RISK ANALYSIS
Aesop’s Take on
Enterprise Risk
Management
By GREGG JACOBSEN, MBA, CBCP
The One-eyed Doe
A doe that had but one eye used to graze near a lake, so
that she might keep her blind eye toward the water, the
other eye toward the land that no hunters could approach
unnoticed. But one day a hunter in a boat saw the doe from
some distance, approached her quietly, and shot an arrow
into her heart. In her dying agony, she cried out, “Alas, sad
fate, that I should die from a wound to the side I thought
was safe, while yet safe where I most expected
danger!”
It isn’t likely this is where the term “get- ting blindsided” originated, but it does nicely illustrate the concept. Organizations and their managements are blindsided daily by events large and small. Risk management may prevent such catastrophes.
While this fable is a dire portrayal of a “downside” risk event,
risk actually is a neutral concept. Risk is defined as the uncertain probability of gain or loss. Investing money in stocks is risk
taking. Gambling is risk taking. Driving your car to work or to the
grocery is risk taking. Operating a business is risk taking and on
many levels as well. When one does pretty much anything, one
cannot be absolutely certain of the outcome.
A primary objective of management is to make decisions,
wherein also is risk taking: whether to invest in new capital equipment, acquire a company that will expand market share, expand
and integrate operations vertically or horizontally, or even enter
a new market. These are all risks of considerable proportion.
Further, managers are responsible to protect the enterprise from
losing its value to customers (market share) and stockholders
(fiduciary responsibility). Thus, risk management must address
both the up and down side of doing business.
Managing Upside Risk
One may ask, “Why would a firm need to manage upside risk?”
A good question deserves an answer. Upside risk, a windfall
profit from a risky investment or explosive growth in market
share from a fortuitous product enhancement may not seem
like a problem that needs managing, but it is. In fact, one
of the most difficult things in life, be it personal or business, is sudden, a particularly overwhelming success.
Winning $30 million in the lottery can ruin a family
not accustomed to handling money on that scale.
So it is with business. A firm with average sales of $50 million
lands a five-year contract for $2 billion – 40 times current revenues! Sounds great at first blush, but what does it actually mean
to the enterprise? At a minimum, there is explosive, rapid growth
of the workforce to accommodate the workload. But there is certainly more: acquisition of additional floor space, furniture, capital equipment, more and likely newer, bigger vendors, et cetera.
The increased level of operational complexity alone can become
a nightmare for management, particularly because none of them
may have experience in a major company expansion, and thus are
unprepared to cope with it.
Organizations are like animals. They are born (founded), they
grow to maturity, level off, and start to decline until they die,
unless… The nice thing about corporations is that they are, from
a purely legal view, immortal: they can live in perpetuity.
Though technically true, there is nothing chiseled in
stone saying a firm can’t just simply go out of
business. Occasionally, it happens to a company that gets tagged with “flash in the pan,”
an overnight success story gone sour. That is
what happens when a company fails to manage
upside risk.
What does this growing “animal” do to
accommodate fortuitous outcomes? A good
example is the lobster. As it grows, it sheds its
shell and grows a new, larger one to suit the
growing body inside. During the transition,
it is very vulnerable, since it takes time
for the new coating of armor-like shell
