Taking Risks To Create Value—It's What Capitalism's All About!
September 2007
The (relatively) easy part of risk management
is learning how to mitigate the threats that can negatively impact your organization's
ability to function. You know the drill. Prepare now for your organization's
response to the next sudden hike in energy costs or the latest credit crisis.
by Mark
Layton and Lara Abrash
Deloitte & Touche
For most organizations, the much harder part is identifying and acting on
risks worth taking in order to create value. The fact is, calculated risk taking
is a fundamental precept of capitalism: no risk taking, no innovation, no competitive
advantage, no shareholder value.
Nonetheless, many established organizations are characterized by a desire
for stability, certainty, and predictability, not by a propensity to actively
pursue risk. These companies avoid entering new markets, fail to develop new
products, or ignore the potential benefits of mergers and acquisitions, preferring
instead to conduct business as usual.
Unfortunately, playing it safe doesn't always prove so prudent after all.
For instance, railroads, the dominant transportation industry of the late 19th
and early 20th centuries, ignored and failed to co-opt the development and application
of the internal combustion engine. As a result, they were not prepared for and
thus did not share in the value created by the shift to traveling via passenger
cars and shipping freight via truck. More recent examples include the emergence
of Internet-based telephone service (VoIP), the digital delivery of videos direct
to consumers' TV set-top boxes, and the massive migration to email and away
from postal mail. In each instance, dominant players did not anticipate and
capitalize on the shift.
As demonstrated by these examples, we believe that a major impediment to
establishing a risk intelligent enterprise is the irrational fear of taking
justified and calculated risks to create value. Such fear is a product of what
we call "the taboo of failure." Despite many organizations' propensity to invoke
the language of bold decision making, in today's global business environment,
too few decision makers are comfortable with the notion of failure—to the point
where those who bring up the possibility are characterized as "doomsayers" or
are marginalized for not being "team players."
And upper management is not the only group seemingly unable to take reasonable
risks. Fiona Lee, a psychology and business professor at the University of Michigan,
conducted a study that found that traditional management styles often leave
employees at all levels too insecure to risk innovation. She noted that fear
of failure impedes taking the risks necessary to innovate. "Corporate America
has very little tolerance for failure," she noted in a recent interview.1
Intelligent risk taking for reward will never become the norm in an organization
where failure is not acceptable, no matter how reasonable and justified the
risk taken.
The risk intelligent enterprise strives to banish the fear of failure and
in so doing positions both decision makers and personnel at all levels to embrace
intelligent risk taking for reward. We believe that an open and supportive environment
that encourages the examination of previously unquestioned assumptions will
help bring about intelligent risk taking.
Is success a product of such an environment? According to the Stern School
of Business at New York University, the most successful companies—General Motors
in the 1920s, IBM in the 1950s and 1960s, Microsoft and Intel in the 1980s and
1990s, and Google in this decade—share a common characteristic. Each achieved
success not by avoiding risk but by seeking it out.2 Furthermore, a study of the 50 largest U.S. oil companies between 1981 and 2002
found that the firms taking more risk in exploration and development earned
higher returns than firms that took fewer risks.3
Banishing fear begins by rewarding intelligent risk taking—even if occasional
failure is the result. Once employees understand that failure may be an acceptable
price of taking justifiable risks, the organization will be positioning the
enterprise to live long and prosper. Intelligent risk taking can make it so.
Lara Abrash is a partner and the
national audit and enterprise risk services chief of staff at Deloitte & Touche
LLP. She can be reached at (212) 492-3918 or at labrash@deloitte.com
1"How
to Overcome Your Fear of Failure".
2"Strategic
Risk Management".
3Ibid.
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