Make It Happen
My Tipsheets are chock full of ideas. They are all aimed at translating knowledge into action...in a quick, action-oriented 60-second nugget.

First Name:
Last Name:
email:
Tipsheet Archive
Randall's Resources
Whenever I speak or write, I often prepare extra "bonus" materials.
Enter the Resource Code to access this special content:
Resource Code:
Try this example Resource Code: eventplanning

strategy

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

{ 0 comments }

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: how is it possible to get exceptional performance when a new board member shows up at the first meeting after having – at best – a short conversation with the chair, and a quick review of the meeting’s agenda and materials?  While an orientation meeting is better than nothing, the board member still will not hit the ground running.
If a high performance board is what is required, then so is an investment in time to make sure that this happens. Consider the following onboarding process:
  1. Build personal relationships first.  People work best when they have a personal, collegial relationship.  Not that a one-time social event will make this happen, but one must start somewhere.  The work of the board means that there will always be disagreements, so building personal trust means that tough discussions can happen respectfully.
  2. Build on the history.  New board members need to understand what has happened before: the history, issues, decisions.  They need an understanding of their responsibilities – and others’.  Without this knowledge, it is impossible to build on the good work of past boards. Without this knowledge, everything must be discovered and re-done anew. Knowledge transfer ideas include a new board member briefing book, a board orientation presentation, “job shadowing” with outgoing board members, and committee leadership prior to joining the board.
  3. Build a common team vision.  While most organizations already have a mission, vision, and values, how a particular board executes this vision will always be different.  The pressure of the first few meetings – where decisions need to be made – is not the time to synchronize.  Even worse, when there is no common vision, competing visions rush to fill the void.  Spending time on the vision means that it can be incorporated by each board member as they contribute.
  4. Set tactical priorities.  While a common vision sets the direction, agreeing on tactical priorities beforehand means a far more effective decision-making process throughout the board’s term.  No longer would each issue be debated in isolation – the agreement on priorities can help govern the conversation. (Of course, the board might change these priorities along the way, but that is a different decision.)
  5. Agree on ground rules.  These include both formal rules, as well as the social contract between board members.  Examples of ground rules include board materials being sent a week before the meeting, always coming prepared, always starting on time, the level of formality of the meeting, etc.  If the ground rules aren’t defined and agreed to, each person will make their own ground rules, leading to unproductive friction, frustration, and disappointment.
  6. Build mutual support.  No individual board member has it all: in fact, it is the diversity of perspective that provides  fertile ground for great decisions.  A supportive atmosphere where there is a willingness to step in when needed – or in times of crisis – can both help get things done, and avoid individual burn-out. A board that works together gets things done.  (And has fun.)
  7. Build beyond the board.  A high performance board engages the next tier of individuals through committee work, and engages wider audiences through communication, events, social media, and more.  This engagement is a key intelligence-gathering channel for the board.  More critically, focusing on succession is the only way to build a sustainable organization in the future.
When should all of this work happen?  Clearly it takes time, so if the goal is to have a high-performance board right from the get-go, the real work must begin 2-3 months before the mandate even starts.
This week’s action plan:  This list is just as applicable to any team: a management group, a workplace taskforce, or a volunteer committee.  This week, consider the next group you will be leading: have you thought through each of these points?  And if you are an individual joining a new group and the leader doesn’t have a formal onboarding process, what can you do to walk yourself through each step?  Your success – and the organization’s – is determined as much before you start than on day one.

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

{ 0 comments }

Insight: Building a Thinking Organization

by Randall Craig April 8, 2016

In just about every organization, the focus is on action.  The connotations of words such as goals, objectives, action plans, and status updates are all positive, and are viewed as necessary for organizational, professional, and personal success.   (Even these Tipsheets, some 600 of them, each end with This Week’s Action Plan).  Yet is the […]

Read More

Building Your Marketing Stack

by Randall Craig October 2, 2015

Most marketers think of themselves as builders. Their work grows the organization, grows market share, grows the portfolio of products and services. A bit more tactically, the marketer builds page views, conversions, and social engagement; underlying all of these activities, the marketer builds relationships. But is there merit in growing marketing itself? Not the ad […]

Read More

Viewpoint: Spoiling the broth with a “bad” post?

by Randall Craig September 11, 2015

It’s amazing how a “different” perspective-type post generates a ton of feedback.   Two years ago I wrote a post on how to become invisible on the web.  The post described how to remove your footprint, guard your privacy, and generally how to avoid being digitally targeted. The post also generated a firestorm of comments […]

Read More

Finding the Social Media Tipping Point

by Randall Craig January 23, 2015

How do you know the “right” amount of Social Media? Too little Social Media is like spitting into the wind: no traction and no impact.  It also leads to discouragement: if the efforts are not making a difference, then why bother at all? On the other hand, too much Social Media is an obvious waste […]

Read More

Exceeding Expectations

by Randall Craig July 18, 2014
Thumbnail image for Exceeding Expectations

Two people walk into the campground office. The park ranger warns that there are bears – and that it is dangerous. The first camper quickly replies – “that won’t be a problem”. The ranger says, “I hope you can run fast – very fast”.  “Not really,” the camper replied. “But I am faster than the […]

Read More

Viewpoint: Social Media – Going Out of Business

by Randall Craig March 21, 2013

Before Social Media really took off, the number of tools for engaging stakeholders online was very, very small.  You could create a bulletin board on your site.  An interactive calculator. A “guestbook” (remember those?)  Or get people to sign up to a ListServ and participate in a discussion via email.  These all had one thing […]

Read More

Corporate Success Factors

by Randall Craig April 5, 2012

It’s always easy to look at other organizations – or other people – and marvel at their incredible foresight, acumen, and investment.  To look at some of the most successful companies and their products – Apple and Google come to mind – and say “They were just lucky” is too easy, and unlikely. Few people […]

Read More

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? […]

Read More

What Social Media Tier are you on?

by Randall Craig November 11, 2011

Every organization – and every individual – can find themselves somewhere on the three-tier Social Media Engagement Index.  Where are you? Level I, Passive:  At best, passive users have a profile on a few sites, but do very little within Social Media except for responding to the occasional connection request.  Benefit: passive users will be […]

Read More

The Power of a (Broken) Promise

by Randall Craig September 28, 2011

Have you ever been disappointed, frustrated, or annoyed with an experience with a person or organization? In today’s Social Media world, suffering in silence need not be your only option. You can Tweet, Blog, post to Facebook, create a YouTube video, write on a review site or even create your own complaint site. You can […]

Read More

Viewpoint: Is the Cloud for the Birds?

by Randall Craig September 1, 2011

If you read the business or technology press, you’ve probably heard about “the cloud”.  And if you believe the ad copy, just about any problem can be solved merely by “putting it on the cloud”.  Can this really be true?  Is the hype even close to reality?  And what is this cloud, really? The cloud […]

Read More

Strategy and Synergy

by Randall Craig April 5, 2011

Many people are interested in writing a blog, particularly if they have special expertise.  Yet, the precise subject of the blog usually eludes them.  Choose the wrong subject, and you’re stuck with it, and because of Google, it sticks to you… forever. The overall blogging rule is simple: write for your reader.  Imagine who that […]

Read More

Blog Intentions

by Randall Craig December 22, 2010

With so many people and organizations getting on the blogging bus, it seems that blogging must be very important. But why? Deciding on a strategy helps clarify the underlying purpose of the blog itself, and helps give focus to the writing. Here are some of the reasons that we’ve come across; do any sound familiar? […]

Read More

Twitter Strategy (updated)

by Randall Craig September 29, 2009

There are no shortage of discussions about Twitter, which is ironic, as each “Tweet” is at most 140 characters, the length of this sentence. Yet most people wonder how – and even why – this so-called phenomenon is being used. Is there an ROI?  Who has the time? (another 140 characters) If you are just […]

Read More

Cheap, Smart, and Trusted

by Randall Craig February 13, 2007

How do you compete? Why would someone buy your services? While we may not think of ourselves as “product”, we compete all of the time: for jobs, for acceptance of our ideas, and for personal approval. Tier one – Price: At the most basic level, you are chosen because you are the cheapest. This clearly […]

Read More