Rethinking Risk

Edges are risky places.  Yet they are also rich in learning and innovation potential. To successfully explore and navigate along edges, executives must learn how to more effectively manage risk.

Steve Weber (a Professor at UC Berkeley and the author of a great book, The Success of Open Source) and Eamonn Kelly (the CEO of Global Business Network and the author of a forthcoming book – Powerful Times: Rising to the Challenge of our Uncertain World) wrote a nice piece for the Financial Times on “The Changing World of Risk”, calling for a shift in mindset and focus in managing risk.

Weber and Kelly suggest that “most risk management today is based on coping strategies that manage downside risk.”  These coping strategies involve the use of increasingly sophisticated risk models, elevating the risk function within the corporate hierarchy and acting conservatively.  They argue that these coping strategies are increasingly inadequate: “Loss aversion is not a long-term way to win.  In expanding markets the smart hopeful will always beat the fearful.”

Weber and Kelly go on to observe:

We believe that coping strategies, while remaining a necessary part of any corporate strategy, will in the future increasingly be seen, used and priced like utilities that everyone simply must have. But they will not be a source of significant and sustained advantage – that will come from seizing the upsides of risk. . . . . the ‘unknown’ or at least ‘the uncertain’ will become increasingly important as a source of competitive advantage.

As a balance to coping strategies, Weber and Kelly encourage executives to “re-embrace risk as a source of adaptive advantage”, observing that

When advantage lies most profoundly in the unknown and the uncertain, the ability to sense and learn faster, to correct mistakes and drop losing bets, to tolerate ambiguity and live with, even embrace, ambivalence, becomes absolutely essential

Unfortunately, their focus on adaptation obscures one of the best ways to manage risk.  Rather than just treating the environment as a given, executives need to realize that in times of rapid change and uncertainty, significant opportunities to shape the environment arise.  Opportunities often exist to shape the environment in ways that would just not be possible in more stable times. By being alert to these opportunities, executives can both increase the potential upside from their business initiatives while reducing the potential downside.

Edges often provide the most significant shaping opportunities.  This is one more reason to seek out, rather than avoiding, the edges on the business landscape.