Doing business is risky – particularly these days.
When my colleagues and I are out talking with executives and business leaders, we are increasingly finding that this group seems to be more concerned than usual about the topic of risk. More specifically, they are seeking more information about both the existing and emerging business risks they should be considering as a part of doing business; they want to understand the regulatory requirements for risk management and mitigation; and, if possible, they are looking for guidance on the best strategies for minimizing or, ideally, eliminating business risk.
Interestingly, we are seeing more and more CEO’s participating in the Board Director certification programs offered by the various business schools. Many of us speculate that this participation is driven by the executives’ thirst for knowledge about the nature of business risk and the current compliance requirements from the point of view of the Board Directors they will be dealing with. I wonder though if this uptick in interest and activity is actually more fundamental than that.
In an era of ongoing disruption and uncertainty in the external business environment, I think that executives and business leaders are looking for a source of sound information about, and effective strategies for, responding to and managing emerging business risks. What executives are looking for is help leading and growing their business in a dynamic, ever-changing operating environment.
What I really think is that executives need a different approach to business (and risk) management with new rules of engagement.
First, let’s look back into the not so distant past to understand where executives are coming from. In the “old days”, the external environment didn’t change that much and when it did change, the changes didn’t come at you quite so quickly and furiously. While many companies participated in industries and markets where change could be characterized as an evolution (long and slow over time) rather than a big bang, some did face a more dynamic market. However, even in those industries, the 3 – 5 year plan was still reasonable because the rate of change wasn’t that fast. So the rate of change executives had to deal with was manageable AND, importantly, the changes were more predictable. The business environment (including customer and competitor behavior) was easier to read and had some predictability to it. In addition, the economic situation just seemed a bit more stable. Essentially, business leaders had a pretty good handle on how their world worked and what the possibilities for change were.
In this type of environment, scenario planning was king. Because it was fairly easy to predict the potential changes in the business environment, analysts were able to create all types of future business scenarios and the potential responsive actions all mapped out with the associated financials laid out for business executives to consider and choose from. Managing change became kind of easy. When a change happened, all business leaders had to do was identify the scenario, consult the scenario plan options book, select the best response with the best financial outcomes, and implement.
The result of this situation was that organizations didn’t need to develop their capability and capacity to read and respond to a changing business environment. Because change didn’t happen that often and it was generally predictable, it didn’t take a lot of resources to deal with change. Not many people in the organization needed to have the skills to identify and respond to change. And the skills required to respond effectively to change were very specific – more related to having a deep understanding of the market and excelling at analyzing options based on a predictable model.
Now, fast forward to today’s business environment - it’s volatile and dynamic. Things change at a lightening fast pace in unpredictable and often breathtaking ways. Your customers' expectations constantly change and there’s a new competitor ready to respond. No one plays by the “rules” anymore. Heck – the rules have gone out the window and everyone seems to make new rules up as they go along. Economic decisions in one part of the globe can impact business operations in your world. A business decision made by one person in some company you’ve never have heard of or had dealings with can cripple or take out your company before you know it – and you didn’t even see it coming. When the “experts” can’t even predict what’s going to happen in the external environment next week, the old way of dealing with change, and the associated business risks, isn’t effective any more.
In fact, it’s a useless waste of time and mind capital to approach things in the old way with old tools and approaches. More importantly, the majority of companies have been caught flat footed with skills and capabilities that don’t help much in the current “new normal”.
In the face of these new pressures, many companies have responded by getting defensive in their approach to managing change and risk. Many are trying to eliminate the risks that they can through controls and other mandated risk management approaches. They are studying past experiences and are using that information to determine, understand, and respond to the “standard” risks in their environment. The only problem is that looking at the past doesn’t help you predict and deal with the unknown, non-standard event that is lurking in the near future. Taking a reactive approach like this is also a problem. However, choosing to be defensive in your response to business risk is the biggest problem in my mind. This is because it’s very difficult to grow your business when your focus is on being defensive against the potential risks that exist out there.
The better approach, that is more compatible with business growth, is accepting and leaning into change and the perceived associated risks.
What I mean by this is that companies need to build the capacity and capability to: (1) pro-actively identify changes occurring in the local, national, and global operating environment, (2) assess the relevance and potential impact of those changes on the business and opportunities for business growth, (3) generate creative solutions/responses and make quick decisions about what to do next, (4) implement and re-align the organization and business activities and priorities quickly, and (5) get ready to change again almost immediately.
Operating in this way requires a different skill set that is distributed more broadly across the organization than ever before; new processes for surveying the environment and engaging people in the required analytical, solution creation, and decision-making conversations; and mechanisms for collecting external AND internal information and insights proactively and sharing new/changed business directions across and up and down the organization quickly and efficiently.
Some of the new organizational skills required for this new approach to change and risk include flexibility and adaptiveness, openness and curiosity about the marketplace (and the business environment in general), the ability to assess the impact of trends in the environment against business imperatives (and determine whether expected changes are even important in that context), and creative thinking and solution generation. Skills in effective communication, dialogue, and conversation are also important for successfully leaning into risk.
Most importantly, leaning into risk requires a completely different organizational mindset and culture. One where openness, flexibility, creative thinking, pro-activity/pro-active action, agility, a level of comfort with change and ambiguity, smart risk taking, experimentation, and sharing and collaboration are fundamental values. It also requires an operating environment that is built on high levels of trust and security, and supports employees in living these values and exercising new skills and capabilities every day.
So, while successfully leaning into risk requires the implementation of new processes and infrastructure, and the development of new and broader employee skills and capabilities, these investments will not translate into success unless you also transform your company’s mindset and culture. Quite simply, the classic command and control style of doing business and approaching change and business risk is not conducive to adopting a “leaning into risk” approach.
Your business environment is changing and the associated changes can result in higher levels of risk. The old approach to managing change and business risk just doesn’t work any more. In fact, maintaining approaches that may have been successful in the past carries an unacceptable level of risk - most business leaders recognize this. The dilemma is what are the alternatives? While taking a defensive position, that seeks to control risk, is one alternative, the impact on your company’s prospects for business growth will probably be too limiting.
I believe that the better approach is to accept that the business environment is volatile and unpredictable and then lean into the perceived risk as an organization by transforming into an organization that takes a pro-active and agile approach to identifying, sizing up, and responding to changes that could have meaning for business success and growth moving forward.
Leaning into risk is THE smart approach to moving forward in the “new normal” business environment but it isn’t just a cosmetic change – you’ve got to change from the foundation up. If you are willing to accept this challenge, I encourage you to begin making the change today – the future success of your business is probably depending on it.