Risky business – defining and working with risk

 

Have you ever asked yourself what you understand risk to be? Or thought about how your colleagues think about and work with risk?  For some people, their understanding of risk may be clearly structured and understood as part of the industry they work in. In other environments, however, people are working with risk in much less structured ways. The challenge, it would seem, comes when these different approaches to risk come to work together.

Added on 04 March 2015 by Trudi West

Working with risk

At Ashridge, we were finding that our clients were increasingly becoming frustrated by the common response to working with risk – which is to create a framework of certainty by measuring, monitoring and mitigating against it.  The reality, of course, is that risk is a complex phenomenon and attempts to define it and capture its complexity remain elusive.

We decided to find out more about how senior managers think about and work with risk, so that we could provide some understanding beyond the limitations of existing theory and technical advice and provide some practical advice on how managers could work with it in practice.

Our findings, based on a literature review plus interviews with managers from a broad range of industries, provided some important insights for managers working with risk – and what might get in the way.

Defining Risk

Broadly, we discovered that senior managers spoke about two approaches to risk:

  • A formal approach which is objective, evidence-based and where there may be a requirement to comply with regulation or governance.
  • An informal approach – intuitive, experience-based and sometimes referred to as instinct, gut feel or the common sense to look for threat or identify opportunity.

Both approaches have their merits and need to be considered as part of the context when thinking about, talking about and dealing with risk. Language is also key. There is much ambiguity about the words used when talking about risk: Formal or informal? Individual or collective accountability? Risk management as a process or a skill? It is perhaps ambitious to imagine one, truly-shared language across all sectors and industries, but a language shared with most people involved is a start.

The illusion of risk

From our interviews, it became clear that using the terms formal risk and informal risk can create the illusion that risk is being dealt with, when in fact, it is not. With formal risk, the illusion is that risk has been controlled for – and that someone somewhere must have thought about it. With informal risk, there can be an illusion for people who describe it as common sense; but common sense for one person may not be common nor make sense to another. These illusions can lead to potential harm and to opportunities being missed.

Principles

The principles that individuals hold have a bearing on how managers deal with. Principles can include integrity, values or ‘good intention’. A formal approach to risk can stifle attention to principles whereas an informal approach requires transparency to understand decisions based on them. Managers working with risk need to think about how principles impact on risk. Is the level of riskiness mitigated by the ‘rightness’ of the decision?  Have allowances been made for the unintended consequences of decisions which conflict with important principles?

Accountability

Accountability is an essential part of any approach to risk. Individual accountability provides a mechanism to ensure that essential parts of a process are administered without gaps and with transparency and correctness. However, individual accountability can create behaviours which lead individuals to protect themselves before managing risk.  In collective accountability trust and communication play a vital role to draw out what is at stake and what influences outcomes, as failure is generally distributed across the collective.  A mix of both provides greater sharing of risk perceptions and better informed decision-making as a result.

Change

A major challenge facing managers is that people perceive change as risky. Formal approaches to risk can be bound by process, while informal approaches to risk can be free to make progress. However, progress and process need to be considered together, as taking a ‘one-size-fits-all’ approach to process can get in the way of making progress, whereas a short-term focus on progress can undermine communication and limit learning. Either way – managers need to be aware there is risk in not changing as well as in changing.

Leadership responsibility

Managers were clear that leaders should be held responsible for the management of risk, and importantly, provide the frame for others to understand and act. Key actions for leaders are to articulate a frame of risk which reflects the different contexts of an organisation and provides consistency for those working within it.   They also need to share the leadership of risk - engaging and enabling individuals across the organisation to feel responsible for identifying threats and opportunities.

Risk as a ‘human endeavour’

The research revealed a consistent high regard for people who are able to consider the implications of risk, and importantly, be able to communicate that well, engaging and enabling others to think about and work with risk day-to-day. However, risk is often viewed as the responsibility of those with occupational experience. In effect, risk gets ‘taken care’ of by someone considered expert. But unless that person is able to communicate well, ‘risk’ does not translate to other people. Distributing expertise by enabling individuals to take responsibility for thinking and working beyond minimum requirement provides greater scope for them to participate meaningfully. Leaders need to allow for contributions from across the organisation by providing time for people to talk about risk and develop understanding and a shared language of risk, to improve quality of information and communication. In turn, both formal and informal approaches can contribute to each other.

Find out more:

The full findings of the research are outlined in the report ‘Working With Risk In Practice And In Principle: Lessons From The Field’, by Trudi West, Jamie MacAlister, Dev Mookherjee and Martyn Brown.

Read our 360° article by Trudi West And Dev Mookherjee “Working With Risk In Practice And In Principle: Lessons From The Field.