A Decision Making Framework for Innovative Leaders, Part 2: Assessing Risk vs. Opportunity

This is part two of the series. Feel free to start here, or go back to start with Part 1: Embracing Uncertainty.

Look at you – ready to face (and assess) risk and opportunity!  Thanks again for reading – now let’s get right into it. 

These are some of the secrets no one wants to acknowledge in business (Startup, VC, and Enterprise alike):

• To achieve “big” growth, you have to accept that you’ll never have enough information to ensure that your idea will work.
• Some of the best-created strategies that are supported by overwhelming evidence will fail.
• New products and businesses that were based on little evidence have succeeded without any human-centered design or empathy for people.
• Most startups fail (>90%).
• Most new businesses fail within the first 18 months.
• Most corporate innovation fails.

Ok Robert, but what the hell are we supposed to do with this? Am I supposed to be energized? Are you trying to discourage me? 

Stick with me – we’re getting to the point where you’re really embracing the unknown – and can step confidently into the (invigorating – yes, really) –  invigorating – growth mindset and plan for your business. 

Now, how to transform how you transact with your customers in as little as 60 days.

Make Braver Decisions 

It’s simple, really – we can make braver decisions once we better understand the risk versus the opportunity.  You need to assess each – to confidently move in a direction and build a strong business case to move forward. 

Let’s define to align:

• Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail. Anything that threatens a company’s ability to achieve its financial goals is considered a business risk.
• A business opportunity, in the simplest terms, is a packaged business investment that allows the owner or key stakeholder to begin a business(let’s assume this investment is based on some evidence to suggest there is a large enough market of people who will purchase the goods and services in your early-stage business).

It seems straightforward but there is tension within both of these.

Tension is the conflict between a business opportunity and risk and between the objectives within them. Tension is knowing that moving forward with a new opportunity can temporarily reduce your profitability before you increase your profits. There’s tension about how your growth will affect your business model and even your culture.

Remember, tension is natural and surmountable. It’s staying in place that often puts future profits at an even bigger risk.

Understand and Define the Tension

So, let’s go deeper into the tension we’re grappling with. A business risk for a venture capitalist is different than it is for a head of new ventures inside an enterprise, which is different than it is for a corporate strategist, which is also different than it is for a product manager exploring new features, etc.

The risks for these individuals vary from risking political capital inside of a large corporation to a wide portfolio of investments that assume less than 10% will successfully pay off.

If you’re like any of the other leaders I mentioned above who happen to reside inside of a company that wants to explore “the new,” your company is generally designed to avoid risk. It wants employees to over-analyze decisions to prevent loss, has a chain of command to approve decisions and manage budget expenditures, an annual budget approval process predicting where you might spend dollars and what you hope to achieve through it… and the business model depends on you following those rules, to achieve success. That success is largely predicated on revenue, margin, net profit, while achieving goals supporting your mission and vision.

Your cost of goods cannot exceed your revenue stream with a healthy and mature business model. In order to find the same success (increase revenue, drive profits, retain customers, attract new ones), you can tend to follow the design of the original business model over and over again.

It might be time to break that habit.

Assessing Your Company’s Risk Tolerance

Risk Tolerance is intentionally and unintentionally designed within three areas of your company: (1) the business model, (2) your executive team who passes it on like scripture to their employees, and (3) the inherited personal tolerances of every employee’s predecessors, especially at the c-suite. I suspect, based on my experience with our clients, that much of the risk tolerance is inherited as opposed to explicitly stated.

Therefore, to assess risk tolerance is to explicitly discuss and define it by documenting how risk is viewed by your various stakeholders, including the executive team who may be providing permission and resources to pursue something “risky”. In short, the implicit mental model people in your company use needs to become an explicit definition, allowing for “the new,” the pursuit of substantial growth.

Try out the following framing to help define the tolerance for risk within your peer group or company:

1. Who might benefit from the pursuit of this initiative?
2. What is the potential benefit from this problem we might solve?
3. How does the solution we create benefit the company even if the idea fails?
4. When would we know if this initiative worked and how long might it take to capture its long-term value? And, finally…
5. Why is this initiative important to our company? Why does it support our strategic vision & goals? Why is it critical for us to do this now?

Answering these questions provides healthy constraints for your team to review and to start having the right conversations. 

This is part two of the series. Keep reading Part 3: The Risk of Not Doing.