Risk Management Is The Best Bang For Your Buck – Everybody acknowledges but very few proactively manage risks like they should.
We all do risk management in some form in everything we do on a daily basis. For example, the risk of getting back pain is very high when we don’t lift the weights properly. We mitigate the risk of back pain either by bending our knees when the impact (proportional to the Weight) is small enough or use lifting tools when the impact is high. If we know the probability of lifting that particular weight is higher, we plan for a standard procedure to minimize the risk of back pain. Do we put the back pain risk management process on a piece of paper or a tracking sheet every time we lift a weight? No, we do it mentally and have learned to mitigate it over time knowing what works against (Probability & Impact) and what works in favor (Mitigation).
The pitfalls for not managing startup risks in a formal planned process are huge in terms of schedule delays, resource consumption, and opportunity cost of not able to work on the right things Startup Risk management is the process of identifying possible startup risks that could potentially come up while adventuring into the business world. Each risk has three critical components associated with it: probability of occurrence of the risk, impact of the risk if it does occur, and planned mitigation to avoid / minimize it.
Mr. Akira Hirai’s (@ Cayenne Consulting) has summarized the importance of startup risk management very well in the closing remarks of his must read article http://www.caycon.com/what-kills-startups.php : as below: “Don’t let risk paralyze you. Entrepreneurs are, by definition, risk takers. Strong risk management is an important source of competitive advantage. You can beat the odds and build a thriving and rewarding venture by learning to recognize and mitigate risks.”
Why Startup’s don’t manage risks – proactive risk management will save money and improve morale
Can startups react mentally fast enough in a similar way to how we address risk of back pain in our everyday lives? I think you would agree with me for a “NO” on this question. Every startup tries to solve a new customer problem or an existing problem in newer way. The ambiguity and never been done nature of startups, make it difficult for a founder to react to startup risks mentally fast enough even to avoid the smallest unplanned risk This is why I believe strongly that every startup needs to perform proper risk management. How much attention should be given to risk management in startup? A lot, but not everybody does it as we get caught up in the whirlwind of things to be done while adventuring in to the unknown startup world. Let’s assume we do find time for performing proper risk management between the whirlwind, still we find reasons to avoid doing the risk management. This is partly because currently available tools for risk management are inadequate. Let’s briefly see why…
- Doing risk management on paper is unproductive & not affective
- Managing in a spreadsheet is too cumbersome to track and maintain especially in a team environment.
- Collaboration capability amongst the team members to capture and react on the go is not available
- Tools available are either pricey or not easy to use and not integrated into a startup’s ecosystem
- Email me at firstname.lastname@example.org if you see reasons beyond these to not effectively perform risk management planning for a startup.
A tool which addresses the above concerns would be a nice starting point, but I really don’t see these as major hurdles to still perform risk management planning, because the benefits from risk management are invaluable particularly for a startup. Good risk management will save you from wasted resources, lost time, unnecessary costs and last but not the least it will help maintain positive team morale. Remember a little time spent in risk management planning will save a lot in major cost, time, & brand image.
5 Best Practices in Risk Management – Simple and effective way to manage risks in a startup
In the graph above, X-axis represents the time to maturity of a startup and Y-axis represents the level of Impact & Probability of each risk during the startup launch to maturity phases. In the “plan & validation” phase, impact of the risks is low due to no extensive capital or resource commitments and the probability of the risks are high due to the ambiguity. As a startup moves into the “Develop & Build” phase the impact of the risks tend to grow higher due to some capital & resource commitments and the probability of risk occurring would stay higher as the scope of work grows, if proper risk management is not followed. In the “Finance & Launch” phase, the impact & probability of each risk items would stay higher and eventually lead the startup towards failure for which lack of growth & any profits are the outcomes. Improper risk management is one of the top reasons for a startup to lead towards failure. On the other hand, a well-planned risk management process in a startup keeps the impact & probability of the risks at a lower level all through the different phases, there by achieving planned market growth & profits. Proper risk management is a continuous process throughout each phase and needs to be closely monitored even after maturity of a startup. There are always different kinds of risks in different phases of a startup. The best practices to be followed for proper risk management are as below in order of priority:
- Identify risks early
- Analyze and reprioritize risks
- Develop proper mitigation plans to reduce the impact & or probability of the risks
- Allocate clear risk owners who would be accountable
- Update & identify risks continuously on an ongoing basis.