Taking a risk is a choice that puts people at odds. Risk management is a subset of the management world and all organizations deals with risks in one way or another. It would seem intuitive that businesses shouldn’t ever take risks but that is not the case.
By taking risks, organizations are able to innovate or bring about changes to the industry earlier than others and grab a market hold or be the market leader. Apple is a risk taker, bringing along a whole catalog of new and untested products and grabbing a market hold while Kodak, never bothered trying the untested formula. This, of course, meant that they had the first digital camera prototype sitting in the back of their testing grounds while Fujitsu came and pulled the rug under them and Kodak is just a name of the past now.
So taking risks seems like a good thing from these little anecdotes but those are the success stories. There are far more stories of failure than success, failures of grandiose proportions. It all comes down to the definitions of risks. There are known knowns, things that everyone is sure about. There are known unknowns, things that you are sure that you don’t know accurately. Then there are unknown unknowns, things that you don’t even know that you don’t know. Huh? Well, let’s watch someone else talk about it.
That’s Donald Rumsfeld, 21st Secretary of Defense during 2001 to 2006, explaining that time when US went to war in Iraq for ‘unknown unknowns’. The weapons of mass destruction that were not found, the Al Qaeda links that were never proven and mobile chemical and biological weapons that were also not discovered. This is a risk management story that has had profound implications, as its effects are still being seen and felt around the world today. The US adopted a risk appetite that was appealing too to them at that time, right after September 11 terrorist attacks, an attitude that allowed for zero tolerance. If there is 1% chance of an attack from a foreign body on the US soil or assets abroad, then it was justified that the US will go and ‘treat’ these risks at all costs.
Usual risk appetites of companies can be expressed in the form of simple diagrams, that shows how willing companies are to take risks. It also profiles organizations according to their risk attitudes; risk seeking behavior when taking risks is completely acceptable and risk averse behavior where risks are not tolerable. Then there is middle ground which is defined as As Low As Reasonably Practicable, where organizations accept that significant risk still exists, but treating them further is just too expensive. A side by side comparison of a normal risk seeking and risk taking organization should help visualize these risk profiles.