The Four Key Principles of Risk and Resource Management

When it comes to determining what is a Risk worth taking, there are four principles that apply.

Accept no unnecessary Risk.

Every mission is going to require some degree of Risk. I’ve touched on that in a previous blog entry. There are some very good reasons to not insist on the complete elimination of Risk (not the least of which is that it’s impossible).

But there’s a difference between accepting the fact that Risk exists and throwing caution completely to the winds. When looking to reduce vulnerability and move towards success, it is important to reduce Risk as much as you feasibly can.

If you were going to drive a cross-country trip you might set the goal of reaching your destination safely, on-time, and while having some fun. An unnecessary Risk might be trying to drive 120 mph. There are very few places outside of a NASCAR track where that kind of speed is safe. Even if it is safe, there are still fewer places where the cops will let that slide. Getting a ticket, getting your driver’s license pulled, or getting in a wreck means that you don’t get to reach your mission success parameters (Safe, timely, and fun).

In an organizational setting there are frequently rules and regulations that proscribe certain behaviors. These parameters are often set for reasons of legal or regulatory compliance, safety, or to increase the chances of success.  Taking any Risk that requires going outside of these operational priorities should not be accepted.

Accept Risk only when the benefits outweigh the cost.

Given that you’re operating within the parameters set by your organization (or yourself personally), there is often still some space where it is up to your judgement as to whether or not a Risk is worth taking. Risk must be balanced against the potential gain. I’m going to repeat that;

Risk must be balanced against potential gain.

To use the example in the point above, 120 mph is an unacceptable Risk for pleasure or trip driving. However, using my superpower of “having lived on the internet since I was a tween”, I know that some of you dear readers are already pointing out edge cases where it would be an acceptable Risk.

What if my sister with a burst appendix needs to be rushed to the hospital and I can’t get an ambulance?

Saving your sister’s life is a gain that outweighs the Risk.

What if I’m Dale Ernhardt Jr on the Autobahn?

Then you are a professional driver used to much higher speeds, on a road designed for speed, driving a car designed to go fast, and the benefit of visibility is definitely a gain when you are a celebrity known for racing. Carry on.

(His top Autobahn speed was 130 mph, incidentally).

What if I’m in the movie Cannonball Run?

Image Property of 20th Century Fox

Also, how did you even get online from the year 1981?

I would not call the characters of that movie paragons of Risk Management. And even Ed Bolian, the current real-life holder of the Cannonball Run record (fastest time from NYC to Los Angeles), took heroic steps to pursue the record with as little Risk as possible. It took a $9,000 tuneup, numerous aftermarket modifications, several illegal devices to prevent being caught by the cops, two co-pilots, scouts, a team of advance drivers, and a bedpan. Bolian even waited until the meteorological conditions were right. Even though the gain of being the record holder (28 hours and 50 minutes) of a coast-to-coast drive was worth it for him, he spent a lot of time and money to lower the Risk to acceptable levels before he undertook the drive.

There are times when even what seems like an objectively dumb and unnecessary Risk can provide enough potential gain to be worth the literal gamble. There’s a semi-famous story about Frederick Smith, one of the founders of FedEx. Around 1973 FedEx was millions in debt and looking at bankruptcy. The rising cost of fuel had left the company with a mere $5,000 in savings. There was no way they could continue with just that. Smith figured that since they couldn’t afford the following week’s fuel bills with that anyway, he was going to try to multiply that money. He withdrew it as cash, went to Vegas, and hit the blackjack tables.

99% of the time, you can say that withdrawing all of your company’s funds and going to Vegas is a completely unacceptable risk. But Smith knew they weren’t going to be able to afford to fly in the coming week and bankruptcy was imminent. He allegedly also knew a little something about counting cards. The risk of taking no action was the certain collapse of FedEx. The risk of gambling with FedEx’s cash was losing the money and still going bankrupt. The potential gain of gambling with its cash on hand was the slim chance of winning enough money to keep it going another week while they looked for more funding. Smith returned home with $27,000 cash in hand and things quickly started looking up.

Anticipate and manage Risk and vulnerability by planning.

Or “prior planning prevents [pretty] poor performance,” if you’re a fan of alliteration. Possible errors that you or your organization are vulnerable to have to be addressed before they happen in order to have effective Risk management. The resources to reduce risk and exposure to disaster must be in place before the error chain to disaster begins. Once the dominoes start falling it is infinitely harder to stop the chain reaction than it would have been to keep the first one from falling.

The issue of whether or not trying to set a Cannonball Run speed record is a reasonable pastime aside, it is clear that Bolian spent a great deal of time planning his trip – mitigating his risks to reduce his vulnerability to disastrous error.

First, there was careful consideration of what potential disasters could occur. Some of these were a matter of safety but others were a matter of failing to make the record. He could have been in an accident. He could have been stopped by the police going thirty miles over the speed limit. He could waste too much time stopping for fuel and restroom breaks. The weather could slow him down.

Each of these potential disasters was mitigated through planning to minimize risk. There were scouts who drove ahead of him to look for speed traps. There were extra fuel reserves in the trunk. The type of car was carefully chosen for mileage, power, and safety.  The run did not take place until a full moon and clear weather was guaranteed. A bedpan was included in the supplies in the car.

But even with all of these precautions, the ride did not go off flawlessly. In the first fifteen minutes Bolian’s GPS directed him to go the wrong way down a one-way road. A police officer did pull Ed’s team over. Fortunately for the record, every other Risk was mitigated to the point that they were successful in their under-thirty-hour drive despite the delay.

Not all Risk can be eliminated, but with planning it doesn’t have to tip the first domino in the chain to disaster.

Make Risk decisions at the appropriate level.

There are different levels of decision making that depend largely on time available. Obviously an organization has a corporate structure that makes decisions at various levels. These decisions filter down as policies and rules. In higher levels of an organization the decision makers have plenty of time to strategize and consider all aspects and repercussions of a decision. This is where you might make decisions that resemble mission statements – overarching goals for the company.

With less time available, middle managers make allocation type decisions on how best use available resources. Again, this is something that is frequently handed down as an imperative. You will do this in such a certain way. However, they cannot go counter to the decisions made higher up when more time was available.

At some point you end up on the pointy end of the time spear. Boots-on-the-ground-rubber-meets-the-road, you have to make decisions quickly. These are the kinds of decisions ER doctors and nurses make when they are dealing with a coding patient. Where there is no procedure to directly address what needs to be done, any good decision is forward motion, even if it is not the optimal decision. There may not be time to consider all the factors to make the best possible decision.

If you were to blend up these types of decisions and the levels they are made at however, disaster would ensue. Imagine if an ER doctor was consulting copious amount of literature to make the best, most researched, most comprehensive decision possible while a patient was bleeding out. Or if the CEO of a major corporation tried to build five year plans with seat-of-his-pants-gut-feeling decision making.

This applies to personal decision making as well. For some kinds of decisions you want to make the best-possible choice because once the decision is made it will be hard to change course. eg; What kind of car to buy, where to go to college, how are you and your spouse going to discipline your future children. For other kinds of decisions you need a moderate amount of time. These decisions have to be good choices, but if they aren’t the best you can adapt and update – you can build resources here as well.

The big takeaway is this: you cannot build resources in a time-critical decision. At that point all you can do is take action and then keep taking action until the issue is resolved. If you have resources like policies, procedures, checklists, and a good knowledge base then that can help you take better actions in those circumstances.

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