Finding the Optimum “Risk vs. Performance” Balance

Organizations are often pressured to enhance and improve financial performance; it is a necessary action in order to remain competitive and to satisfy owners and stakeholders. Regardless of an organization's ownership structure there is always both a need and expectation to continuously improve efficiency and output – even if it is not always openly expressed! Without this the organization will simply not thrive, and eventually will not survive.

One sure way to improve financial performance, at least in the short term, is to take more risk. This could mean anything from pushing staff working hours too hard, to reducing governance thresholds, to accepting a reduction in the quality (and cost) of raw materials, to delaying necessary technical or technological investment, to being frugal with customer service etc. All these measures will likely mean an improvement in short-term financial performance. The benefits realization from ramping up risk can lead to results fixation, and the appetite to continue to escalate risk can be compelling. However, cumulative risk is increasing and could be snowballing and, whilst there may be no apparent negative impact, there is a growing danger that a risk will become reality with potentially catastrophic results that could far outweigh the short-term benefits delivered. The risk of catastrophe increases with the law of diminishing returns, with further increase in risk leading to lesser and lesser performance benefit over time.

That said, for an organization to shun all possible risk will probably not lead to acceptable performance and is unlikely to enable an organization to keep up with, let alone beat, the competition.

So how much risk is it reasonable to accept, in the pursuit of performance? At what point does risk tip the balance and become too much to bear? Whilst taking some risks is part and parcel of running a successful business, the risks must be understood and the potential implications controlled. Risk can never be removed, but it can be managed. With a combination of technology, experience and application, it can also be predicted, and thus mitigated. A healthy risk management strategy has all these bases covered.

This is the risk vs performance balance – openly knowing where you are and where you want to be on that continuum, appraising and understanding the pros and cons of your position, and knowing how to shift location (very quickly if necessary) to re-set the balance are all key components of an optimal risk management strategy. An appropriate balance would be one where there are risks, but these risks are not only leading to performance improvement they are also considered acceptable, fully understood, managed and mitigated. They should also be contributing positively to a healthy and engaged workforce, not vice versa. And they must never create an increase in safety risk, especially human safety.

Ultimately, organisations should always be striving to establish new laws of physics – where the risk is “light” and the performance “heavy”, and yet the balance is still perfectly poised. Now wouldn’t that be something.