There is no such thing as risk free business growth. Moving forward and creating new opportunities involves uncertainties in a way that cost cutting does not, and therefore growth is always accompanied by a risk that things won’t eventuate the way we think they will.
What is our natural instinct when we see risk? We try to reduce risk and increase our confidence in projected outcomes. We gather information and create systems and processes to inform decision making. This ‘on the surface sensible approach’ is all geared towards trying to eliminate uncertainty. But what if we don’t really understand the uncertainties involved with growth? Are we in fact trying to reduce the wrong type of risk? Hold that thought….
Lessons from the Poker Table
I’ve recently been reading On The Edge - The Art of Risking Everything by Nate Silver and in the book he talks a lot about poker. If you have played or even watched tournament poker, you will know that it is a highly mathematical game that involves the world’s best players knowing the rough odds of any given hand winning. Yet despite the intellectual precision of probabilities, conservative players simply do not win.
The problem with poker is that it involves multiple players. Talented players can work out the odds, anticipate what you will do and try to counter it, only for you to anticipate what they anticipate and so on. Poker is a study in game theory, and ultimately ‘aggressive play’ (actively bluffing but in an unpredictable way) is the best way to win. Conservative play would mean only betting chips when you have a good hand, but if all players understand that you will act in this way, then an attempt at risk minimisation for a single hand is the best way to lose your seat.
There is no world in which I am suggesting that business growth requires bluffing. I also acknowledge that both poker and the concept of ‘aggressive play’ could feel to some to have masculine overtones that I would rather avoid. Finally, poker is also inherently a form of gambling and I have seen first hand just how damaging this can be. As such the poker analogy troubles me and it is why I hesitated to publish this article. That said, as a game in of itself, poker can teach us so much.
The best players have a deep understanding of what risk they are minimising. They are minimising the risk that they become predictable. These players are still highly influenced by the quality of their cards and the odds of winning a single hand, but they are trying to win a tournament. Embracing risk in poker will often mean bombing out, but when the alternative is an inevitable slow decline of chips (think Netflix when they were facing a declining DVD rental market), risk taking also results in more progression through the tournament and the occasional last person standing win. The rewards for winning are disproportionately attractive when compared to the tournament buy in cost. However, most company operating models are geared towards creating a growth environment that does the exact opposite.
Picking the right risk to minimise
What risk are we trying to minimise when we look for bold ambitious growth in our organisations? Are we trying to create certainty around one poker hand, or are we trying to win the tournament? If the chances of success for a particular new business initiative are dependent on so many external variables, including how competitors respond to any moves we make, perhaps we are attempting to build certainty in the wrong area.
I would suggest that we need to focus on a portfolio of moves. Growth will require us to make multiple bets, knowing that many will fail. We all know about Amazon’s successes such as AWS, Amazon Prime and Kindle, but they didn’t just luck into three winners. Growth orientated leaders can look like geniuses in retrospect, but there will undoubtedly be a litany of unsuccessful bets that diminished their chip stack without knocking them out of the game.
The capacity for multiple bets requires us to invest more in the systems that underpin growth rather than in the traditional processes that provide us false certainty – processes such as financial modelling which often assume a static view of the world rather than seeing competitors as being able to react to anything we do. It requires us to acknowledge that we simply cannot know the cards that everyone is holding, and we are therefore making bets. Our focus should be on how we minimise the consequences of the bets we lose, so that we can make a heap of them and maximise the chance of the big payoff. Instead, the risk mitigation strategy of most companies is to try and forecast the major payoff and only enter the game in a big way on that one hand.
What’s your style of play?
Minimising ‘whole of system’ risk requires a very different mindset and level of comfort with failure. It means admitting that our intellect can’t see through the haze of uncertainty and pick the one hand where we will go all in, expecting to sweep the pot. Organisations need to accept that winning the tournament comes from a style of play, and that the key to unlocking growth is to hone their approach. Many sports teams talk about ignoring the wins and losses and focusing more on the process. If they get that right, the wins will come. Growth is no different. It’s not about the killer idea. It’s about the system (or operating model) that allows you to ideate and quickly test gazillions of ideas to ironically reduce the risk of any one big bet and maximise the chance of the tournament win.
What makes this so hard is that nine losing hands before you take a big pot is really challenging when you are in the midst of it. It requires faith in your system – that the odds will eventually play out and work in your favour. Disaggregated, the nine losing hands feel uncomfortably risky at the individual initiative level if you are not looking at the bigger picture. As every VC knows, growth comes from a portfolio. They certainly aren’t fooled into thinking they can pick the one winner, which is why they invest in many opportunities. If your organisation is looking for bold ambitious growth without designing an operating model that embraces the risk that comes along with a volume of bets, you may as well fold and leave the table now.