An Executive’s Guide to Risk Management

The traditional approach to business has been upended by Industry 4.0. Executives must now embrace alternative strategies to compete in innovative markets. Here, Ade McCormack outlines his view of risk management in this new era…

There was a time when people would stumble across a market-pleasing idea and convert it into a successful business. Having created the machinery to convert raw material into what the market was happy to pay for, the focus of the business turned towards profit maximisation. Typically three levers could be pulled – better, faster or cheaper.

Back in these simpler times, the original idea might sustain the business for years, if not decades. So the focus was more on business process reengineering, rather than radical customer-pleasing innovation. Why should you waste money on innovation if the market is happy to buy what you already offer?

Business model refinement was the primary focus for industrial-era organisations. But the world has moved on, prompting me to write this executive’s guide to risk management.

The clock-speed of business is accelerating. Customers are increasingly fickle. New tech-savvy competitors are emerging in unfamiliar guises. Today, that original market-pleasing idea is likely to have a much-shorter shelf life. Market dominance is transient at best in the digital age. No amount of refining your existing business model is going to save the organisation. No amount of new technology sprinkled across your existing business model is going to save your organisation. A smarter, faster cheaper Titanic is still a Titanic.

But a new type of business model has emerged over the last few decades. One that is comfortable with the increased uncertainty and volatility of the post-industrial era. Silicon Valley is home to this new breed of player.

Silicon Valley is in large part a sprawling set of experiments at various stages of maturity. No business has a guaranteed future, but the more assets you have behind the company the more likely it is to whether the storms ahead.

Some Silicon Valley players are perilously close to an extinction event. These are the startups, particularly those that are all potential and burn rate and little to no income.

But these companies are not simply manifestations of a founder’s idea. They may have started that way, but they are led in such a manner that they will change direction if they see a better opportunity or even pull the plug when they have run out of pivoting options. This lean startup approach is predicated on failure.

Failure is the only way to truly learn. Silicon Valley leaders are natural experts in risk management.

Those startups located beyond the Bay Area can similarly emulate the lean startup approach. Though one of the biggest risks of not being in Silicon Valley is that whilst you are not, the people most likely to make your business a success are. This is a problem given the role of people in creating innovative and differentiated customer experiences that command a very high margin.

I am not suggesting that the talent you need only inhabits Silicon Valley, but increasingly the best people in the world are gravitating to a handful of talent super hubs, often built on Silicon Valley principles.

Access to the best talent is your biggest risk in the digital age.

The only way to mitigate the industrial era model risk of only having one business model is to create a business that itself creates business models. Think of the industrial era factory model morphing into a portfolio of experiments. Each experiment represents a new business model. Not just a new product or service but also new go-to-markets and financial models.

The business of being in business in the digital age is being in the business of creating new business models.

Think of your primary business as experiment A. To reduce the organisation’s existential risk, you as a leader need to quickly set up experiment B, C, D etc. So that one day when the digital grim reaper pops into your plan A reception, you have other sources of cash to sustain you.

As these experiments move from prototypes to cash generating businesses, they become assets. Your job is to build a diverse portfolio of assets. This can be achieved through creating your own experiments or acquiring other organisations.

Keep in mind your asset portfolio also includes cash and cash equivalents, patents, clients, relational capital, your brand and increasingly your organisation’s data lake (assuming it is more lake than cesspit). We could add property, land and machinery to the list, but these are things that it is best to rent just in case you need to radically change business direction at short notice. Going bust because you couldn’t sell your properties fast enough would be a shame. We should also of course consider your people as an asset, in particular their cognitive capacity.

This portfolio of assets will give you the buffer needed to cope with unforeseen circumstances. Such circumstances, including Black Swan events, will be increasingly common as the clock speed of business accelerates.

Again your embryonic business experiments will add to this portfolio as they become cash positive. The challenge is to get the balance right between successful and failed experiments. Like a solid portfolio the magic is in the diversification. The tendency will be to create experiments that are mini-me versions of the original company. You need to create experiments that sit in adjacent and non-adjacent markets to your core business.

Think of this new approach to business engineering as polymodalism.

The beauty of the industrial era factory model is that once you worked out how to create a profitable business, you simply needed to create an operating manual and ensure everybody followed it. This required suppressing your workers. In effect denaturing them so that they would be compliant cogs in your machine.

People are waking up to the inhumaneness of this employment model, and in many cases they want to contribute more cognitively rather than just turn the handle all day every day.

Given that our brains have millions of years of programming installed, it seems a shame not to harness the array of organic supercomputers available to you.

What’s more, given that the war for talent is becoming more acute, the power axis is shifting away from the employer to the talent. You can no longer control your people. They will increasingly set the terms of the engagement. This requires a more dynamic and engaged form of leadership. No longer can you just point them to the operating manual.

Compliance was the mantra of the industrial era: “This is how we do it around here so employee, just do it!” But of course compliance extends beyond the master-slave employment model. Some industries are regulated and therefore a lack of compliance could lead to large fines, or worse.

But if we remind ourselves why regulators exist – i.e. to serve the interests of the consumer – then they need to disrupt thier own business models.

That is to say, I would encourage the regulators to similarly take more risks through experimentation. Prototype new regulations with a controlled subset of the market, scaling up or down based on the impact they have on the consumer. No one is immune from the shockwave generated by our rapid departure from the industrial era.

If you are going to be in the business of creating new business models, you will need to think about adding some new key performance indicators to your existing list. Incubated startups aside, Google has acquired almost 250 organisations in the last couple of decades. Amazon has made over 100 in the same period. So acquisition velocity would be a useful KPI. This number would be a subset of the number of concurrent experiments you have on the go.

You might also include pivot velocity to flag the degree of adaptability/market sensitivity built into your organisation. This might be considered a subset of the more general failure velocity. If you are not taking enough risks, then as an organisation you can be considered as at risk.

Risk management in the digital age is not risk avoidance or risk elimination or risk minimisation. It is risk acquisition. It is wired into our DNA to take risks.

Risk taking has in the main improved the plight of humanity over the millennia. We need to reawaken this ‘dormant gene’.

What I am proposing will make for uncomfortable reading if you developed your leadership skills in the industrial age. This is not a charter to be reckless. This executive’s guide to risk management is however a charter to evolve your organisation from an inert factory to a sensing organism that has one eye on the future and three (at least) on the present.

You might say that experimentation is the new strategy.