Business Decision Management, Inc. | H ome
Risk Management
As a business management consultant, BDM would typically start with a very structured and abstract acedemic approach and then gradually mold that into the real world specifics of the problem at hand. We, for instance, can look at business, in general, as being a matter of risk management. To begin that examination, we must begin with understanding what is risk. To that end, there are three aspects of risk reduction are:
(1) Risk Awareness - knowing and understanding that the risk exists;
(2) Risk Analysis - understanding the nature and extent of the risk and your options;
(3) Risk Avoidance - avoid the risk but not the opportunity, find the work-arounds and the actions that will avoid or reduce the risk to acceptable limits.
Imagine you are having a pleasant walk in the woods. Sunny day, bird chirping, clean smells, beautiful scenery. Picture that for a moment. Imagine walking in that situation.
Now picture an identical scene but you come upon a sign that says, “Danger, you are in the middle of a mine field”! Suddenly, you notice that the rolling forest floor is actually overgrown mine explosion craters. Now imagine how you would walk in that same forest.
The difference in the manner in which you walk is called Risk Awareness. Unfortunately, it is not aways that simple.
In this case, you believed the sign and you instantly understood the implications. What if there are no signs and the nature of the danger is not at all obvious. Knowing and understanding that the risk exists involves education, study, observation and in some cases, faith.
Risk Awareness. Awareness is something you can be informed about and you can uncover and learn by reading and observing. Of course, the critical element of Risk Awareness is believing that the risk exists. In reality, there is virtually no situation in which risk does not exist. It is always there to a greater or lesser extent.
Risk Analysis is considerably more complex and takes some special skills and knowledge that are a little harder to get than just by reading a book. For instance, the analysis might involve cost-benefits and trade-off studies. You might also want to quantify and compare risks and alternatives. Some of this might involve looking at trends or standards and the use of some classic methodologies such as “utility theory”.
Risk Analysis amounts to quantifying risk, which is no easy matter. A formal area of study called Business Modeling includes being able to build “What-If” models and run simulations of various scenarios in order to support your decision. This can become very complex, especially when so much of the data to be used is subjective. There are some simple formulas that are based on such models that will give you the basis to help you make a few critical decisions.
Risk Avoidance does not mean taking NO risk. There is always risk. You simply want to avoid MOST of the risk. Specifically, you must determine a threshold of acceptable risk that you are willing to live with. People that gamble are very familiar with the idea of a threshold of acceptable risk even though they may not call it that. When any risk is involved, then the decisions made are essentially a gamble. The question you have to answer is how much risk is too much. That is your threshold of acceptable risk.
You might not want to go after a contract opportunity that you have a 10% chance of winning but one that has a 70% chance of winning is an acceptable risk. Somewhere between 10% and 70%, was your threshold of acceptable risk.
Unfortunately, as you will see, it is not that simple. Suppose you have two contracts. One has about a 60% chance of winning a contract for $450,000 and the other is a contract that has about a 30% chance of winning a $40 million contract. Which will you pursue? Where will you spend your B&P (bid and proposal) funds? Other white papers will show you why the human mind is pre-wired to sometimes give you bad answers to questions like this. BDM can show you how to resolve such conflicts objectively on the side of least risk. You'll be surprised how difficult that is.
The bottom line is that Risk Avoidance refers to the part of the risk that is above your threshold - that's the risk you avoid.
Just like a mountain climber, Risk can be reduced sometimes by simply picking a different path to the same destination. So it is with business management. For instance, there is a big difference between doing business with the government (called a Prime) and doing business in the government marketplace WITH a prime (called a Sub or subcontractor). It is still no easy walk-in-the-park, but doing business in the government marketplace as a sub does have a lower risk and is not quite so difficult. BDM can show you the difference and what to watch out for in both the Prime and Sub arena. This is not to say that you should not enter and do business in the government marketplace as a Prime. Just come into it with your eyes open and receptive to anything.
|