Aurecon's Risk Leader, Program Advisory Simon Van Wyk shares the eight-step process business leaders can use to nail the risk optimising challenge.

Thinking

Risk exposure: A balancing act

Despite being recognised as impractical and unrealistic in the professional sphere, businesses still have a tendency to reduce their risk exposure to a “zero state”. Instead of adhering to the traditional thinking about the 4Ts of risk (Tolerate, Treat, Transfer, and Terminate), why not pursue the opportunity to optimise risk exposure instead?

There is substantial hype around risk mitigation and treatment effectiveness within most mature risk frameworks and systems. However, this perceived contribution of risk management as an enabler to healthier profits, sustainable triple bottom-line performance, operational optimisation and the like can do us more harm than good.

Nowadays, risk management is embedded in organisations through risk frameworks, risk processes, tools and techniques. Unfortunately, these are often based on largely outdated thinking.

Here is a quick test: how many organisations can you list that still rely on Consequence/Likelihood Matrices to determine significant risks? More than a couple, right? The reality is that all organisations face uncertainty, but only those who navigate it and adopt a means to embrace it will come out on top.

An organisation is like a great white shark. In its prime, it chews up the competition, but if it dares to sit still for too long, it dies. Some of the world's most profitable and enduring organisations have achieved their long track record of success by constantly reinventing themselves.

Embracing change

In business, it's better to be a chameleon than a great white.

Take Apple for instance. The billion-dollar tech company has done more than reinvent itself; you could say it reinvented the "reinvention" business. Legendary CEO Steve Jobs didn't invent any of the machines that made Apple a household name, but he and his design team made them infinitely better. Apple didn't invent the personal computer, but the intuitive icon-based interface on the original Apple Macintosh blew the doors off the existing DOS-based home PCs.

Apple's greatest reinventions came when it turned its attention away from computers and toward hand-held devices. Again, the iPod and iPhone were not the first MP3 player or smartphone, but their zen-like design and advanced touchscreen technology revolutionized the gadget industry.

With the iPad, Apple combined all its recent reinventions – the touchscreen, a lightweight design, incredibly powerful processors and batteries – to breathe life back into the tablet, a gadget sector that was pronounced dead back in the 1990s. Apple's next reinvention remains to be seen, but if anything, it is one of the masters of embracing uncertainty.

So, how do we optimise risk?

There are many tools and techniques available, but ultimately, one needs to fully appreciate the pareto point, the optimal point, between willingness to pay and willingness to accept. This simple economic theory remains valid and timely because the sweet spot between the level of investment and the level of exposure is the equation that needs solving. Get it right and you are heading in the right direction in the pursuit of risk optimisation, knowing it is relative to context.

Consider this eight-step process to help nail the risk optimising challenge:

  1. Understand the production output target (i.e. the performance metrics which would denote success)

  2. Establish the available budget that can be used to treat risk (CAPEX and OPEX)

  3. Identify and assess risks relative to the project or organisational context/scope

  4. Ascribe treatment options to risks that need to be managed

  5. Define budget allocation to treat risks

  6. Calculate the ROI as a ratio (e.g. for every dollar spent on intervention, measure how much was saved in risk exposure)

  7. Create a risk spectrum demonstrating the optimisation of risk exposure relative to the activities, products, or services of the project or organisation

  8. Tie in a treatment plan investment to the production output target, establish the variance and take further measures to invest or divest to optimise risk exposure

Risk optimisation is not a defined science, it’s a process of trial and error and subject to constant uncertainty. The test will be to have as narrow a variance between performance targets and investment to realise a level of risk exposure that is both palatable and practical within the project or organisation context.

Treating risk management as a means to reduce negative consequences from a risk source is a disillusion. Instead, we should start seeing its contribution towards value creation and protection as a compass for organisations lost in a maze of uncertainty.

Read Part 3 – Symptoms of risk: Dealing with uncertainty


About the Author

Simon Van Wyk is Aurecon's Risk Leader, Program Advisory. He has 19 years of experience in risk management and advisory in different countries, including Australia, United Arab Emirates, China, and South Africa.


Originally published as LinkedIn Pulse, “Adapting to uncertainty; not like a boss but like a chameleon” by Simon Van Wyk.

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