How Risk Aversion is Killing Your Business & What to Do About It

In Risk Aversion, we explained how human biology works against us when facing tough decisions. We are hard-wired to eliminate uncertainty meaning that we tend avoid tough decisions or choose the traditional path because following this path feels safe. Taking even a small risk scares us.

The consequences of succumbing to our biology are an agonizingly slow decisions process and reduced revenue. In a recent Harvard Business Review article, “How to Live with Risks,” the author cites recent research about risk assessment and succinctly summarizes the dilemma:

Fully 60% of the corporate strategy officers surveyed said that their company’s decision-making process is too slow, in part because of an excessive focus on preventing risk. They added that if this “organizational drag” were reduced, the rate of revenue growth might double.*

Based on our work with a variety of large organizations we propose three solutions to the risk-aversion problem.

Focus on Failure

Experts who study organizational effectiveness often refer to organizations with exceptionally low error and failure rates as high reliability organizations (HROs). Examples include aircraft carriers and air traffic control centers in the U.S.

These HROs do not ignore the possibility of failure. On the contrary, their leaders, managers, and employees use specific techniques to identify and, when possible, prevent failure. These techniques include:

  • A refusal to simplify explanations. Complex problems require serious research, extended discussions, and complex solutions.
  • Sensitivity to front-line operations. Who knows what happens on a daily basis? That’s right, those working in the store, at the reception desk, or in the hospital intake area, to name a few examples. Why not ask them what works and what’s broken?
  • A commitment to resilience, to the notion that you cannot prevent all errors or small problems. Instead, the goal is to focus on fixing these small problems before they mushroom into large problems.
  • A deference to expertise, to those who have the local, specialized knowledge as opposed to those who simply have authority in the hierarchy.

Good decision makers are pre-occupied with failures of all sizes and shapes but not in order to point fingers. Rather, these decision makers treat each failure as a potential indication of a much larger problem.

The point is that problems are not the enemy. Rather, hidden problems are the enemy because these hidden problems become serious threats down the road.

Listen, Learn, and Reduce Uncertainty

Eliminating uncertainty is unrealistic and likely a waste of time. A more productive approach is to employ proven techniques to reduce uncertainty to the point where it can be managed.

Despite nearly universal consensus on the importance of listening to the customer, many organizations fail to engage in the hard work required to understand customer’s actions, thoughts, and emotions.

In other words, many pay lip service to “listen to the customer” while whistling their way to failure. Focus groups are not enough. We must observe our customers. Remember the New Coke fiasco?

Executives at retail pharmacy chain CVS walk the talk. They solicit feedback with an 800 number on receipts, and CVS receives many calls from customers who want to discuss their shopping experience.

CVS leaders don’t stop there, however. They have instituted a customer call-of-the-day program. An executive sorts through the calls and chooses one. She then distributes the actual audio file to the senior management team so that executives can hear customers’ comments directly. The result? A sound basis for taking action to improve the customer’s experience.

Harness the Power of Micro-decisions

Another way to enhance the customer’s experience is to allow employees to make micro-decisions. A micro-decision is a choice made by an individual within a context that he or she understands and controls.

Failure to empower employees with decision-making authority can hurt the bottom line. For example, when Wal-Mart opened a store in a São Paulo suburb, someone in the corporate home office decided to stock the same types of goods sold in U.S. Wal-Mart stores, including footballs and snow blowers. There is little demand for snow blowers in South America. Furthermore, soccer is the sport of choice in Brazil.

While Wal-Mart decision makers stumbled, the solution is straightforward. Grant local store managers the authority to make decisions about some of the merchandise offerings. Doesn’t it seem likely that a Brazilian store manager would choose soccer balls over footballs?

While we may not manage the world’s largest retailers, we all make similar decisions about price, product inventory, hiring, and delegation.

Whether Wal-Mart or a three-person startup, we must decide how to empower ourselves and our employees as we pursue a sound decision-making process for the current stage of our business.

Want to learn more? Click five things you need to know about decision making to download our free white paper.

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*How to Live with Risks Harvard Business Review July/August 2015

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