Taking Risks Is a Natural Part of Being in Business, Just Make Sure Yours Are Calculated

To maximize your chances of success, make sure the risks you take are the right ones.

Taking risks is a natural part of being in business. The key to dealing with them is to make sure you're balancing the downside with the upside. It's perfectly acceptable to take risks that give you an opportunity to make big wins. What's not acceptable is to put your company in harm's way when there's no upside. The challenge is that you can err both ways.

Here are a few key steps you can take to better calculate the tradeoffs of the decisions in front of you.

1. Brainstorm all possible risks

Once you develop a plan, the first thing is to brainstorm all the possible risks you might face. This includes internal risks associated with your ability to deliver on your tasks and efforts. It also includes external risks that might impact your ability to successfully complete your plan.

Like all brainstorming efforts, the trick here is to create the right context and mindset to explore all possibilities. Set yourself appropriate ground rules to allow for all ideas to get on the table, and suspend judgment and commentary in the beginning. Once you've created a sufficiently long and broad list, you can start to filter and prioritize.

2. Determine the likelihood of trouble occurring

Using the list you brainstormed, determine how likely each one of the troubling events is to occur. What most teams get wrong is that while certain specific risks are highly unlikely to cause a problem, categories of risk are actually more likely. While the chance of your facility getting hit by a tornado is low, having some type of weather-related event that disrupts operations is quite a bit higher. A solution here is to focus more on categories and types of events than specific scenarios.

3. Assess the impact on your business

Once you've identified the likelihood of each of these events happening, then assess how it will impact your business and project. Categorize the impact assessment on a similar scale as you did probability. This will allow you to see which events will generally have a low impact on your plans and which ones will have a more significant impact.

Once you've completed the likelihood and impact ratings, you can plot each risk on a chart that shows all risks brainstormed and how they relate to each other on these two axes. This will allow you to decide which actions to take for each situation.

4. Ignore all low-impact risks

The first thing to do is ignore anything that's low impact, even if it's a high-likelihood event, mainly because it's something I can just deal with if and when it occurs. Unfortunately, I see a lot of teams spending time and energy here. Usually, it's because low-impact risks are easier to deal with, and it feels good to solve them. But in fact, it's not a good strategic decision and will be a waste of your effort. You're better off focusing on higher-impact risks.

5. Create a plan of action for low-likelihood risks

For low-likelihood risks that have a chance to significantly impact the business or project, we want to make sure that we have a plan of action. We want to know what we would do should this risk occur and how we would mitigate and minimize its impact. This could be things like taking out insurance or having a backup plan or an alternate strategy in place. However, since this kind of event has little likelihood of occurring, I'm not going to spend much money, time, or energy mitigating the risk upfront.

6. Adjust your plans to avoid/minimize high-likelihood risks

The high-likelihood, high-impact risks are where you want to spend the bulk of your time, energy, and money. First, you want to look at how to change plans and strategies to avoid these risks in the first place. It's often easier and more efficient to just create a plan that makes these either low likelihood or low-impact right away. If you can't avoid these risks, you want to have a plan for how to mitigate their impact if they do occur.

No business is without risk, and if you were growing and scaling quickly, you'll be taking on more risk than other businesses. But that doesn't mean you need to accept a lower chance of success. By properly assessing all the risks you might face and categorizing them into the appropriate buckets, you can make smart plans to deal with them, or hopefully even avoid them altogether.

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