Surface Ripples

Risk, Reward and...?

Many business leaders will be familiar with the term “risk/reward” that describes the approach to taking risks if the rewards are justified.  This two-dimensional view has served well for some time, but at times I wonder if there are other aspects to consider. 

To keep things simple, we’ll use “High”, “Medium” and “Low” to describe a risk.  These are subjective descriptions but suffice for our purposes.  In the same way, rewards will also be classified as “High”, “Medium” and “Low”.  

We now have a situation where, traditionally, if the risk of taking an action was high, but so were the rewards, management would consider it (especially if they could reduce the potential risk somehow).  Conversely, if risk was low and rewards were high, the action would be taken.  In between lie all other permutations.

Into this equation, we now need to add two more elements: cost and consequences.  The cost is the cost in terms of time, resources and money of undertaking an action.  Generally, these are inter-related in that, the less time available, the more the cost in terms of money and resources to complete the action will be.

Consequences are the results (short-, medium- and long-term) of undertaking an action (or not undertaking it).  A simple example might be: the consequence of not installing self-service checkout counters will be a loss of business.  This could be said to be part of the risk of doing something, although it is more aptly described as consequences.  

The risk of installing self-service checkout counters could be low as we know that the equipment is available, can be installed with minimal disruption to the business, employees and customers at acceptable cost, operates efficiently, has low maintenance costs and will last a set number of years at defined rates of use.  Absent staff available to man checkout counters, this looks like a “good bet”.  

If the costs of operating (say) three self-service checkout counters over a given period are lower than those of recruiting, training and employing the people to do the work, then the next step is clear.  

There are other consequences to installing self-service checkouts, of course, such as:

• The machines go wrong and need a member of staff to stand by to troubleshoot;
• Certain customer groups may be scared of using them and prefer traditional “face-to-face” interaction with a cashier;
• The equipment relies on back-office computers for details of price, quantity, special offers.

All of these can be overcome but must be factored into the “cost/consequences” of the equation.  If, for example, the installation is poorly done (risk), customers may lose faith in the equipment and simply refuse to use it.

Appreciating the interrelationship between risk, reward, cost and consequences helps us make better decisions for the business, our people, our customers and our community.

How do we in our organisation weigh cost/risk/rewards/consequences?  Everyone has their own approach.

I’ve spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With a wealth of international experience in international financial services around the world running different operations and lending businesses, I started my own Consultancy to provide solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email. My website provides a full picture of my portfolio of services.  For strategic questions that you should be asking yourself, follow me at @wkm610.

Labels: Financial, Productivity, Strategy

posted by William Martin @ 15:23