Managing Excerptations: Risk and the Management Professional

Risk management Probabilistic Thinking

I started my blog to kick my non-writing habit. I've now got enough material to start blocking out a book (hooray!). So while I'm doing that, I thought I'd start a small series looking at some of the books that have influenced me.

"Managing expectations" is one of my least favourite managerialisms. I cringe whenever I hear it. Expecting is about hope, which is the only thing that keeps many professionals going. We take what we can from life and do our best with it.

So this series is about some of the excerpts that caught my eye over the last six months. They're part of what gives me hope about the profession of management.

Risk. One of the most coarse four letter words in the business dictionary. A source of vast confusion in the profession of management. A word that has distinct meaning in a wide variety of domains. A word that needs to be immediately clarified when it comes up in conversation.

"Are you managing risk?" is a constant remark. "Yes. I'm not trying anything different." or "Yes. I'm not trying anything that I don't understand." are what is often said in response.

Peter Drucker wrote in his 1973 book 'Management: Tasks, Responsibilities, Practices',

"The first test of any business is not the maximisation of profit but the achievement of sufficient profit to cover the risks of economic activity and thus to avoid loss"

And,

"To take risks is the essence of economic activity. Existing means of production will yield greater economic performance only through greater uncertainty, that is, through greater risk."

So the question "Are you managing risk?" is actually "Are you managing?" And if a person thinks of managing as minimising 'risk', then the answer is "No".

When managers hear the word 'risk' they often substitute the word's 'loss' or 'wrong'. People don't like to lose and don't like to be wrong. Loss aversion is a threat response and where our ego is concerned it is usually right.

Yet what happens in modern business practices? We establish a culture of experimentation, where 'being wrong' means a chance to improve our theories. Where 'losing' is a natural consequence of being at the big table. Good management makes use of the scientific method and recognizes that, like all things, business is cyclical.

Patrick Leach's 2006 book 'Why Can't You Just Give Me The Number?: An Executive's Guide to Using Probabilistic Thinking to Manage Risk and Make Better Decisions' is a good book for the management professional who knows they need to get across this stuff but doesn't want to go too deep.

The field of probabilistic thinking in business is, as you might expect, very deep. But just enough can be quite a small amount when it comes to shifting away from deterministic thinking. Which is the big bad wolf of the management profession in our time when the creative economy is smashing head on into the era of big data.

Leach,

"The second most important value-adding activity a senior executive can engage in is to identify, characterize and understand the key uncertainties in her business, and then consistently incorporate this understanding into her decisions. The most important value-adding activity for an executive is to create a corporate culture in which all employees are encouraged to think creatively about their jobs, their company, and their industry and to voice their thoughts without fear of adverse reaction"

Couldn't put it better myself. Understanding risk and encouraging creativity. The management professional that gets them right is giving herself a great foundation for success.

"A bigger problem with the deterministic approach is that once a value is generated, put down on paper and incorporated into the business plan, it becomes gospel. Nobody questions it anymore; it's in the plan, so it must be true. The deterministic approach leads to complacency. We actually begin to believe the numbers we've generated, conveniently forgetting how shaky the initial estimates of many of the input parameters were. This is dangerous, except in stable and highly predictable environments."

In the head on collision between the creative economy and the era of big data, stable and highly predictable environments don't really exist. Our lazy idolisation of the 'plan' is shorthand for ineffective management. It might make us feel better, but it doesn't help us towards greater economic performance.

Image via Gratisography