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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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23 Reasons to Skip Social Media

by Randall Craig on November 20, 2015

Filed in: Blog, Make It Happen Tipsheet, Social Media, Strategy

Tagged as: ,

There are many reasons why an investment in Social Media makes sense, but precious little about why it may not.  After advising on digital strategy and online engagement for over 23 years, here are 23 reasons why you should give it a skip:

  1. When your target audience isn’t online.
  2. When it is not “core” to your organization’s success.
  3. Because Social Media doesn’t close the sale: real people do.
  4. Because you suspect that the value of likes, comments, and shares are over-valued.
  5. Because Social Media is not producing the results you expect.
  6. When there is no accountability for performance.
  7. When it becomes a significant chore.
  8. When it cannot be properly resourced.
  9. When personal Social Media time masquerades as business Social Media time.
  10. When it is preventing the organization from resourcing other critical activities.
  11. When you actually have nothing to say.
  12. When the activity skates on the edge of the ethical.
  13. When doing the activity is no longer legally compliant. (e.g. CASL)
  14. When there is no commitment to community management.
  15. When you cannot (or choose not to) invest in the technologies that will activate your Social Media investment. (eg Marketing Automation)
  16. When you cannot keep up with the latest best practices.
  17. When you think it is cost-free.  (Time does have value!)
  18. When there is inadequate time to monitor the impact of your efforts.
  19. When you tried it before and it didn’t work.
  20. When you don’t have a risk-management policy.
  21. When you choose not to leverage your stakeholders to spread your message.
  22. When you don’t invest in staff training.
  23. When you choose to execute… without a strategy.

This week’s action plan:  While these are great reasons to skip Social Media, the list also serves as great criteria for how to do it well.  This week, use this as a checklist: what is your organization doing, and what is it missing?  

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

www.108ideaspace
.com
www.ProfessionallySpeakingTV.com

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Social ROI: Connecting Community to Commitment

by Randall Craig October 10, 2014

Do you have a creeping feeling that you will never get an adequate return on your Social Media investment?  If so, you’re probably right. To improve Social ROI requires three key ingredients: the first reduces costs, and the second and third improve return. Improve program efficiency: Swap out experimentation and opportunism with goals, persona-based editorial […]

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Real World or Digital

by Randall Craig June 27, 2014

Despite the near ubiquity of Social Media, you can’t say hello to your Starbucks barista there.  You can’t see your team’s body language during a meeting.  You can’t celebrate with friends and family in real-time.  Everything seems to be in 2D – at best a reflection of what is happening in the real world. Interestingly, […]

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Testing the Social Conversation

by Randall Craig December 27, 2013

Have you ever put your social influence to the test?  Or said another way, do others find you half as interesting as you do yourself?  If you’re not sure, here are seven ideas that might spur some different thinking. 17 Ways to Great Social Engagement: Not sure why your blog and other social media efforts […]

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Generating ROI: The other 95%

by Randall Craig May 31, 2013

How do you determine the ROI on your marketing and sales investments? The standard formula is simple: divide the return, less investment, by the investment. A marketing campaign costs $1000, and reaches out to 1000 prospects. Five per cent of these respond, generating $1000 profit, for an ROI of zero: (1000-1000)/1000.  If the profit is […]

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Social Over-Indulgence

by Randall Craig May 24, 2013

Social Media is here.  It’s everywhere.  In fact, the absence of it sends a signal that the sponsoring organization is completely disconnected, un-hip, and behind the times. Unfortunately, this zeal to include Social Media is often taken to the extreme.  There are numerous cases where “doing” Social Media makes no sense at all.  Three examples: […]

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Low Social Productivity?

by Randall Craig February 22, 2013

Are you one of “those” people who have thoroughly adopted Social Media, but have a nagging feeling that you just aren’t that productive with it?  Or are you tapped out, and have no interest in adding extra time to your day with low-value Social Media activities?  In either case, you’re not alone. Here are the […]

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Eight Great Social Media Reads

by Randall Craig December 21, 2012

Out of all of the thinking, blogging, tweeting, posting, and speaking on the subject, here are some of the most practical – and thought-provoking articles on the topic. 1) When users defect:  Understanding why users leave, and what to do about it. 2) Six Steps to Strategic Blogging:  How to build an effective, focused, and […]

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Social Capability

by Randall Craig October 11, 2012

With so much focus on Social ROI and social performance, an important issue is often forgotten: social capability. This concept refers to an organization’s ability to take advantage of the promise of social media. Too often, the limiting factor for social performance is not what is being done, but rather what cannot be done. Removing […]

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LinkedInvestment: Eight ways to improve your Social ROI

by Randall Craig April 19, 2012

If you spend 10 minutes on LinkedIn each business day for the last two years, you’ve made an investment of 86 hours… or two weeks of vacation. Up that to 15 minutes, and you’ve gobbled three weeks over the year.  How satisfied are you with the return on your time investment?  If you’re like most, […]

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Social Media Measurement

by Randall Craig April 12, 2012

How do you know if you are successful at Social Media?  While the answer a few years ago may have been it’s so experimental, we’ll have to see, the answer from some today is similarly dissatisfying:  Social Media ROI is comparable to computing the ROI of a telephone. We can do better than this – […]

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Social Media Stop Sign

by Randall Craig September 13, 2011

How long ago did you (or your organization) start your Social Media “work”?  Likely, a few years ago.  First came LinkedIn: you filled out your profile, asked for (and responded to) connection requests.  Then you asked for (and responded to) recommendation requests, asked (and responded to) questions, and joined a number of groups.  Then you […]

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Viewpoint: 47 Tough Social Media Questions

by Randall Craig March 22, 2011

How does your organization decide to invest in Social Media? With all of the fluff being written on the topic, it isn’t surprising that finding a list to help executives make better decisions is tough.  Based on our experience advising clients, here is my contribution, with questions in no particular order: 1.      What are the […]

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Special Social Secret Sauce – Improving Social Media ROI

by Randall Craig March 9, 2011

Despite the frenzy everywhere else, many senior executives look at their corporate Social Media initiatives, and wonder why there isn’t a better return on their investment.  Many marketers, despite implementing clever campaigns, secretly worry about the same thing. Here’s the question:  is there some special social secret sauce that can dramatically improve results every time?  […]

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Social Media ROI

by Randall Craig December 15, 2010

Do you have a nagging concern that all of the time you spend on Social Media is not giving you a good return on your time investment? If so, you’re probably right, and you’re not alone. Too many people (and businesses) waste time doing activities that yield very little, often for the sole reason that […]

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Online PR and Social Media for Experts, Authors, Consultants, and Speakers

by Randall Craig January 7, 2009

After a grueling amount of research, writing, and editing, Online PR and Social Media for Experts, Authors, Consultants, and Speakers is now available. Check it out at www.OnlinePRSocialMedia.com. The book itself is 130 pages, and while it is aimed at “experts”, it is completely appropriate for those with expertise working within an organization, whether they […]

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