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Planning

Insight: The Business of Risk

by Randall Craig on March 7, 2017

Filed in: Blog, Business Development, Make It Happen Tipsheet, Risk

Tagged as: , , ,

What if something goes wrong?

Most people are not keen on taking risks. A small faction of people are definitely risk–takers. Whether you are one or the other, the decisions you make often boil down to one ratio: The Risk-return equation.

We spend a lot of time on Return, and a lot of time on ROI, but surprisingly little on Risk – which is the main topic of this segment.

Probably the first thing we should do is define risk. Here’s what the dictionary says: Exposure to the chance of injury or loss. From my perspective, this is a bit narrow. I’d like to widen it to include business risks, financial risks, project, personal – just about everything. And, I’d also like to look at the source of risks, but more on this later.

Let’s start in the world of investments, and examine a concept called “variability of returns”. This concept refers to the fact that most investments oscillate up and down in value. The more frequent the variability, and the more dramatic the swings up or down, the greater the risk that you’ll be exposed to loss. Clearly, the fewer the swings, the “less” risky the investment.

The challenge for investors, is to determine the “risk profile” (of their client?), and only invest securities that match. So if you are risk averse, you might purchase a Guaranteed Investment Certificate, which has zero variability. If you can handle risk, you might purchase a number of stocks or mutual funds. Of course, when you do buy the stocks, you’ll want to purchase when their value is at the lowest point of the cycle, and sell when they’re at the peak of the cycle.

Another way to mitigate this type of risk is to hold the security for a longer term: 10-15-20 years. Over time, the shorter-term variability means less and less, especially relative to the longer-term growth of the stock.

Finally, a third strategy to reduce risk is to hold a number of stocks (statisticians will tell you 30+ is the magic number) as this diversification means that any losses with one stock will be cancelled out with the gains in another. With variability cancelled out, then the portfolio is left only with the LT gains.

Let’s go back to the Guaranteed Investment Certificate – seems like it’s zero-risk? Think again: the GIC has huge inflation risk. Specifically, what happens to the purchasing power of the dollar at the end of the term? If there is inflation, the dollars from the GIC are worth less, even though there is a “return” – the interest payment. Contrast this with stocks, where since they represent a real asset, if the value of that asset increases with inflation, then the share price should reflect this.

Several other investment-related risks:

  • Liquidity risk: The possibility that you cannot sell your shares when you would want to. For example, when there are no buyers.
  • Credit risk: The possibility that a debtor doesn’t meet their debt repayment obligations.
  • Currency risk: The possibility that while the investment is doing well, the exchange rates move in the wrong direction, and the value of your investment slides.

This last risk-currency risk – something that happens all of the time with businesses doing international trade. Let’s say, for example, that you lend a big contract in Euros, selling one million Euro’s worth of your widgets, for delivery in six months. The deal is profitable at today’s exchange rate, but if the dollar/euro exchange rate moves in the wrong direction, you could lose your shirt. Using currency futures and forwards, you can reduce the risk, almost to zero. Essentially, the way it works is that if currency rates swing badly, the value of the financial instruments increase. If the exchange rates move in your favour, then the value of the financial instruments decrease: you’re safe, but at a slight cost of setting up the hedge. From a business perspective, there are many risks:

  • Risks that a client doesn’t pay
  • Risk of physical damage
  • Liability in case of injury
  • Liability for negligent business decisions

Each of these (and others) can be addressed in two ways:

(1) To use business process to reduce risk, or (2) To purchase insurance to make you “whole” in case the risk materializes.

For example, to reduce the risk that a client doesn’t pay, a business might do the following:

  1. Only sell on credit to customers with good credit scores – credit history.
  2. Include clear contact language spelling out payment obligation, and what would happen if payment isn’t made.
  3. Invoice in a timely manner, with clear, understandable language.
  4. Etc.

The use of insurance to protect against risk materializing, should really be the second strategy – not the first. There are several parts to an insurance contract: premium, the risks, the payment amounts, and the payment conditions. The premium is how much you pay, and is completely dependent on the other three components. The “risks” are what you are insuring against. The payment amount is how much you get if the risk occurs. And the payment conditions are the fine print. It may be easier to work through an example using a “personal” risk. Most homeowners carry insurance on their home, insuring against fire, flood, and several other risks. The payment amount will be capped by the insurance company at the value of the house: you cannot get $3 million insurance for a $600K house. The payment conditions might specify a $1000 deductible on any claim, and may also specify the maximum number of claims per year. Based on this, the insurer will tell you the premium you will need to pay. Lower deductibles will mean higher premium. If you have a fire alarm with monitoring, your premiums may be lower, because houses with alarms can be saved, more so that houses without them.

There are many other risks…

  • IT Risks: This refers to the risk of technology being compromised, or data being compromised In the medical world
  • Infection Risk: This is the risk that infection will spread to others In the project management world
  • Project Risk: This refers to the risk that a project won’t be delivered on time or on budget

Some other observations:

1. The downside – the risk – in large enterprises/ projects/ investments – is inherently larger than for smaller initiatives, for two reasons:

  • In absolute terms, a project failure or disastrous investment can wipe out whole companies and individuals
    • To mitigate against this, many will syndicate – or spread – risk across many people or many companies
  • Moving parts issue: large initiatives have lots of “moving parts” – schedules/ people/ companies – if any one part falls off the track, then the whole thing is impacted
    • To address this, project managers will embed buffer time, redundant/ multiple suppliers, independent project reviews, frequent milestones, and program management oversight

2. There is a relationship between “fear” and risk. As we, as individuals, become afraid – or rather emotional – we perceive risk differently. The over confident will minimize the real risk. The afraid may ignore it. The greedy may minimize it, etc. The uncertain may be paralyzed by it, and so on.

  • To address this issue requires you to be self-aware. And asking others for their views provides a second perspective as well.

 

Note: The Make It Happen Tipsheet is also available by email. Go to www.RandallCraig.com to register.

 

Randall Craig

@RandallCraig (follow me)
www.RandallCraig.com
:  Professional credentials site

www.108ideaspace.com: Web strategy, technology, and development
www.ProfessionallySpeakingTV.com
:  Interviews with the nation’s thought-leaders

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Consumerization

by Randall Craig on December 23, 2016

Filed in: Associations, Blog, Make It Happen Tipsheet, Management

Tagged as: ,

Wikipedia defines consumerization as the reorientation of product and service designs to focus on (and market to) the end user as an individual consumer, vs an earlier era of organization-oriented offerings.  It speaks to growing markets by looking for a completely different category of buyer, who may also be an influencer for the organizational purchase.

Of greater relevance, however, is looking at consumerization from the buyer’s perspective.  Consider:

  • “consumerized” members of an association may no longer see membership as a great investment: they may compare membership with alternatives, and decide that something – or anything – is a better use of their funds: impacts membership.
  • “consumerized” staff may prefer their own computers (and smartphones) over the “clunky” official tech gear: impacts IT planning, IT security, and brand.
  • “consumerized” clients may suddenly look elsewhere for answers to their problems… including Google, LinkedIn groups, and your competitors:  impacts both marketing strategy, and revenue.
  • “consumerized” learners may prefer to learn at a time of their choosing using Lynda.com (now part of Microsoft/LinkedIn), instead of attending your “official” professional development offerings: impacts training strategy (and training providers!)

If the internet (and Amazon) has taught us anything, it is that we are fast approaching a time with almost perfect access, both to information and capability.  It takes merely seconds to find an answer on Google, and mere minutes to set up a server on the Amazon cloud.

This week’s action plan:  Imagine a time, five years in the future, when you are competing in a completely consumerized market.  While it is a significant analytical exercise to imagine what this looks like, this week’s action plan is more practical:  what is your organization doing, right now, that you don’t think measures up to consumer choice?  Then either up your game and choose to compete with this, or give it up and redeploy your resources to an activity that has consumer “legs”.

Note: The Make It Happen Tipsheet is also available by email. Go to www.RandallCraig.com to register.

Randall Craig

@RandallCraig (follow me)
www.RandallCraig.com
:  Professional credentials site

www.108ideaspace.com: Web strategy, technology, and design
www.ProfessionallySpeakingTV.com
:  Interviews with the nation’s thought-leaders

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Six Ways to Sabotage your Consultants

by Randall Craig October 28, 2016

Why are all consulting projects not wildly successful?  Why are some merely acceptable, and others fail? Without a doubt, consultants are often to blame: they over-promise, under-scope, or take on assignments with unrealistic deadlines.  Yet clients also control the outcome of the engagement, and often, unwittingly, sabotage their consultants. Here are six ways this is done: 1) Selection […]

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11 ways to build creativity into brainstorming

by Randall Craig September 30, 2016

Many leaders find themselves faced with the difficult task of harnessing their team’s creativity to solve challenging problems.  Yet so often, group brainstorming yields little or no significant benefits.  Why? Sometimes it is a question of facilitation skills.  Sometimes a lack of creative process.  But often it is because of one key fact that is […]

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Insight: Building High Performance Boards

by Randall Craig September 2, 2016

Have you ever considered why some boards (or senior management teams) are more effective than others? While the usual reasons may include individual skills and knowledge, attitude, strong staff support, and infrastructure, one of the most powerful drivers of board performance – and also one of the most overlooked – is the onboarding process. Consider: […]

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11 travel hacks

by Randall Craig August 19, 2016

Are you one of those people who despise air travel? Or wish that you could somehow tolerate it, just a little bit more? It is true, in the 1950s travel was a grand affair: it was special. By the 1980s not as much, but there was still an aura of dignity. Today, air travel is […]

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Today Marketing or Tomorrow Marketing

by Randall Craig June 26, 2015

Think what it was like to be Lewis Downing Jr:  Back in the mid-late 1800’s, he was the President of the Abbot-Downing Company, one of America’s most celebrated stagecoach manufacturers.  He was at the top of his game, literally opening up the west with his vehicles.  Lewis Downing Jr. supported an entire industry, from wagon wheel makers […]

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Ten Tests: Can Your Website Live Through One More Year?

by Randall Craig August 23, 2013

How long do you keep your car?  Some people swap their car every 2-3-4 years, while others keep them for ten, and run them into the ground.  There are pros and cons to both strategies, and endless arguments about which is best: older cars have higher maintenance costs, sport some rust, and look dated.  But […]

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Social Media Planning Calendar

by Randall Craig April 19, 2013

How do you organize your Social Media activities?  Most people have a system – whiteboards, excel documents, Google Calendar, or often, scraps of paper.  Unfortunately, none of these are particularly effective, nor are they efficient.  And they certainly don’t help you share your activities with your colleagues. Our take on scheduling and planning:  Social Media […]

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Your Daily Social Media Routine

by Randall Craig June 14, 2012

How do you spend the first 20 minutes at the office each day? If you were in the 1970’s, you would spend the time reading the newspaper, then organizing your inbox (the box on your desk), and finally looking at your calendar before “starting” your day. In the 1980’s, you would be doing the same, […]

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13 Social Media New Year’s Resolutions

by Randall Craig December 20, 2011

Are you one of those people who have given up on New Year’s resolutions?  If you are active on the Social Web, an annual review – and a few resolutions – can make a significant difference to your effectiveness.  Here’s my take on a few you should consider: This Week’s (Year’s) Action Plan: Review and […]

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Viewpoint: Planning for an Uncertain Future

by Randall Craig November 23, 2011

In 1997 there was no Google. In 2002 there was no Facebook. There was no Twitter in 2004, and the iPad only made it’s debut in 2009. There is no indication that the pace of innovation will slow, so how can you plan for the future when the target is moving , and moving quickly? […]

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Backwards Thinking

by Randall Craig June 22, 2011

How often do you crack open the instruction manual for the new TV, car, or piece of software? If you’re like most, the answer is never. Reading through an endless list of functions is both irrelevant, and incredibly dull. In other words, a colossal waste of time. Why then, when it comes to social media […]

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Prep the Night Before

by Randall Craig March 3, 2010

How often have you booked an early morning meeting (or airplane flight), and needed to be out the door far earlier than normal? Or stressed over a critical meeting, hoping that everything will turn out right? One of the most powerful concepts in time management (and in project management) is the concept of prep the […]

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Plant a seed and something will grow

by Randall Craig December 26, 2006

If you are reading this on the day that it is published, then I have a secret to share with you. I came up with the idea for today’s tipsheet last month. Then, about two weeks before “today”, I wrote the Tip. I edited it the next week. And then I used a nifty feature […]

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