The Costs of Poor Risk Assessment

145H (2)In our prior post, we explained that people do not assess risks well and don’t take responsibility when they commit errors. These two basic flaws lead to most business problems.

Wasted Effort.

Shigeo Shingo, the Japanese industrial engineer who developed the Toyota Production System, said that the worst kind of waste is the waste we do not recognize. The painful fact is that we don’t even recognize most waste. After decades of studying and consulting for some of the most advanced organizations in the world, Peter Drucker concluded that no more than 15 percent of the efforts in even the best organization produce 80 or 90 percent of the results. “The other 85 or 90 percent of those efforts, no matter how efficiently taken care of, produce nothing but costs.” P. Drucker, People and Performance 33 (1977).

Think about that for a moment: At least 85% of an organization’s efforts are either unproductive or, worse, actually harmful to the organization. That is a staggering figure. If you have a budget of $1 million, you are wasting $850,000. $8.5 million of a $10 million budget goes to waste. Some of that money is being spent on activities that actually harm your organization. Why? Because we don’t know how to identify and address threats and opportunities.

Disputes and Friction.

Most litigation and disputation involves smaller organizations. Small business owners are in the cross hairs, and business disputes are costing them tens of billions of dollars per year. These lawsuits hurt reputation and credit worthiness, increase the cost of goods and services, and reduce employment. And that’s even when a company is not liable. If they are, they can face hundreds of thousands of dollars in penalties. Furthermore employees increasingly are suing their employers: according to published reports, 60 percent of employers have faced an employee lawsuit in recent years. Organizations are actually eating themselves alive. Again, why? Because we fail to identify and address threats before they lead to litigation.

Human Costs.

Poor risk assessment and finger-pointing also have enormous human costs.

  • Anxiety. Threats and uncertainties cause stress, uncertainty, and anxiety. This in turn affects organizational decisions. Research has shown that those who are facing substantial anxiety are much more likely to seek advice, but much less likely to be able to determine whether that advice is sound. In other words, anxious people need help but find it difficult to determine whether that assistance is actually helpful.
  • Lack of Trust. Facing risks in the workplace leads to a loss of trust in organizations and a loss of confidence in employees’ ability to succeed.
  • Talent Management Problems. Inability or unwillingness to address risks, both positive and negative, can lead to mismatches between people and positions. When one is not sure what threats and opportunities in organization faces, it is hard to tell whether the right people are in the right seats. If you don’t know what you need, it’s only happenstance if you actually get who you need.
  • Disengagement. Inability to address risks undermines employees’ perceptions of an organization’s ability to learn from mistakes. Employees don’t feel as engaged. For their own protection, they withdraw. They don’t see opportunities for advancement.
  • Undermined Morale. Poor risk management can also lead to employees feeling devalued and unrecognized. When an organization can’t shoot straight or gives the impression of being unprofessional, this undermines morale and team spirit.

Reputational Harm. Poor risk management can cost an organization its reputation. Warren Buffett famously said that reputations take years to build, but only a single misstep to lose. Poor risk management fatally endangers trust. Why? Trust is formed through repeated interactions, consistent behavior and follow through, and honest communication. Poor risk management undermines consistency and follow-through. It makes it hard to communicate accurately. Missteps come quickly when one wears a blindfold.

Jay Baer, in Youtility (at 14-15), spells out the implications of reputation in the marketplace. Referring to a study called the Edelman Trust Barometer, Baer notes that businesses worldwide are trusted by fewer than 60% of their customers. That means that of every ten potential customers your organization is trying to reach, four of them don’t trust you. This has enormous impact. If an organization is distrusted, almost 60 percent of people will believe negative information about that organization after just one or two repetitions. By contrast, if an organization is trusted, half of potential customers will believe positive information after just one or two repetitions.

What threats and opportunities do you see in your workplace? Do you have the means to address them? Give us a call and we can talk about it.

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Photo Source: Gratisography.

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