that “Great entrepreneurs live in paranoia”. While I do agree with the sentiment, the risk management course I took back in the day was truly shattering, revealing stories of flood in data centers, construction work crisis in Sydney, and a number of highly unlikely events that actually happened in the real world.
This is the very reason risk management exists in the first place.
What Is Risk Management?
According to projectmanager.com:
“Project risk management is the process of identifying, analyzing and then responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Risk management isn’t reactive only; it should be part of the planning process to figure out risk that might happen in the project and how to control that risk if it in fact occurs.“
Risk management is crucial in organizations of all sizes.
Smaller companies and startups wouldn’t last long without projections and continuous pivoting. Scaling an organization is contingent on finding a successful business model and refining it until it converts really well.
Larger companies have established business processes that help them generate a positive margin over time. However, innovation is always suppressed for safety reasons, until the company turns into a Kodak or Toys “R” Us, failing to adapt to the market adjustments or overtake an emerging startup.
Here are practical risk management techniques most business people employ when it comes to handling unexpected events and reducing financial loss.
1. Running Organized Business Experiments
Experimentation is a necessity in every business. You either scale and improve or competition will catch up and acquire a portion of your share.
And risk management is about organizing test activities while considering the risk-reward factor internally.
Experimentation frameworks are utilized in organizations in different forms. For instance, the marketing department may run one experiment every single month, after setting the right KPIs and allocating a limited budget on testing.
Using statistics would be a good way to showcase some patterns and the likelihood of something impossible to happen.
However, statistics could be deceiving. For instance, 100% of the people who pass away have been drinking water throughout their lifetime. Does that make water poisonous?
Spend some time on industry research and provide objective and arguable data. Understand the implications of every decision or the risks of your venture.
2. Learning From Mistakes
One important aspect of risk management is understanding that tests are a part of the process. Some are brilliant but most are either negligible or completely unsuccessful.
Failure in business is something that happens on a daily basis.
- You may lose a client, an important partner, or a key employee.
- A system may crash.
- Some data may be lost.
- An email may hit the “spam” folder.
- A campaign may contain typos.
- A product launch may lead to a website overload due to insufficient resources.
Let alone all of the small, annoying discrepancies lurking through your day.
Once you hit the rock bottom, you have to reevaluate your current process and refine it with a safety net in place.
Reducing the failure ratio is definitely important but in the meantime, learning the right lessons will strengthen your business and provide you with enough data to navigate your course in the right direction.
3. Conducting Internal Risk Assessments
Risk management is employed in numerous fields, including government and finances.
Security is a good example here. Penetration testing companies partner up with larger organizations, ensuring that digital systems are safe and sound. These “white-hat” hacking organizations mimic malicious users who try to steal private data or harm the system in any way possible.
Chaos engineering was heavily adopted by Netflix in 2011, building a toolkit that kills random instances of different services they use only to prove that a hardware malfunction or a software failure won’t impact the distributed nature of the platform.
4. Validating Business Theories
It is important to validate a business theory with users or a survey group to test a concept without spending months (or even years) on building a complex platform that nobody needs.
Validating a business theory is a common principle of lean startups introduced by Eric Ries and even smaller experiments are now possible thanks to creative marketing and product management techniques used by experienced entrepreneurs and executives running successful businesses.
Study the rest of the process. You won’t magically become an expert overnight. However, you will come to learn how to validate as you go forward scaling your business.
The better you are at putting the pieces together, the more adequate your ideas will become.
Practice makes perfect. Follow case studies, explore success stories by people in business and keep mapping the whole puzzle.
5. Building Minimum Viable Products
A continuation of the previous principle, MVPs are commonly used across the board.
The concept of an MVP is simple. Build a simplistic, minimal version of a software product that focuses solely on the key selling feature you plan to sell later.
Popular production systems are really complex. Tens of thousands of engineers work for companies like Google and Facebook for a limited set of online services.
But the core feature set of every platform is minimal.
- A Google Calendar should primarily allow you to add events to your calendar. All of the natural language processing on mobile or the complex user roles can be built later on.
- Facebook was a limited access platform to a single university, letting people connect with each other with a simple profile page for everyone. It took traction and multiple iterations to add everything else we know on the platform now, from galleries to events to groups and whatnot. The “Relationship” status itself was sparked from an outdoor conversation once the product was already live and really active.
- Instagram’s distributed systems, compression mechanisms, and advanced search are massively complex and often serve as learning guides to other distributed engineers and software architects. But hundreds if not thousands of engineers have built prototypes of Instagram-alike tools within a day, simply because the core feature of the network is “Post a photo and connect with users” which is really simple if you discard the scale considerations.
Organizing product development and even ideation around minimum viable products is a practical way to navigate the risk management space and innovate without jeopardizing the future of your business (or drifting too far from the original scope).
6. Maintaining a Safety Buffer
One important aspect of risk management is that most unexpected events are, well, unexpected.
From lawsuits to IRS regulations to new laws contradicting with a key feature, maintaining safety buffer for unexpected surprises (including late payments) is a core component of running a healthy business.
This is why all lasting companies operate under predictable margins, utilize different financial mechanisms for loans, often take funding “just in case” or to invest in a new area that is less certain than the core business.
Operating at “break-even” (or worse) is not sustainable in the long run.
7. Analyzing data
Successful businesses are data-driven.
You cannot sustainably run a business without collecting enough data for business insights. A core principle of risk management is operating with data and analyzing trends, thus building upon proven concepts.
I’m not referring to privacy violations or selling data. But even a simple Google Analytics dashboard can be instrumental to an experienced analyst.
Most businesses employ a large number of tools to run their business successfully (and predictably). From analytics to marketing automation to CRMs and ERPs, every system is designed to generate reports, run predictions, and report when something isn’t going in the right direction.
8. Calculating Risk and Reward
There’s a reason why so many startups emerge that fill in a gap between customer expectations and what established enterprises offer in their products.
Adding a simple formula to Microsoft Excel requires a complex process with notable stakeholders in the organization. Over 30 million users operate with the popular spreadsheet tool, and adding a new feature will impact each and every one of them.
Depending on the data usage, customer requests, feedback loops, beta testing, forum conversations and hundreds of other factors, product managers and engineers work closely to provide the best possible experience without cluttering the user experience (and its corresponding interface).
There are multiple WordPress plugins with over a million active installations. This proves a serious adoption, but still represents a small percentage of the global user base. Deciding to incorporate a similar feature in the core product may impact the ecosystem in a negative way, which is why the plugin marketplace is healthy and going strong without jeopardizing the product.
Entrepreneurs evaluate a lucrative idea in multiple ways, often considering factors beyond what the public understands. Antitrust laws prevent companies from acquiring large competitors. Legal or financial regulations can get in the way on an international level. Simply acquiring a product may fail without the right network, PR channels, an alignment with the core customer audience, etc.
9. Making Contingency Plans
Successful entrepreneurs and executives plan several steps ahead.
Failing experiments may lead to lawsuits or losing a major portion of the customer base. Successful companies navigate risk and run similar experiments with alternative plans in place:
- Deploying a feature to a limited portion of users (0.1%) and testing reactions before going global
- Implementing quick revert policies in case something goes south immediately
- Launching separate products independently, ready to merge them into a core product if needed
- Planning to sell a product to a specific company if the experiment isn’t aligned with the core business goals
- Taking external investment for a specific division or a branch of a company
Different plans are outlined to reduce the risk of failing big and impacting the business a lot worse than initially anticipated.
10. Using Communication Best Practices
Often neglected, but lack of communication can be a true show-stopper to running a successful business.
- The Net Promoter Score is broadly used by businesses to gauge customer engagement and satisfaction.
- Feedback review cycles are used internally to keep everyone on the same page and handle internal problems before they escalate
- Onboarding processes are designed to quickly onboard new staff in case of resignations
- Customer support surveys are for gauging support quality
- Internal workshops or board meetings are formed to keep the team strong and aligned around the same goals
There are communication techniques and strategies you can employ to ensure efficient communication and smooth-sailing business processes.
Avoiding Risks at Scale
Risk management is one of the key challenges for every single business out there.
Broadly speaking, risk management is a complex set of processes that are often unique to every organization. There are best practices that you can learn at management schools. But, everything is either reactionary (a failure turning into a process) or creative (executives projecting possible causes and preparing as they could).
You may also benefit from your competitors in the market by reverse-engineering their best practices.
Refining your business model after what failed or worked best among your competitors can serve as your shortcut to running a successful business.
However, finding a reliable consultant to work with from the beginning is what can help you tremendously in assessing and managing risks.
Make sure that you start with a mentor or a business advisor as early as possible, so you don’t make too many wrong choices that would delay your growth or endanger your company’s future.
And if in doubt, enroll in my free business accelerator training. Expand your business acumen across multiple areas of business strategy, marketing, sales, tech, and planning.
With the right preparation in place, you will be ready to undertake your next risky endeavor and turn the threats into strengths.