Developing a new vocabulary of risk
Published: 04 January 2015
GUEST EDITORIAL: Learn how to use both your heart and your head when dealing with project risk, in Jonathan Norman’s third guest editorial.
Guest Editor: Jonathan Norman
We talk about risk impact and risk likelihood as if they were fixed elements, but the trouble is that they are constantly changing shape. In a single project, one organization’s perception of risk may be another’s view of opportunity. And the scale of impact and likelihood that each organization applies to the risk will depend on their confidence, competence, experience and a hundred other things.
To make matters worse, the two organizations’ views on risk can change – in the long-term but also in the short-term. If you are engaged in a business change project and something happens to make the external environment more unfriendly, then you may find yourself making decisions to do things you would never have countenanced at the start of the project.
On that last point, risk doesn’t immediately appear the minute you make a decision to act or to initiate a project; there’s often a risk associated with not doing a project.
All of which means that we need a way of understanding the pictures that our two organizations have of risk and of benchmarking our decisions on the basis of these different sets of perception. David Hillson and Ruth Murray-Webster have developed a model to help you do that. They call it the RARA model, shorthand for Risk Attitude and Risk Appetite.
In simple terms, Risk Appetite is the ‘tendency of an individual or group to take risk in a given situation’ whereas Risk Attitude is ‘the chosen response to a given risky situation, influenced by risk perception’. The important word here is ‘chosen’, Risk Appetite is essentially part of an organization’s DNA but Risk Attitude can be and should be a conscious choice.
Using these lenses, most risks present you with two elements of choice:
1. How much risk do you naturally feel you want to take? Does your gut say ‘go for it’ or ‘don’t go near it’?
2. How much risk should you take?
Risk is not an exact science; it merely guides your choices in a decision. But by thinking and learning about your organization’s level of risk appetite – whether you tend to be risk takers or risk avoiders in certain situations – you are already armed with a better understanding of your options.
We know that risk taking is habit forming; the more risk you take and get away with, the greater the chances that you will ultimately lose your bet. Think about the financial crash of 2008. On the other hand, while risk avoidance may have been a hugely successful strategy for your business for many years, in the face of dynamic market change, you run the risk of becoming extinct.
Using your risk attitude to change your natural appetite is also itself not without risk. It may well be prudent to adopt a more risk averse attitude if your inherent riskiness is threatening to get out of control and it may be necessary to adopt a more risk indulgent approach if your long-term stable business model is threatened and you need to find a new model.
In both cases, your organization may be poorly equipped to handle the consequences of the decision; the status quo could well re-establish itself if managers, who have been tolerant of high levels of risk, become frustrated by an overly cautious approach. And managers who have been very risk averse may not be well equipped to manage higher levels of risk if this is asked of them.
Language is a human construct and so is risk. Talking about risk appetite and risk attitude is an essential technique. It allows you to get a sense of your risk taking as an individual, a group, or as an organization in comparison with other organizations with whom you may be working on your project. It is also a great starting point for helping you set parameters in the face of a fast-changing environment: ‘if you are comfortable with this situation; how does the situation need to change to make you uncomfortable’ and to map uncertainty; ‘which are the potential implications of this decision that make you most uncomfortable’.
Your head may say one thing and your heart may say another. Are you sufficiently competent in the language of both to make a good decision?