Calculating Risk: What Have You Got To Lose?


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By broadening their risk management outlook, IT leaders can spark remarkable innovation and growth. Understanding six key truths helps decision makers overcome the fear of failure and develop effective skill sets to achieve untold business results.

By Jim Stikeleather and Sanjib Sahoo

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Calculating Risk: What Have You Got To Lose?

  1. 1. Perspectives Calculating risk: What have you got to lose? By Jim Stikeleather and Sanjib Sahoo By broadening their risk management outlook, IT leaders can spark remarkable innovation and growth. Understanding six key truths helps decision makers overcome the fear of failure and develop effective skill sets to achieve untold business results. F or the most part, businesses seek to of avoiding potentially negative ones. Now, it is avoid risk. Leaders equate risk with imperative for IT decision makers to understand potential failure, so organizations have and consider multiple risk factors and develop the morphed into hierarchical, fixed systems skills to address them effectively. to constrain variability within an acceptable range Decision risk. IT leaders must determine that has narrowed progressively. As a result, in whether to make a decision and the recent years innovative ideas have been stifled consequences of not making a decision. and entire industries have fallen into the death Decision risk can result from not challenging spiral of cost- and price-cutting commoditization. common wisdom or reevaluating basic Enterprise IT is no different. business assumptions. Other factors leading To respond effectively to the volatility, uncertainty, complexity and ambiguity of today’s to decision risk include overly weighted worst cases, invisible bureaucratic biases business environment, IT leaders must take a and prejudicial framing (relative, absolute, different tack. Looking at risk in totality, they 40 percent loss = 60 percent win). should question assumptions, challenge long- Adoption risk. Several factors contribute to held assertions, and recognize both the analytical adoption risk. For example, some organizations may fallacies and less-than-perfect cognitive processes adopt technologies or respond to market, business currently in play. Now, instead of associating and technology trends too quickly or too slowly. risk with potential failure, IT leaders need to They may do so reactively or by overthinking, equate calculated risk with innovation — meeting and they may not consider nontechnical marketplace demands, leapfrogging competition implications or unintended consequences. and creating true economic profits beyond financial engineering. Execution risk. A wrong execution model or poor execution can make a project run too long and cost too much, leading to a loss of focus and Risk factors a reduction in value creation. Execution risk also An essential aspect of innovation, risk requires comes from inadequate consideration of an leaders to weigh all the potential benefits and organization’s energy, skills and policies to harms of one course of action over another. accomplish the project. Moreover, it calls for an important shift in focus, Leadership risk. In his book “Thinking Fast as leaders balance positive potentials and stated and Slow,” Nobel Prize–winning psychologist priorities to achieve desired outcomes instead Daniel Kahneman states, “For most people, the 10 2013 Issue 04 | Reprinted from Dell Power Solutions, 2013 Issue 4. Copyright © 2013 Dell Inc. All rights reserved.
  2. 2. fear of losing $100 is more intense than for evidence. Overconfidence is another 56 percent deliver less value than the hope of gaining $150.” IT leaders are hallmark of identity risk. predicted.1 Fear of failure paralyzes many no exception. This loss aversion prevents them from taking appropriate risks. Cultural risk. Having a failure-is- IT teams into doing nothing. However, it unacceptable culture causes total risk is not failed projects as much as projects avoidance or an inability to cut losses not taken on that can most influence the to identity risk. Leaders may constrain and walk away from a decision that future success of an enterprise. Research innovation to a known, specific doesn’t work out — a trap of escalating from the Standish Group suggests higher infrastructure or platform stack. They might commitment to a losing course of action. failure rates result in more total value focus on project completion success rather This type of culture prevents the wisdom generated for the enterprise.2 Accept than value creation success or attend more of learning from failure. failure; do not accept not trying. Identity risk. Many practices lead to technology issues than business issues. Reputation risk. The C-suite often fears Some may take psychological shortcuts diluting its brand’s reputation, neglecting 2. A focus on acquiring gains leads such as the illusion of knowledge, in which what’s best in creating value for the business to better results than a focus on familiarity hides ignorance, and the illusion or customers. Instead, the C-suite lets the avoiding losses. of truth, in which repetition substitutes bureaucratic brand image — which mistakes Many new projects get hung up on the chance appearance for relationship, and form for of failure. Business and IT leaders need to view content — prevent experimentation. the glass as half full — a 40 percent chance Measurement risk. Sometimes leaders of failure is a 60 percent chance of success. fail to measure the real goal of innovation. The value of an IT investment must not be They focus on project progress rather than based on its cost, but rather on its capability to created value. Or they turn management generate value to the organization. There is no measures into goals, which instigates safe innovation, only varying risk and reward. aberrant behavior. Opportunity risk. Applying scarce 3. Preservation of past investments resources in one area of IT precludes delays value creation. investment in another, which presents Businesses make irrational, fallacious the risk of missing an opportunity. decisions on sunk costs — costs that Inaction disguised as patience, as well have already been incurred and cannot as impatience disguised as initiative, also be recovered. IT is particularly prone contributes to opportunity risk. to this practice when trying to force-fit everything into a previously acquired 6 truths about failure hardware or software platform, regardless By understanding the various risk factors, of its applicability to the problem being IT leaders can take risks that are better addressed. Trying to preserve past calculated than before — as long as they bear investments or force-fit capabilities into in mind these six key truths about failure. unsuitable platforms delays value creation, raises prospective costs unnecessarily and 1. The failure to take on value-adding creates applications that are not suitable for IT projects is worse than taking on IT actual use. Sunk costs don’t count. projects that fail. Failing to deliver new capabilities to the 4. Confusing leadership, governance organization can be the most significant and management creates risk. risk controlled by IT. Almost half of IT IT often fails to step up to its leadership role, projects run over budget and about hiding behind what it identifies as alignment 1 Michael Bloch, Sven Blumberg and Jürgen Laartz, “Delivering large-scale IT projects on time, on budget and on value,” McKinsey & Company,, October 2012. 2 “CHAOS Tuesday #20: Project Success Versus Project Value,” panel discussion led by Jim Johnson, The Standish Group, August 27, 2013, Reprinted from Dell Power Solutions, 2013 Issue 4. Copyright © 2013 Dell Inc. All rights reserved. | 2013 Issue 04 11
  3. 3. Perspectives with the business. This outdated thinking can be disastrous. IT must lead by showing how technology can be applied within the IT group itself, and then by influencing and guiding the organization in making the right decisions and coming up with an innovative implementation plan. Next, IT must direct and restrain but not hinder the use of technology: how it is developed, sourced and applied in the best interests of the organization and its stakeholders with appropriate governance mechanisms. Lastly, IT must monitor and manage the delivery and application of IT to “nstead of associating risk with I potential failure, IT leaders need to equate calculated risk with innovation — meeting marketplace demands, leapfrogging competition and creating true profit.” serve the organization, even if IT itself is not the primary source of delivery. The risk of a wrong decision is much less than the risk of Innovation through risk tradeMONSTER, a small start-up founded in no decision. By taking better calculated risks than ever 2006, has become a leader in online trading before, IT leaders help their organizations by taking risks, such as being the first browser- 5. Small IT failures provide great learning achieve unprecedented success. based trading platform and the first HTML5 opportunities. Companies with broader risk management mobile trading platform. The company also The concept of learning from failures and outlooks and practices outperform their offers disruptive option trading tools based adjusting strategy during the process is called peers, according to a survey from Ernst on an open source trading platform. failing forward. Risk doesn’t involve putting Young.3 all funding into a huge project only to watch the only examples of risk-takers that create examples? Leadership overcomes fear it crash and burn. Rather, IT leaders should transformational innovations. of failure by broadly balancing risks. The Apple, Amazon and Google are not What key similarity lies behind these experiment by funding small innovation For example, Dun Bradstreet, known result is groundbreaking innovation that projects — preferably of a non-mission- for its insight on businesses, went a notch leads to business growth, strengthened critical nature. The lessons learned from ahead when it launched data as a service. customer preference, industry recognition thinking big and starting small can be critical Even more impressively, the spin-off and awards. for large projects down the road, helping IT Dun Bradstreet Credibility Corp. totally earn credibility when presenting a business transformed and integrated its existing case for them. Don’t measure and punish technology platforms from several expensive failure; measure and celebrate learning. legacy systems into a single platform utilizing software-as-a-service (SaaS), cloud and open 6. Failing fast and moving forward is a big win. source technologies. Netflix is another example of disruptive If an IT project fails or a strategy must innovation. The movie-by-mail program change, failing fast helps prevent losing was enhanced by the streaming option big. Small, agile cycles of development in 2010, and the company slowly killed and risk assessment allow IT to easily its competition, including Blockbuster. measure goals, evaluate success and Interestingly, Netflix started with the simple change execution strategy. Asset-light concept of eradicating late fees, even though models always beat capital investment until the move could have led to revenue loss. a predictable scale is achieved. If the next step needs a budget, it is too big a step. 3 “Turning Authors Jim Stikeleather is chief innovation officer for Dell Services, where his team enables, facilitates and accelerates advanced technologies, business models and processes to address evolving business, economic and social forces for Dell and its customers. Sanjib Sahoo is chief technology officer of tradeMONSTER Group. He directs all aspects of IT for its online retail brokerage and its financial media site and masterminded tradeMONSTER’s award-winning desktop and mobile platforms. In the financial industry, technological innovation is almost dead. However, Risk Into Results,” by Ernst Young, 2012. Dell is a trademark of Dell, Inc. 12 2013 Issue 04 | Reprinted from Dell Power Solutions, 2013 Issue 4. Copyright © 2013 Dell Inc. All rights reserved.