In the manufacturing world, retooling machinery for a different purpose is a common practice. Once a machine becomes worn out, obsolete, or the product is no longer in demand, engineers can modify the equipment for another purpose and thus save the company tens of thousands, even millions of dollars.
The best example of this on a mass-scale is the COVID-19 pandemic, when thousands of manufacturers, breweries, and other companies around the world were retooling their equipment (…and processes) to produce necessities like hand sanitizer, PPE, and more.
The concept of “retooling” though is also relevant in other areas, including risk and opportunity management.
Now as risk managers, we don’t use huge drilling rigs, conveyors, grinders, or welders to produce outputs…most of our work occurs in conference rooms, Zoom meetings, and laptops using either spreadsheets or one of several ERM software systems out there.
However, the concept of retooling is quite relevant to ERM…
In my experience, organizations describe risk(s) in one of two ways:
- If/then statements (e.g., If our X product causes harm to a consumer, the company could face litigation, regulatory scrutiny, reputational damage, and financial hardship.)
- The risk that XYZ happens, potentially causing ABC (e.g., The risk that the company’s supply chain fails, preventing the company from receiving critical parts and materials necessary to producing the product for sale to our customers.)
Generic risk statements may be sufficient for regulators, but they are not helpful or specific enough for decision-making.
According to surveys (including the recently released State of the Risk Oversight Report from NC State), a large number of companies of differing sizes and industries struggle to realize a strategic advantage from their risk management processes.
As we discuss here following last year’s State of Risk Oversight Report, one likely culprit is the fact that risk management is just another layer of processes that end up being cumbersome for executives and managers to follow. What usually happens is that ERM ends up being seen as just another check-the-box exercise that’s not helpful for ensuring the company’s success.
One thing that I and other risk management professionals have realized is that only referring to risk management standards or concepts is not enough for changing this perception. Instead, we need to determine how we can apply concepts from other disciplines to risk management. Examples can include decision science, statistics, modeling, and even neuroscience, according to some thought leaders.
Complex problem solving is another discipline or tool risk managers can harness when trying to determine the appropriate course of action for both risks and opportunities. In fact, the “skill” of complex problem solving tops the list of must-have skills, according to The Future of Jobs report from the World Economic Forum.
Bulletproof Problem Solving by Charles Conn and Robert McLean provides a great primer on this increasingly vital skill.
In reading this book, it dawned on me how a part of the process the authors outline can be re-tooled for risk and opportunity management.
Bulletproof Problem Solving is an iterative process that traces its roots back to the 1980s when co-author Charles Conn was an intern at Canon in Japan where he was assigned the task of developing a model for how to site factories. Through several twists, turns, and setbacks, Charles was able to develop an iterative model that:
…became the core tool used by the department to make complex factory siting decisions! The secret was that it was a single-page way of seeing complicated trade-offs that had previously been buried in dense reports.
The first step in this process, problem definition, is where I want to focus. In spite of it being relatively straightforward, poor problem definition is the source of many failed initiatives (including figuring out the appropriate action to take for a risk or opportunity). As the authors explain…
Getting problem definition right, including boundaries, is essential to good problem solving and can be an essential competitive advantage.
Below are six core components of properly defining a problem, or answering the question – “what are we trying to solve?” (From Exhibit 2.1, p.34)
- Decision maker(s) – identifies the audience and who needs to decide/act.
- Key forces acting on decision makers – addresses concerns and issues around the decision and how conflicting agendas will be resolved.
- Boundaries/constraints – establishes what is and isn’t under consideration.
- Criteria/measures for success – identifies how the decision-maker will know if the effort is successful or not.
- Time frame for resolution – establishes the timeframe or how quickly a decision is needed.
- Accuracy necessary – establishes the level of accuracy needed.
This problem definition framework can be “re-tooled” into the risk context or strategic decision-making. Let’s take the risk context first.
The ultimate question of “what are we trying to solve?” can be changed to “what risk are we trying to address?” The six core components could then be modified like the following:
- Who will have ownership of the risk and who will be responsible for action(s) around the risk?
- What are any concerns both the risk owner and action owner need to address? Make sure both parties are working collaboratively.
- What is off limits or not under consideration? Instead of throwing everything at a risk, placing boundaries ensures efforts stay on track. A scattershot vs. a methodical approach is one of the key differences between traditional risk management and ERM.
- What will be our measure or criteria that we’ve adequately addressed the risk? This is where risk appetite can enter the picture.
- How quickly could the risk emerge or occur?
- What level of accuracy is needed? How accurate do any metrics (i.e. key risk indicators, etc.) need to be?
Likewise, this framework can be adapted or “re-tooled” to improve strategic decisions. Instead of answering the question of what problem do we need to solve, the question becomes “what situation would we like to change?” An example could be “we would like to increase sales by 20%.” Therefore, the framework can be modified to the following:
- Who will need to make decisions around this change?
- What are the concerns of any decision-makers, implementers, and other interested parties?
- What are we willing to consider or risk and not willing to consider or risk in this effort?
- How will we know we have achieved our goal?
- How soon do we want to reach this target? Within six months? One year? Five years?
- How accurate do any metrics for determining success need to be?
It’s important to note – this doesn’t have to be an add-on process but can be done ad-hoc.
Making risk and opportunity management into a valuable tool for decision-makers requires some out-of-the-box thinking. Simply referring to well-established ERM standards and processes will be increasingly insufficient for addressing threats and opportunities in our fast-changing world.
What processes have you “re-tooled” from other disciplines and applied them to your company’s ERM efforts?
To share your thoughts on this important topic, feel free to leave a comment below or join the conversation on LinkedIn.
And if you feel like your organization’s risk management practices are stuck in neutral, please don’t hesitate to reach out to me today to discuss potential ways to get things unstuck!
Featured image courtesy of Kateryna Babaieva via Pexels.com