Blue Dots Partners

There is no meaningful opportunity without risk. Do you remember taking the chance to ask that special someone for a first date? Or beating the odds by shooting a buzzer beater from 30 feet? Entrepreneurs and leaders of established businesses alike accept dealing with risk as a necessary evil.

How should business leaders confront risk and make the best decisions, particularly when contemplating a major initiative or change in direction? How can leaders mold their teams into high-reliability organizations? How can they act with confidence when, more often than not, data is an aid to judgment and not indisputable validation in advance of a decision?

Authors, business leaders and military strategists have weighed in with their own approaches to successful decision-making. There is even an academic construct called “Sensemaking” to create insights into how organizations address risk, uncertainty, and ambiguity. However, as operating leaders, most of us lean on common sense simplicity more than scholarly theory. In that vein, you may find the following approach to decision-making in the face of risk to be useful, particularly for decisions with significant consequences. You can think of the following as a checklist of questions and actions to consider and accept or reject depending on the specific decision.

1. Frame the opportunity and likely risk

• In one sentence, what is the specific, well-defined opportunity?
• What challenges encourage change and taking on new risks?
• What are the targeted goals or benefits?
• What will happen if you do not pursue it?
• What is the set of MECE (Mutually Exclusive and Collectively Exhaustive) decision alternatives, including no change from the status quo?
• What are the risks and their magnitude and probability?
• Is implementation of the decision truly within the “feasibility envelope” for your business?
• Would a high-level SWOT analysis help you summarize the situation

2. Build a solid data foundation to inform the decision.

• Decide in advance what questions need to be answered to ultimately tilt the decision scale one way vs. the other.
• For each question, define the data most likely to support the answers.
• Scale the analysis to fit the impact and complexity of the decision. High-risk, high-return decisions typically merit more analysis but, even there, extracting the last bit of data wastes time and talent with little added value.
• Before embarking on the decision analysis, design the presentation that you envision delivering to inform or influence your audience. Use that structure to guide the effort and frame the recommendation.
• Carefully select the people to do the analysis and build the decision foundation. Ensure that each person has a clear understanding of the decision and how it relates to the business. Decision team members must know how to source reliable, accurate data, test hypotheses, produce the relevant analysis, and deliver it all in a clear and compelling way. They should communicate well and be objective.
• Sidestep shortcuts. Avoid the temptation of an end-run around meaningful data analysis in favor of an intuitive decision.
• Expose the data gaps. Make clear what data are missing that would have been important to the decision. Be honest about whether that gap is dangerous or would simply increase the comfort level.

3. Assess the risks

• In what ways could the decision fail and why?
• Categorize the risk level of the decision. A simple structure in which impact analysis can fit is Adam Nash’s three levels of consequences resulting from risks gone wrong[i] from (i) Fatal: Bet-the-company; (ii) Painful: significant repercussions; or (iii) Embarrassing: no significant impact.
• What are the probabilities of the identified risks?
• How will your target customers and competitors react to your decision?
• In what ways could the risks be mitigated?
• If the decision is to maintain the status quo, in what ways is the business likely to be impacted?
• Debate the risks and how the organization will deal with them.
  

4. Make the decision

• If the risk impact is low, make the call and move forward.
• If the business impact and risk are high: (i) Consult objective advisors with relevant experience; (ii) Debate within the team accountable for implementing the decision; (iii) Set guardrail metrics to flag results that merit corrective action; and (iv) Explore whether the risk level and outcome can benefit from a phased implementation.

5. Avoid “fire and forget” decisions

• Monitor the impact of decisions relative to a success definition.
• Course-correct before crashing into the guardrails.
• Deal with new or unanticipated risks before they become major problems.
• After any major decision failure, dig for the root cause, learn from the mistake, and help the organization avoid repeating the same mistake.
• Evaluate a near miss just as you would a failure.
• Extend the learning throughout the organization to promote best practices.

Ultimately, every change and every step forward require a decision. The bigger the complexity, ambiguity, or magnitude of the decision, the greater the pressure on you, as the leader. A risk evaluation and decision-making approach that works for you, whether it is the checklist offered here or something completely different, will benefit you, your business, team and stakeholders.

[1] Adam Nash, Psychohistory blog, “Three Types of Risk: Making Decisions in the Face of Uncertainty”, Psychohistory blog, April 9, 2019.