Taking risk and creating opportunity. The three-dimensional appetite model.

Is risk two-dimensional? I don’t think so. It would be too limited and would block peoples thought process into silos of acceptable and not acceptable. Leaving no room to make the original action or idea more appetizing. Currently the guidelines imply that if you are beyond the appetite set then you have to stop that activity. There is no room to innovate and transcend from the original idea and take advantage of potentially new opportunities.

The second issue I have with these two dimensions is one of time. The time axis is correct when one thinks of days, weeks and years. But what about the rate of change of the environment we are operating in? It does not give insight into how, using the appetites that we have, we modify the strategy so we can use those appetites that are not fully leveraged. And don’t forget that appetite is changing continuously. Any risk taker will tell you that for short periods of time I will take the risk as I’m less vulnerable to the consequences. Or simply “lets go for it!”

The IRM appetite model

In practical terms, if I reduce my risk by vertically integrating my supply chain how can I represent this in the graphics of appetite commonly used?

You can’t because risk and appetite is three dimensional, not two! It’s an aggregation of all of my risk category appetites (political, operational, economical, macro and micro) and its changing.

So how can I visualise this entrepreneurial appetite view and give my managers ideas on which to build decision making?

Let’s start with the risk universe, broken up into major categories. If necessary, you can use the surface area of the circle as the level of risk you wish to take in each category.

Figure 2 Risk universe

Each companies risk universe is a small slice of the global risk universe of today. This means that if a company is taking its full level of risk and opportunity available to it then the risk universe will be a smaller version of the global view. See Figure 2.

Advancements in science, technology, politics, economy etc will ultimately result in more opportunities in the future through innovation. This means the circle representing the global picture will in fact be a little bigger tomorrow than today.

Initial Risk Cone

This is the idea behind the risk appetite cone shown. This concept is embedded in innovation theory.  Using this idea as the basis then – If the company continues with “business as usual” there will be a gap between the world risk cone and that of the company. These are missed opportunities or, risks the company has decided not to take.

The ability to capture ideas related to opportunities, and close this gap, will enable the company to grow and leverage its skills and products. These are spinoffs or spin ins.

So how do you represent the vertical integration of buying your supply chain to reduce risk exposure and change appetite?

The supply chain risk appetite will be in a slightly different position of the world risk cone than yours as it has a natural fundamentally different risk scope. There will be overlap related to location, infrastructure, product etc. therefore the combined risk universe will have a different risk fingerprint than the original company.

Integrated Risk Cone

What is being promoted in the guidelines as the appetite graphic is in fact a slice of this bigger picture. Mathematically speaking the risk cone is the integral of all risk appetites over all of the company’s risk universe.

The benefit of using such a model is that when people talk about risks “that are on the horizon” then they are referring to those risks outside the cone of the company at that time. The second, possibly larger, advantage is that you can see in which areas of the current business world you can move if your appetite is not exhausted. You have certain competitive advantages that, if you took the opportunity, would enable you to create value. This is something the old graphics fail to represent.

The prerequisite for this opportunity driver is the system that generates the ideas and actions necessary to take the advantage. As always, companies should, and need, to take more risk – as long as its managed.

So how many ideas have been generated, how many have been turned into actions and what value have they brought to the company? Are these the KPI’s your using?

Call me to help facilitate the opportunity brainstorming sessions.

Passionate Risk Manager. Accomplished thought leader with more than three decades of industrial and financial experience. Visionary and functional Opportunity Strategist. Doing things right ... but differently.

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