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AS CARILLION COLLAPSES, HERE ARE SOME TOP TIPS FOR RISK MANAGEMENT

Posted by Isobel McEwan 16 January 2018 Innovation Consultancy

Innovation is an inherently risky business, requiring organisations to invest time, money and effort into future projects that may or may not come to fruition. As the unfolding crisis surrounding British multinational Carillion has shown, without proper risk management and sound investment, things can easily go wrong. Yet with a sound strategy in place, there is no reason for organisations to meet the same fate.

THE CARILLION SAGA

News broke yesterday morning of the impending collapse of Carillion, a British firm which, since 1999, has been one of the biggest contractors of building and public services across the country. Following ongoing financial difficulties throughout 2017, the firm announced its compulsory liquidation and sparked fears of widespread repercussions including job losses, the collapse of education and health provisions and a stall in construction contracts.

Speculation as to the cause of Carillion’s collapse has been rife, with the BBC noting the company had accumulated £1.5bn in debt due in large part to ‘taking on too many risky contracts that proved unprofitable.’ This clearly isn’t a problem which developed overnight, and calls into question the long term risk management strategy of the organisation.

On the back of such situations, it is important to understand how organisations can avoid a similar fate by ensuring they have a sound risk management strategy in place. Here are some top tips for getting started.  

UNDERSTAND WHY WE FEAR RISK

The first step to building a strong risk management strategy is to better understand why so many of us fear taking risks at all.

Andrew Pope, CMS Wire contributor and innovation partner at Innosis, defines risk as ‘a function of probability and impact’ or, put simply, asking yourself ‘what’s the chance of something happening, and what is the likely impact should it occur?’ 

Pope argues that ‘we have a natural inclination to never expose ourselves to any risk at all,’ meaning that even low risk tasks like idea generation suddenly become daunting and can seem insurmountable. Given the wide scope of risks involved in daily working life, it is therefore little surprise that many become risk averse when it comes to bigger questions such as investment in innovation or overhauling a long-entrenched process.

Pope suggests that the first step to tackling risk aversion is to challenge the expectations inherent in many organisations. While of course any risk has the potential for negative repercussions, understanding the probability and impact of this is half the battle in building an organisational culture which is receptive to calculated risk. By allowing permission to fail and creating a safe space in which employees can carry their ideas through to fruition, organisations can take the first steps towards dismantling the fear of risk that so many harbour.  

USE AN ANTICIPATORY ORGANISATION MODEL

According to Business2Community, ‘risk is an imperative in a constantly transforming environment.’ Yet while many organisations become risk averse, as mentioned above, anticipation can be a useful way to build a strong risk management strategy.  

The article argues that ‘risk can be effectively anticipated and managed by using several elements of the Anticipatory Organization Model.’ Coined by innovation expert Daniel Burrus, the model divides risk into two categories: hard trends and soft trends. Hard trends are things that will happen, or future facts which provide certainty, for example that life expectancy is continually increasing and therefore innovation in healthcare is needed to meet the demands of this trend. A soft trend is something that might happen but which can be influenced, meaning that acting upon a soft trend carries a larger risk than that of a hard trend.  

By adapting this categorisation, the Model suggests that organisations will be able to better anticipate disruptions, problems and customer needs in order to identify important opportunities. This will also make it easier to pinpoint where the greatest risks lie, meaning you can better assess the cost-benefit analysis of the task at hand and strengthen your risk management strategy.  

By knowing what makes organisations risk averse, or indeed overly willing to take risks, organisations can take concrete steps to employ techniques and models to tackle this phenomenon. By building a risk management strategy suited to your organisational needs, you can learn from the fate of Carillion and develop a healthy relationship with risk.

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