by Rai Chowdhary
MS, Cert: CQA, CQE, CQM, Six Sigma Black Belt, Lean
www.hownwhy.com
© 2008

While everyone who starts a business dreams of success, few really make it. Statistics indicate varying figures on survival rates, often as low as ~20% at 10 years. A myriad number of reasons lie behind the success or failure of a business, varying from inadequate cash flow, to loss of premises.

A key factor for success lies in understanding and managing risk. Trouble is - few take the time to do it, even fewer know how to do it well. The result is Risk Management by Chance - a surefire way to hit or miss. When things don't work out, god is blamed, on the other hand if one gets lucky smartness is claimed.

For one to do Risk Management by Choice, one needs to know what to do, as well as the mistakes to avoid. In this article I will share the 10 Mistakes of Risk Management, as discussed in my book. Here they are:

1. The Terribility Factor - High severity events or situations stir emotions to the point that rational thinking takes a back seat. The result is over-reaction or over-compensation. Example: Sarbanes Oxley, which is now being re-thought.
   
   
2. Recency and Frequency - The influence of recent events or frequently occurring events builds cumulative trauma, eventually bringing us to a snapping point. The result is loss of rational thinking. Example: A valuable employee who is tardy frequently (even if the tardiness does not impact business) gets fired.
   
   
3. The Illusion of Control - The mistaken belief that things are under control or that we can control them, when in reality it is not so. This leads to erroneous decisions and actions. Example: A company thinks that because they have been successful in the past, they can control the outcomes in the future.
   
   
4. The Trap of Comfort Zones - Trapper habits and behaviors make us comfortable, and complacent. The result is ignored signals, slow responses, and increased risk.
   Example: Gambling as a habit continues despite persistent losses to the point of bankruptcy.
   
   
5. No Time for Risk Analysis - A constant feeling of being rushed causes us to focus more on the activity than doing meaningful risk analysis. This makes one oblivious to risks that are building up. Example: NASA launches the Challenger in 1986 to keep on schedule, ignoring the fact that the temperature at the time of the launch is detrimental to critical O Rings in the joints of the booster rocket.
   
   
6. Confidence without Competence - The erroneous belief and over confidence that things will work out in our favor. It pre-disposes people to undertake reckless risks.
   Example: A policeman is assigned to patrol a troubled neighborhood without adequate training on how to deal/work with the ethnic group that resides there.
   
   
7. Ignoring the Time and Space Dimension - Studying cause and effect without consideration of the time and space dimensions. This leads to faulty analysis and/or focus on the wrong risk factors. Example: Upon receiving a damaged crate, blaming the shipper when in reality the damage occurred in the factory before the crate was delivered to the shipper.
   
   
8. Tip of the Iceberg - Seeing the tip of the iceberg we think we know where the risks are, whereas a majority of the risks lie below the surface. This leads us astray and we make wrong choices. Example: A business owner avoids the high interest rate loan from one lender, not realizing that the bigger risk is due to a customer that is about to jump ship.
   
   
9. Mixing up Signal and Noise - Mistaking one for the other, we either take faulty action or no action at all. As a result, real risks go undetected, and may even magnify. Example: In the days before 9-11, there was high static and telecom traffic, however, the signal could not be separated from the noise. We were un-prepared for what was to come.
   
   
10. Rationalization - A Double Edged Sword - Rationalizing leads us to justify everything, including wrong actions and behaviors. The resulting paradigms can leave us unprepared to deal with known risks. Example: Justifying addiction to habit -forming drugs under the pretext that it helps relieve stress.

This list is not all encompassing or final. We as the human species - have a long way to go in boosting our ability to deal with known and yet to be discovered risks. The journey begins by understanding of the self. The 10 Mistakes discussed above are pointers to get started.

Credit:

About the Author:

Rai Chowdhary is the President and CEO of TEAM 2000, a company that offers workshops on several topics, including Strategic Planning, and Risk Management. His clients include both large and small companies, such as Amedica, Teco Westinghouse, Dell, Applied Materials, Abbott Labs, Applegate Tool Co., and Celerity. He can be reached at 1-877-469-6949, or via e-mail at rai_chowdhary@yahoo.com. You may also visit www.hownwhy.com to learn more about TEAM 2000.

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Reprint of this article does not constitute an endorsement by the National Business Association; the article is for informational purposes for our members and viewers of our Web site.