How To Help Your Company Focus on the New World of Risk

Tip #2: Get people talking up and down the corporate hierarchy.

Convincing your C-level executives of the importance of a new, broader approach to risk is a crucial first step. But it's equally vital to expand the conversation to include people at many levels within your organization. The challenge of identifying, measuring, monitoring, minimizing and reversing the strategic risks your company faces can't be successfully met until middle managers in every corporate department are involved.

There are many reasons why drilling down through the organization is so essential when you're trying to launch a conversation about risk management. Front-line managers are closest to the realities of the marketplace, fielding customer complaints, tracking competitive initiatives, and dealing with suppliers, distributors, and other players throughout the value chain on a daily basis. As your company's eyes and ears, they are the ones most likely to be the first to recognize tomorrow's threats in time to respond, as well as the ones most likely to see the opportunities bundled with the risks. And of course, middle-level leaders will be charged with implementing the risk management moves developed by the company. If they don't understand or support the initiatives, nothing meaningful will happen.

A recent paper published by Babson Executive Education describes the frustration that can arise when middle managers are reluctant to buy into a company's risk management strategy. The company in question is Harrah's, the casino firm that has become the paradigm of knowledge-intensive risk management:

Harrah's has developed a centralized real-time yield management system for all of its hotels that needed to be sold to property managers. . . . When a customer calls for a reservation, the system's algorithms weigh a number of variables and data . . . to calculate a price to offer to the customer. The system almost always produces higher revenues for individual properties when it is employed. Yet property managers usually have to be convinced the system is more effective than traditional approaches to yield management and local decision making [emphasis added].

As the Harrah's story suggests, your middle-level managers have an effective veto power over whatever risk management system your company's top leadership creates. If the people in the middle don't buy it, it won't happen. In some cases, they may prevent it from being implemented by refusing to follow the system (as some Harrah's managers did). In other cases, they may block its effectiveness by failing to participate in the discovery, gathering, combining, sharing, and analysis of information needed to keep the risk countermeasures up to date and accurate. Either way, the best intentions of senior management will not get executed.

The moral: As early as possible, involve middle managers in talking about the risks your company faces and the best strategies for overcoming them. The process can start with a few key managers who could play important roles on a task force or project team charged with developing a company-wide risk-management system. Later, these early allies can help you spearhead an educational program that will transmit the new ideas to every corner of the company.

Tip #3: Work to make risk monitoring, reporting, planning, and remediation a part of every manager's job description.

Unfortunately, the culture and communications systems of most companies actively discourage middle managers from contributing to risk assessment, mitigation, and response. Companies tend to punish those who deliver "bad news," which is often viewed as "negative," "pessimistic," "defeatist," or "discouraging." As a result, unfavorable developments from the outside world end up taking longer to reach top management's attention, or they take top leadership by surprise, despite the fact that managers at lower levels were aware of the looming problems for months.

Other cultural biases further impede a realistic approach to risk. Over-valuing confidentiality and secrecy, many companies try to restrict the flow of information that's deemed sensitive, even internally. In combination with the traditional silo-like structure of many corporations, this tendency produces cadres of managers who are well-informed only about their corners of the business and therefore are unable to "connect the dots" that might generate a larger, more informative, and more actionable picture of how the company's world is changing.

Silo structures impede broad-based risk management in other ways. Most companies incentivize managers based largely or even entirely on departmental or division performance. And job promotions, of course, are driven mainly by the perceived success of a manager's own group. This is logical and to a degree unavoidable, but the sense of inter-departmental competition it sets up inevitably reduces the willingness of managers to share information and ideas. The result isn't always data hoarding, but the energy that managers apply to cross-fertilization of knowledge is, at least, drastically diminished.