Written by: Andrew Rudin | Contrary Domino
The English language needs a new word. A word that combines the meanings of hope and stupidity. Hopeidity sounds right.
A versatile noun I can use when someone exclaims, “Hey y’all, watch this!”
I searched for this phrase online, and began an adventure to the boundaries of risk taking. Among the gems I uncovered:
These specimens are among the few I can call cerebral. The rest? Sheer hopeidity. Which opens deep questions: what motivates people to accept risks? Why do some BASE jump , or willingly leap from high bridges with a bungee cord strapped to their ankles ? Why do men and women descend into coal mines 175 stories deep in the earth to earn a paycheck? Why do entrepreneurs invest their entire savings to start companies, when others say, “no freaking way!”
I accept that I will not come close to solving this bafflement.
It joins a collection of other perplexities: how infants transform from joyously happy to shrill meltdown in a mere instant. Why GM ever produced the Pontiac Aztec. But I see a bright side to my willful ignorance. Disparities in risk perception drive capitalist economies, of which I am a part. Ignorance as a patriotic duty? That’s a discussion I will take up later. Today, I will not talk politics.
If every individual had an identical view on risk, commerce would grind to a halt. Financial exchanges and commodities markets would not exist. Money would not be loaned or invested. And that means no farming, no livestock, no food production. Everyone would be forced to subsist on wild mushrooms and berries. Microwave ovens would be cannibalized to provide scrap metal for roofing.
I offer a simple, though imperfect, explanation for why I won’t voluntarily don a wingsuit, and sprint from a sheer, rocky cliff , arms and fingers extended, with experimental clothing and air pressure differential as my only means to support a safe descent: I can’t tolerate the risk. And, for sure, I lack capacity to deal with a failed outcome.
Risk tolerance is a mushy concept. It’s hard to quantify, and difficult to explain.
“I’ll just say that risk tolerance relates to feelings and attitudes about uncertainty in the context of attaining a goal.” Besides, I’ve promised to keep this article short, and Sigmund Freud, I’m not.
What I do know is that for wingsuit flying, the possible outcomes are binary. I can either live to talk about a thrilling experience that few others have the viscera to try, or through an unfortunate landing, I can become sustenance for coyotes and vultures. My thoughtful decision: nein! Here, my risk tolerance relegates me to watching someone else fly, while I’m solidly plunked in a folding chair, eighty feet from the precipice, cold IPA in hand, faithful hound at my side. I’m OK with that. I can still get an adrenaline rush without needing to be asked whether I have updated and signed my will.
I’ll leave risk tolerance to be dissected in touchy-feely psychology journals. But risk capacity? – well, that’s quantifiable, and it fits nicely in my wheelhouse. Give me a number, and straightaway, I’ll crunch it into a ratio or performance indicator. In business, I can’t easily gauge risk tolerance, but I can certainly calculate whether people or companies have the assets and cash flow to sustain a failed outcome.
“Hey, y’all! Watch this!” I can spot versions of this bravado from a mile away. For example, “One year after its inception, IMSWorkX Inc. expects to grow 300 percent in 2014 because of a key personnel addition and recently introduced production.” A feat that requires spunk, and boundless hope. The company’s president, Shannon Chevier, added, “We started off with a little bit of an installed base, but we’ve increased that dramatically this year and we have huge plans for the coming year.” In this vicinity, I expected her to mention customer and future demand. But no. I had to settle for installed base. Hopeidity. We need this word.
Customers create revenue. So executing huge revenue plans requires more than making tangential references to them.
It also requires financial muscle to cover the risk of failure. Something that can’t be assumed, as Richard Harris, CEO of AddThis explained at the Mid-Atlantic Venture Association’s June, 2015 TechBuzz event in Virginia . Harris described a company he worked with which had an operating plan that “relied on one big deal” closing. Hail, Mary! “And what if that doesn’t happen?” Harris asked the company’s senior executive. “We run out of cash at the end of the year.” At least the executive was honest, and didn’t waste time dancing around the answer. The company lost the deal, and suffered a hard landing. High Risk Tolerance with Low Capacity for Failure. This story needs a shorter, less-jargoned title. How about, Hey y’all! Watch This!
Massive layoffs and bankruptcies . These are conspicuous artifacts of incongruity between risk tolerance and risk capacity. Yet, companies often ignore the canary in the coal mine: repeated revenue shortfalls. Which underscores why CXO’s need to soil their A. Testoni shoes , and wade into the sales weeds.
When I asked a related question on several LinkedIn forums recently (“Does your company’s CFO provide input, governance, or guidance over sales lead qualification?”), I received one lonely response: “Please clarify why a CFO would need to provide input, governance, or guidance over sales lead qualification. Do they have any experience in any of those fields?”
Had I substituted the F in CFO for an M, my inbox would have been inundated with adamant opinion and pointed advice. Serendipitously, the solitary answer I received illuminated an important concern: few recognize the connection between financial planning and selling risks.
In fact, the two are intertwined. In 2010, an in-house blog for Rubicon Project, Inc . stated that the company “generates over $100 million in revenue annually” through advertising volume. Beneath the headline MAKING IT RAIN, the company forecast that revenue would “grow to $200 million in 2011.” But in January, 2014, the company’s IPO prospectus “showed just $37.1 million in revenue for 2011 and a net loss of $15.4 million,” according to The Wall Street Journal ( Tech Startups Play Numbers Game , June 10 2015). The company’s revenue “surged [in 2014] to $125.3 million, but that was still far below the $200 million number announced by Rubicon in 2010. Rubicon had a net loss of $18.7 million last year.” “Hey y’all! Watch This!” This revenue estimate collided with a rock.
Such disparities create shock and awe.
Rubicon Project missed its revenue goal by 82% – an epic planning failure. But I’m not surprised. Marketing and sales executives hoard many crucial decisions that influence revenue risk: How to qualify leads, which pipeline multiplier to use, how much revenue to sell through channel partners, how to guide social media conversations, which sales process to use, how to develop and train the sales force. When shortfalls hit the fan, CXO’s scratch their heads, wondering why so many of their spreadsheet cells are populated with red numbers.
Decisions about how to achieve profits, market share, revenue growth, customer loyalty, and high shareholder returns are rarely compatible. Nor are personal attitudes about risk, which vary from “hey y’all watch this!” to “no freaking way!” So companies must establish a risk appetite framework for revenue operations that guides the nature, types, and levels of risk that the organization is willing to assume. That gives decision makers guidance for discriminating between which risks to accept, and which to reject.
The Wall Street Journal describes a risk appetite framework as “a structured approach to governance, management, measurement, monitoring and control of risk.” ( The Benefits of Implementing a Risk Appetite Framework ) . There are three tiers – risk capacity, risk appetite, and risk limits – represented as an inverted triangle, with risk capacity at the top and risk limits at the bottom. The inferences are clear: a company’s risk appetite should never exceed its capacity to absorb failure. And its self-imposed limits shouldn’t exceed its appetite.
According to the article,
Risk capacity:
Management’s assessment of the maximum amount of risk that the firm can assume, given factors such as its capital base, liquidity, borrowing capacity and regulatory standing.
Risk appetite:
The level and type of risk a firm is able and willing to assume in its exposures and business activities, given its business objectives and obligations to stakeholders.
Risk limits:
Amounts of acceptable risk —measures and thresholds—related to specific risks, or to specific departments or processes.
Evidence of a company’s risk appetite is found in its culture. Some companies instill a culture of knock-kneed fear. They perennially take cautious baby steps with new initiatives, and flagrantly penalize employees for failing. Others have high risk appetite, encouraging employees to try things that have uncertain outcomes. Most are utterly inconsistent. One company I worked for had a policy of putting any salesperson who made less than 85% of goal on a Performance Improvement Plan (read: in three months, you will be fired). Meanwhile, executives in other departments kept their jobs as they speculatively tinkered with products and programs, and squandered millions of dollars.
In Defining Your Appetite for Risk (Corporate Risk Canada , Spring 2012), Rob Quail provides a low-to-high scale for risk appetite – averse, minimalist, cautious, flexible, and open. Companies can adopt these levels enterprise-wide, departmentally, or for a specific process. The point is, establish a policy. Don’t leave risk acceptance to personal whim.
Quail shares four questions for determining appetite:
Richard Barfield of PriceWaterhouseCoopers outlines three measures for risk in an article, Risk Appetite – How Hungry Are You?
Quantitative measures. Companies must connect business plans to risk measurement processes. For example, “appetite for earnings volatility.” These “describe the type and [quantity] of risk the business wants to and is willing to take.”
Qualitative measures. “Recognize that not all risk is measurable but can affect business performance. For example, appetite for business activities outside core competencies.”
Zero tolerance risks: A subset of qualitative measures. Identify the categories of risk to eliminate. For example, regulatory non-compliance or ethics violations.
Keys for success.
I haven’t met any successful business developers who don’t enjoy an occasional shot of adrenaline. The pang of excitement that comes from the opportunity to master uncertainty.
“Hey y’all, watch this!” I’m with you!
But please, if you’re wingsuit flying with your revenue plan, get everyone at your company aboard, and make sure you can absorb a hard landing.