In The Risk Paradox on June 13, 2010 by Jim McCormick Tagged: Airbus, EADS, Hans Peter Ring, intelligent risk-taking, managing risk, pricing risk
Airbus Focuses On Price of Risk is the lead for the June 10 Wall Street Journal story by Daniel Michaels. In the article Hans Peter Ring, the Chief Financial Officer of Airbus parent company EADS, is quoted as saying “[Airbus] must now do a better job of putting a price tag on the risks inherent in their airplane programs.”
He continues on to say, “We are in a high-tech, complex business, and there is a lot of risk in our business. That won’t change. The question is how to price risk. Obviously, in some cases we didn’t price it right.”
And finally Mr. Ring said EADS has now changed its approach toward assessing risk and is applying this approach to new programs.
It is refreshing to see an experienced business executive of a global company squarely identify the challenge – managing risk.
While senior managers have many responsibilities, ultimately they succeed or fail based on how well they take risks. If they focus on eliminating risk from their business model, returns will suffer. If they risk poorly, the company will suffer. Their core job is to take risks – well.
Companies in industries with long lead times face even greater needs to manage risk effectively. While a sophisticated and efficient consumer products company may be able to go from concept to market in less than a year, the time from concept to market in aerospace can be many years or even a decade. Unforeseeable changes during that process make managing risk well particularly daunting.
As stated in the article: The challenge is common to most businesses, but is particularly acute in aerospace, where multibillion-dollar programs take years to develop and face huge unknowns.
By correctly identifying where Airbus has done poorly in recent years, Mr. Ring is significantly increasing the chances that will change. As with so many challenges in business and life, correctly identifying the problem is the first step to success. Misidentify the problem and you’ll be chasing the wrong rabbit.
Will Mr. Ring’s vision and awareness guarantee success at Airbus? No. Will it significantly increase the chances of success? Yes.
Risk cannot be eliminated nor should that be the goal. It can be utilized and managed. That is the path to success – corporately, professionally and personally.
In The Risk Paradox on May 1, 2010 by Jim McCormick Tagged: Business Lessons from the Edge, intelligent risk-taking, management excellence, Management Excellence Awards
I recently wrote about discipline being a vital element in exploiting intelligent risk-taking. More broadly, risk has to be managed well to get the results it can provide.
Managing well involves more than just managing risk, but doing so is a critical part of management success. The athlete/executives in my recent book Business Lessons from the Edge (McGraw-Hill) offer some powerful insights into managing excellence. In large part, they revolve around acknowledging and respecting the importance of quality management.
It’s refreshing to see excellence in the art and science of managing recognized. The Australian Institute of Management is in its 20th year of awarding Management Excellence Awards.
The awards are presented annually in a variety of categories. Information on the awards is available at www.managementawards.com.au.
What a great idea. Managing well is a tremendous challenge that requires commitment, passion, resilience and insight. It is great to see successful managers receive the recognition they deserve.
In The Risk Paradox on March 25, 2010 by Jim McCormick Tagged: Business Lessons from the Edge, intelligent risk-taking, risking poorly, risking well, Western Industrial Nevada
Tomorrow I will be presenting to Western Industrial Nevada here in Reno. WIN is a organization that draws the leadership of the business community in this area to its monthly meetings. The presentation will draw from my most recent book Business Lessons from the Edge.
Sometimes we are well served to express our thoughts briefly. It forces us to boil our ideas down to very few words.
Over the years, people have asked me for the brief version of how I recommend they address risk. The answer is among the lessons I will be presenting tomorrow to WIN: risk is like fire. Simple but hopefully clear.
As with fire, we have a choice of how we approach risk. If we forgo using fire, we will have a cold home, cold showers and many cold meals. If we use fire effectively, it makes our lives much better and more comfortable. And if we use fire poorly, we can get burned – literally.
All is the same for risk. If we just try to avoid it, we pay an onerous price. Utilized well, the rewards can be great. Used poorly, risk can extract a high toll.
Risk is like fire.
In The Risk Paradox on March 9, 2010 by Jim McCormick Tagged: Business Lessons from the Edge, Contingency Thinking, human resources, intelligent risk-taking, The Power of Risk
While preparing for a webinar for human resources professionals I’ll be delivering later today, at the request of the client I was focused on ways to avoid worst-case HR scenarios.
The first method I’ll be offering for avoiding major problems are an awareness of the five primary reasons for bad outcomes as drawn from the interviews with forty athlete/executives when we were writing Business Lessons from the Edge.
The second method is a tool called Contingency Thinking, which is also from Business Lessons from the Edge. Contingency Thinking centers on thinking through in advance how you will handle a difficult situation, should it occur. You can readily see how this would be a popular strategy for successful business people who are also accomplished extreme athletes.
The third device is something that is familiar to anyone who has been following this blog, Intelligent Risk-Taking, which is from my book The Power of Risk. Intelligent Risk-Taking involves taking six specific steps that have the effect of increasing the chances of a desirable outcome and decrease the chances of an undesirable outcome for any risk or initiative.
The interesting commonality that surfaced while preparing for the webinar is that both Contingency Thinking and Intelligent Risk-Taking require discipline to be effective – the discipline to apply them faithfully.
This almost falls into the category of counter-intuitive. The common perception is that talented risk-takers are impulsive. The opposite is true. Talented risk-takers are actually methodical and disciplined.
In The Risk Paradox on February 22, 2010 by Jim McCormick Tagged: Arthur Levitt, financial markets, intelligent risk-taking, regulation, risk failure, Securities and Exchange Commission, Wall Street Journal
Risking without failing – sounds like a nice option. Where do I sign up? How would your risk profile change if you were assured you could not fail? Significantly, no doubt.
In a Wall Street Journal opinion piece dated yesterday, former Securities and Exchange Commission chairman Arthur Levitt makes a persuasive case for updating regulation of the financial markets. His core argument is “when people take risks and don’t anticipate failure, they take greater risks and the resulting failure becomes far more damaging.”
It may be the dark side of the risk-taking equation, but the option of failure is critical to risking intelligently. While intelligent risk-taking is all about risking wisely and judiciously so as to maximize the chances of an acceptable outcome, the specter of failure is the source of the discipline that fuels the process. If the option of failure is gone, why bother to be intelligent about the process?
Risk-taking failure: to be respected, acknowledged and avoided.
In The Risk Paradox on February 17, 2010 by Jim McCormick Tagged: chosen risk, intelligent risk-taking, optional risk, rewarded risks, The Power of Risk, unrewarded risks
I was recently made aware of an excellent paper on risk that includes some fresh insights. The paper is titled The Two Faces of Risk – Cultivating Risk Intelligence for Competitive Advantage, was written by Steve Wagner and Mark Layton and is available at DeloitteReviews.com. I recommend it.
One of the more thoughtful insights presented in the paper is the concept of rewarded and unrewarded risks.
Unrewarded risks are similar to the concept of chosen risks as discussed in my last post. Unrewarded risks are the risks that have to be taken to function. They are focused on “value protection, not value creation.” They are the price of being in the game, if you will. And I will add that since they are mandatory in nature that they are often not seen as taken risks.
Rewarded risks, as presented by Wagner and Layton, are risks that have the potential to create value and are likely strategic in nature. These are similar to the optional risks as presented in my last post and in my book The Power of Risk (Maxwell Press).
The power of labeling the risks an unrewarded and rewarded is profound because it speaks directly to the motivation for taking them, of necessity and by choice, respectively. The concept also plays into a point I make often being that both organizations and individuals are risking more than they often perceive. It is the price of admission to what we call business and life.
In The Risk Paradox on January 25, 2010 by Jim McCormick Tagged: business risk, Exxon, intelligent risk-taking, risk aversion, risk inclination
The headline above ran recently in the Wall Street Journal. Kudos to the headline writer. “Wagers” is exactly the right word. Investing such a massive amount is indeed a bet – a gamble.
Some would say, “How can that possibly be justified! What responsible company would put such an enormous amount of capital at risk? How irresponsible.” And anyone making that statement would be entirely wrong.
All of business is about taking and managing risks – intelligent risk-taking. Successful business people do it well. Unsuccessful business people do it poorly.
From a solo entrepreneur to a global corporation, whether they succeed or fail boils down to how well they risk their capital, resources and time in order to get a return.
Shareholders pay corporate leaders to take risks. If they become too risk averse, their returns will decline and they will be replaced. If they become risk inclined to the point that their risks yield poor results, the same outcome will occur. Intelligent risk-taking is about finding the balance point between excessive risk aversion and excessive risk inclination, then executing well.
Some people manage significant risks well. This is what inspired me to write my latest book, Business Lessons from the Edge. I was intrigued to see what forty successful business people who are also accomplished extreme athletes had to say about taking risks well. In summary, they remind us that a risk-free life does not exist on a personal level, nor in a business setting – for long.
In The Risk Paradox on January 18, 2010 by Jim McCormick Tagged: FDIC, ill-considered risk-taking, incentive compensation, intelligent risk-taking, poorly executed risk-taking, regulation, risk, risk-taking as a negative outcome
Think for a moment about this recent statement by the Chairperson of the U.S. Federal Deposit Insurance Corporation, Sheila Bair:
“A broad consensus of academic studies agrees that poorly designed compensation structures can misalign incentives and induce risk-taking.”
There are two observations this brings to mind. The first is that this conclusion seems profoundly obvious. As any accomplished manager will tell you on the subject of incentive compensation, you get what you incentivize – which is why incentive compensation plans need to be designed very thoughtfully and are often modified. That is straight forward. It seems odd that it took a number of academic studies to establish this fairly obvious conclusion.
The second observation is that risk-taking is presented in this statement as a negative outcome. One more time with fervor; risk-taking is not the problem. Poor risk-taking is the problem.
In the midst of many well-intentioned efforts to reduce the chances of future turmoil in the U.S. financial system, we need to keep foremost in our mind that risk-taking is core of our economic system. We need to be very cautious in trying to regulate the risk instinct. It has served us all well much more often than it has worked against us.
Most of all, we need to always differentiate between intelligent risk-taking and excessive, ill-considered or poorly executed risk-taking. We need to allow the former to thrive or we will all pay the price
In The Risk Paradox on January 4, 2010 by Jim McCormick Tagged: employee engagement, HR Solutions, intelligent risk-taking, Kevin Sheridan, rehiring former employees
The whole concept of intelligent risk-taking is to make risk work to your benefit. There are two sides to that equation. One is to reduce risk when possible. The other is to exploit risk when appropriate. Due to our socialization, we tend to be more comfortable reducing risk.
A news story just came out on Human Resource Executive Online that illustrates risking intelligently by reducing risks. It focuses on companies re-hiring former employees as they increase their staffing. The story reports that nine out of ten companies are open to rehiring former employees and that 18 percent of laid-off workers are rehired by their former employers.
This is an excellent strategy for reducing risk. In my most recent book Business Lessons from the Edge (McGraw-Hill 2009), we emphasize the criticality of hiring decisions and the imperative that short cuts not be taken in the hiring process. The brilliance of selectively rehiring former employees is that you know exactly what you’re getting. They have functioned in the culture and clearly illustrated their talents and limitations. A great deal of the risk that is inherent in the hiring process is eliminated.
One of the athlete/executives who contributed to Business Lessons from the Edge is employee engagement expert and HR Solutions CEO Kevin Sheridan. Among other things, HR Solutions helps companies improve employee engagement. What is one of the biggest problems they find in their client organizations? Negative impacts on employee engagement due to poor hiring decisions. Hence the value of selectively rehiring past employees – fewer hiring mistakes.
The referenced story on Human Resource Executive Online by Melvin Scales can be found at: http://www.hreonline.com/HRE/story.jsp?storyId=312960252
In The Risk Paradox on December 18, 2009 by Jim McCormick Tagged: Berkshire Hathaway, financial crisis, intelligent risk-taking, risk-taking, Warren Buffett
What do Lehman Brothers, Morgan Stanley, Bear Sterns, AIG, Wachovia and Freddie Mac all have in common? If you said they are all (or were) in the financial services industry, you would be right. If you said they all struggled or went out of business during the recent U.S. financial crisis, you would also be correct. But what you may not have known is that during the last few years, they all offered investor Warren Buffett opportunities to make significant equity or debt investments that he declined.
What’s the insight here? As a very successful investor who has been in the market for over sixty years, Berkshire Hathaway CEO Warren Buffett is clearly in a league of his own when it comes to picking winners and avoiding losers. Is he always right? Of course not. Is he right more often than not? Yes.
According to a December 12, 2009 Wall Street Journal article, when approached by all these companies, Buffett personally reviewed their financial information. Why is this important? It is a classic example of intelligent risk-taking. He did his research and drew on insights gained from past experiences.
You might say that declining every opportunity is easy and you would be right. But that is not what Buffett did. During the same time period, he took advantage of opportunities he was presented to invest in or purchase Burlington Northern Santa Fe Corporation, Goldman Sachs and General Electric.
So how does this illustrate intelligent risk-taking? In two ways. First, Buffett did significant research so he knew what he was considering. Second, he drew on past experience and hard earned insights. An example was his review of mortgage giant Freddie Mac. He quickly concluded that their problems where too severe. “I said no fast on that one,” was his comment on that opportunity.
You might be thinking that anyone with money to invest during the last few years could have done well with so many companies undervalued due to the global downturn. However, that is not the case. TPG made a disastrous $1.35 billion investment in Washington Mutual Inc. and investors in Abu Dhabi invested billions of dollars Citigroup before their share price plummeted.
Was every decision Buffett made during the financial crisis correct. No. But be being thoughtful and methodical, he appears to have risked intelligently.
Some blame risk-taking for the recent economic downturn. To them I would say there is risk-taking and intelligent risk-taking. The former gives the later an undeserved bad name.
