Skewing the Curve

By Rick Thomas, Business Advisor


Leveraging a theme discussed by Nick a few months ago in his article titled, “Heads We Win, Tails We Don’t Lose Much,” there is a correlation in the view of risk Nick illustrated and how we can look at risk in our businesses, and more importantly, what we can do to skew the curve in our favor.

Everyone would agree that risk in business is as ubiquitous as rain. There is also unanimity in that the return on the business is in general, relative to the riskiness of the particular market or industry the business is in. In the investing world, we refer to the capital markets line, Fig. 1, to illustrate the rate of return an investor may expect from a particular asset class that is associated with the inherent risk of that class.

Where your particular business falls along that line is a function of the market you are in, your business model and the quality of your decision-making. Regardless of its location along the continuum, however, there is a range of upside and downside outcomes your business will experience.

As the vertical bell curves in Fig. 2 illustrate, there is an assumed even distribution of good and bad outcomes to a business. While this is an interesting illustration for understanding risk, it does not reflect reality.

Most businesses do not have an even distribution of good and bad outcomes and yet many business owners go about their work assuming they have just as much chance as the next guy to be successful. As many of you hopefully know, this is a horribly flawed assumption and gets at the root of what I want to illustrate – how to skew the results in your favor.

The following five principles will help you ensure that your upside is enhanced, or in the least, downside is limited as shown in Fig. 3:

1.   Do great work – This is the foundation for mitigating risk in your business and I am constantly amazed at how often I see business owners lose sight of this cardinal rule. Deliver quality, stand behind your work and treat your customers like royalty whether you think they deserve it or not.Until you have these fundamental deliverables in place, I wouldn’t focus on much else.

2.   Be clear about where you are going – Even if it is a company of one, taking the time to reflect and memorialize where you are going with the business and why, will bring energy and clarity to your actions. A common mistake is trying to do too much and being all things to all clients. A clarified vision will help filter those actions that will get you there from the shiny objects and distractions.

3.   Develop a robust hiring process – While the need to have great people in the company is a given, you don’t get there without a good hiring process. For those that have solely relied on hiring friends and family, you either haven’t realized the limitations of your approach yet, or are feeling the pain and not certain what to do differently. If so, then get help soon (your local SHRM chapter can refer you to a good HR consultant) as this is not a quick fix.

4.   Employ a planning process – Notice I did not say have a business plan. Best stated by Dwight Eisenhower when reflecting on the execution of the D-day invasion at Normandy, “plans are worthless, planning is priceless.” The focus needs to be on the discipline of planning. The plan itself is the outcome and often changes within a short time frame. A good planning process is not a one-and-done, but a process that accounts for a shifting landscape and helps the owner and/or team adjust to the changing dynamics of the marketplace.

5.   Get an outsiders perspective – Whether you belong to an industry association, attend a business leader roundtable or hire an advisor or consultant to help you with your business, you need to have another set of eyes on the operation. We all suffer from blind spots and tend not to see the eyesores and systemic problems, either because we are too close to them or are in denial. Having an outsider’s perspective will help you see the problems for what they are. The sooner you are honest with yourself about the issues, the better.

While the law of averages applies to all businesses, these principles will help ensure the coin flip ends in your favor. Of course, there are no guarantees but one thing is certain; doing nothing risks that the averages will stack against you. Your choice, but it is likely your competition is hoping you won’t.