Reducing Risk to Zero?

A few months ago a client asked me how he could reduce risk to zero. He was planning to launch a new product and wanted to be sure that he would get regulatory approval.

My answer was that he could minimize the risk, but not all the way to zero, by learning the regulator’s perspective about the product’s new features and building a strategy based on the company’s current knowledge and new information they could gather.

Experienced field staff had a different view of the regulatory risks. They made comments like: “It will be difficult because…”, “it will take time, but there’s an approach that might work”, and finally “here’s what I recommend ….” They saw the regulatory and political obstacles very clearly and became problem solvers applying their knowledge to achieving the goal.

Absolute guarantees of success are rare in business and in life. The best prescription for risk is knowledge and clear-eyed decision-making.

Armed with knowledge, you can choose to navigate the minefield or alter the course. On the other hand, you can be certain of not achieving a goal not pursued.

A personal view of investment risk

Recently I changed my financial portfolio to make it more “real”. The overall risk measurement stayed the same “moderate,” but I feel safer now.

When I was reviewing my investments with my financial adviser, I came across a “fund of funds” within my portfolio of mutual funds – something I bought a few years because it was “balanced”. (I must not have been fully awake at the time!)

Digging a bit, I looked at the individual funds (within the fund of funds), some were performing better than others and there was overlap in their underlying investments. Then I realized … this was too abstract for me; I wanted something more real, more directly connected to actual companies.

Now my favorite funds are with a company with a winning investment strategy. I know it’s winning because their performance is excellent and because they have explained their strategy to me in clearly written updates as well as in person. I’m tempted to put more money with them, except they’re a young company … so that would be too risky.

Sometimes risk measures don’t tell the whole story. I want the added confidence of knowing how the fund managers are investing my money.

The Risk (or Safety) Chain

You know the “value chain” where each market participant adds some value to a product from the time it starts out as raw materials until it becomes a finished product sold to a customer.

It’s time we added a similar notion called the “risk chain”, or to be positive the “safety chain”. Each organization in the chain would take responsibility for the safety of its output. So the farmer takes responsibility for crops he sells to the wholesaler, the wholesaler for the packaged food that he sells to the grocery store or restaurant, and then they take responsibility for what we buy and eat.

Does this mean testing at every step? Maybe. It certainly means that each link in the chain looks backward to the quality of their inputs and forward to the welfare of the end consumer. Not just for food … for health care, electronic gear, for all products and services that carry risks as well as benefits.

We may have the fleeting thought, “shouldn’t government be doing this?” Yes, and all lawmakers and regulators can reasonably do is hold the participants accountable for their parts.

So as the world shrinks and the value chain stretches around it,  a safety chain needs to go with it to protect the consumers far from their many suppliers.

Risk or Fear?

How much risk is really fear dressed in fancy clothes?

It’s easy to list 10 things that could go wrong for every one that might go stunningly right. Overwhelmed by negatives, we may fall into the default “no action” by studying more and more options or allowing other priorities to grab our attention. Are these negatives risks or ways of expressing our fears?

Risk is about uncertainty. How likely is it that we’ll achieve our goal and what happens if we don’t? What are the specific threats and how can we overcome them? These are questions we can answer, leading to actions we can take.

Fears, visceral reactions to future possibilities, might be reactions to threats or general concerns about making changes. If heeded, they can freeze our ability to think and act.

Many of us work to protect what we have, rather than actively seek what we want – thinking there is safety in the status quo. Standing still, though, is really not an option because stillness is an illusion. Movement and change are our natural state – the attempt to avoid them is fraught with risk to the well-being of individuals and organizations.

Shining the light on our perceptions of risk can reveal  pathways for achieving our goals. Answering the key questions below sets the stage for success:

  • What do we want to achieve? Does this reflect our current circumstances?  How we can reconcile any conflicting priorities?
  • What do we need to know to make good decisions about how to proceed? What relevant information can we access quickly? How can we include a variety of data and opinions?
  • How can we measure progress and any changes in risk … then make any necessary course corrections?

Don’t be fooled by fears legitimized as risks. Knowledge can neutralize fears, reduce risk and uncover opportunities so you can move boldly toward your goal.

Values can cause trouble

Strong personal values are good. Right? Yes …  and they can also cause trouble.

Here’s a scenario: Respected young doctor switches two research study participants so a person she knows is in the treatment group, rather than the control group. She wants to help this person and thinks there is no harm to the study as long as no one knows about the change except her.

When colleague learns about the switch and reports it,  the doctor faces the possibility of losing her job and her husband, the senior doctor in charge of the study. (He thinks she’s crazy and  irresponsible for doing this.)

This is  fictional drama that illustrates a real challenge. It  unfolded on this season’s (2011) final episode of Grey’s Anatomy. The doctor was Meredith Grey helping Adele, wife of the Chief of Surgery, get an experimental treatment for Alzheimer’s. [Small disclaimer: I happened upon this episode but did not watch all of the possibly relevant preceding episodes.]

What was she (fictionally) thinking?  Possibly … OH, NO … Adele is in the control group, she won’t be treated! I’m not supposed to know this. What can I do? She needs treatment – a chance for a normal life, not gradual disintegration of her brain. (Visualized in detail since Meredith’s mother had Alzheimer’s.) I can fix this. After all, it was random. She could have been assigned to the treatment group. It’s OK. Nobody will know.

The immediate and personal won out over the longer term goal.

A unique combination of circumstances perhaps. How might it have been different if Meredith knew it was virtually certain that someone would find out about the switch? Or if it was impossible for her to know which participants were in the treatment or control group, or their names or circumstances?

We all make decisions every day shaped by our past experiences, our values and our emotions, with a dash of information and logic mixed in. It’s human, it’s normal. When the outcomes are critical, we can help ourselves and others to make good choices.

It’s a matter of understanding the pitfalls – knowing the risks – and developing the personal or organizational guidance systems to keep us on track.

Competition Bureau challenges SROs to prove that regulations serve the public interest

This item addresses the 2007 report, Self-regulated professions Balancing competition and regulation , from Canada’s competition watch dog, the Competition Bureau:   The Bureau has also indicated that it plans to release a follow-up report in 2009.

The challenges

This report challenges all regulators of professions and occupations to prove that regulations serve the public interest more than they stifle competition and the benefits that consumers derive from fair competition in the marketplace. Foremost, it challenges regulators (particularly SROs) to be clear about what public interest is being protected by regulation.  Is it really public interest or the self interest of the profession that is being protected?  The Bureau’s view is that unnecessary regulation stifles the marketplace. The report is also clear that it is not about deregulation — it’s about unnecessary regulation.  In this category of unnecessary regulation the Bureau presents many challenges; here are three examples:

  1. Prove the merit of advertising restrictions on professional services since these restrictions prevent the public from learning about and differentiating services and making better choices;
  2. Prove the merit of overly restrictive entry to practice conditions that act as barriers to qualified newcomers who would otherwise add zest to a marketplace that is perhaps too comfortable for established incumbents;
  3. Prove the merit of practice exclusivities and too broadly defined scopes of practice that limit work that can be competently performed by assistants or other professionals at lower cost.

The overall challenge is this, prove that your regulations serve a greater public interest because unnecessary regulations have a damaging effect on competition and in the aggregate, masses of unnecessary regulation damage overall productivity in the economy.

Concern about low productivity is driving this

On this theme, the report opens with this zinger, followed by a solid economic analysis:

Despite comprising a significant part of the service economy in Canada, perhaps as much as one fifth, the professions comprise one of the overall economy’s least productive sectors.

The economic analysis makes it clear that the costs associated with professional services find their way into every other product and service in the economy; hence the concern about low productivity.

Mission clarity is important

Harm reduction or protecting the public interest is the core mission of regulation and it’s reasonable that there needs to be clarity about the primary mission–about what public interest is being protected. Taking a cue from risk management, clarity about the objective is the starting point.  What harm are we to prevent or mitigate and what good are we trying to foster? For a regulator, it’s all about the public interest. If the public interest involves crime prevention, a safety issue, then the public interest is likely quite clear. Regulations are put in place to prevent theft, personal injury or worse. However, in some areas of social regulation or economic regulation, the idea of the public interest becomes harder to define–but nevertheless, important to define.  Regulators need to define the public interest or be vulnerable to the criticism of creating unnecessary regulations that damage another public interest–a healthy marketplace.

Defining the public interest

Standards are useful in establishing public interest-especially if they have been developed through an open process of stakeholder consultation. Public expectations are also useful if there is a systematic and reliable method of establishing this: perhaps through an analysis of complaints, surveys or media reports.

Losing your reputation

The ultimate risk for a public institution

Totonto street car on dedicated path

A recent strike by Toronto Transit Commission workers presents an interesting case demonstrating how unexpected behaviour can swiftly damage reputation.

From sigh of relief to gasp of disbelief

Last week, city of Toronto residents, collectively, took a huge sigh of relief. The city and union officials, representing the Toronto Transit Commission (TTC) workers, had just negotiated a deal that promised to advert a crippling strike.

Granted, the deal had to be ratified by the union executive and accepted by members. However, given that the deal seemed generous, and that negotiations seemed long and arduous, most residents did not expect a strike. Union spokespersons had also made it clear that any possible strike would be preceded by 48 hours of notice.

So when transit workers walked off the job on Friday evening (April 25th 2008), without notice, creating havoc for thousands of people whose plans depended on the service, the collective sigh of relief became a gasp of disbelief. A diverse mixture of views and emotions about TTC workers, union leadership, and city officials got thrown into a public pot that started to brew early Saturday morning.

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