Michael D. Moberly November 12, 2012
In my corner of the intangible asset business world, it’s quite routine to engage highly experienced, intelligent, and successful business owners and management teams who cavalierly and somewhat patronizingly, express the view that it’s impossible and far too costly to eliminate (prevent) all business risk, that is if of one wants to remain in business.
Often embedded in this perspective, is the misperception that preventing business risks equates with being overly cautious and risk averse, which some argue is tantamount to a ‘fortress mentality’ which substantially dampens any sense of receptivity to new or ‘edgy’ business endeavors. Too, a frequent refrain is that business risks are simply too prevalent, inescapable, and asymmetric to avoid in every business dealing, absent literally building a risk prevention – adverse ‘moat’ around one’s business.
My response to such consistent expressions from management teams, c-suites, and boards is to respectfully, but objectively, introduce the notion that a business, with a substantive risk prevention-mitigation pillar is not wholly impossible, nor will it be perceived as antagonistic or incompatible to competitive and welcoming business transactions and configurations.
Some management teams, et al, quite incorrectly interpret, in my view, that the resources necessary for creating a ‘risk moderated’ business (transaction) environment are neither practical nor feasible and, if done, would inevitably expedite business failure because it would hamper and impede business’s engaging their strongest, most valuable, and charismatic assets, i.e., intangible assets such as intellectual, relationship, and structural capital.
I’m confident few, if any readers of this blog would agree to such a restrictive business environment.
My experience and I suspect that of many readers of this blog as well, recognize that many management team’s ‘tolerance for risk’…
- varies considerably, even within the same sector…
- is generally subjective, often influenced by anecdotal evidence, the products and/or services a company produces, and/or evolve from management team, c-suite, and board perceptions – assumptions about (certain) business risks fro, prior experiences, and…
- locations of, and interactions with a company’s primary markets, i.e., countries, customers/clients, supply chains, and a host of other relevant stakeholders.
Let’s not overlook or forget the economic fact that 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in – evolve directly from intangible assets today, which in most instances, a business/company has developed internally (i.e., through prudent use of its intellectual, structural, and relationship capital) or acquired and integrated externally. So, in essence, when we address the subject of a business’ tolerance for risk, in my view, we’re really talking about how tolerant a company is relative to risks to its intangible assets!
According to Dr. Marc Siegel, a globally respected specialist in organizational resilience, there are ways to measure and assess a company’s tolerance for risk which I have added to throughout this post. But, as readers know, sometimes all too well, measuring and assessing a company’s tolerance for risk is frequently dependent on the experiences, anecdotes, and largely subjective assessments emanating through the lens of management teams, c-suites and boards, i.e., their…
- experience and confidence level acquired through their familiarity with and the significance they attach to known, current, and over-the-horizon risks…
- ability to following a risk event through effective risk management, prevention, and/or mitigation initiatives…
- organizational resilienceto sustain a robust business (transaction) environment following a significant (business) risk or disruption and consistently utilize-leverage intangible assets to achieve strong growth, profitability, and sustainability trends, i.e., policies, procedures, and practices in place…
a. to mitigate-minimize the criticality posed by certain risks (reputation or otherwise) and,
b. that would allow a business to return to a state of operational and financial and revenue normalcy in a reasonable time frame because it could maneuver and apply mitigation measures to an array of risks to elevate the probability that a previously agreed upon (accepted) level of business operational continuity is sustainable should a particular risk actually materialize.
4. recognition of core/key intangible assets, e.g., minimizing intangibles’ fragility, and vulnerability to loss and/or compromise, while stabilizing their value, competitive advantage-reputation delivery, revenue streams, and sustaining their control, use, and ownership throughout the risk event, particularly that which is embedded in intellectual, structural, and relationship capital.
Another important and relevant inquiry I routinely pose to management teams, is how they achieved consensus regarding the acceptance and/or toleration of a certain level of risk and/or operational continuity relative to specific transactions, new ventures, strategic alliances, or other business initiatives in which risks are present and/or occur? Interestingly, their frequent answer is again, (a.) certain levels and/or types of risk are inherent features of doing business, and/or (b.) all successful business persons are inherently risk takers.
I examine responses such as to why management teams, boards, and c-suites may be inclined to tolerate certain (business) risks and not others? I find it’s usually because the…
- risk is frequently subjectively assessed and/or measured to be relatively low in terms of vulnerability and probability, or the
- perceived cost of risk mitigation exceeds potential (projected) benefits, making elevated tolerance for risk appear to be the more prudent course of action…
However, experience suggests, absent experienced and expert assessments of risks/threats, management teams and c-suites will characterize certain types/categories of business risk…
- as being low in priority to receive prevention/mitigation resources in terms of probability
- as being low insofar as occurrence and asset vulnerability to loss, value reduction, and/or compromise, but
- high in criticality (adverse economic, competitive advantage effects to the company) should certain risks materialize.
But, the reality is today that, many types/categories of business risks are asymmetric, i.e., their magnitude, frequency, criticality, and speed of cascading throughout a business, should they materialize is substantial.
Therefore, for many, if not most companies, projected business opportunities come already affixed with certain levels of risk. The objective is to mitigate risk exposures to the key-core intangible assets in play to point that management teams can proceed confidently with a particular transaction or initiative while assuming a portion of the risk with confidence and objectivity it will not spillover, cascade, or adversely affect the projected economics or competitive advantages.
This post was inspired by the work of Dr. Marc Siegel and his strong expertise in the field of organizational resilience on behalf of ASIS International.
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