Volume 187: When Taking No Risk is The Biggest Risk of All.
When Taking No Risk is The Biggest Risk of All.
tl;dr: Risk is a subject we’re truly terrible at.
I just finished reading about a $295m home/compound recently listed for sale in Naples, Florida. What caught my eye was less the cost and more that it’s estimated to have a 68% chance of catastrophic flooding within 15 years and a 95% chance within 30 years.
Translated into business-speak, unless something major changes, the terminal value of this $295m investment will be zero, or close to, within 30 years.
Aside from being quite the flex to show that you’re so rich you can afford a $295m home that will be virtually worthless in a couple of decades, it got me thinking about risk. In particular, how bad we are at wielding the term.
Let me use the recent Jaguar brouhaha to make my point. (Don’t worry; I’m not talking about anything in that teaser ad or even the car concept unveiled the other day).
The most common refrain among proponents is to laud it as being a “brave,” “radical,” and “risky” choice. It’s a common trope in such circumstances and a trap I’ve fallen into myself. But, from a business perspective, it’s flat wrong. From the perspective of Tata, which owns Jaguar, they’re minimizing risk rather than increasing it.
Why? Well, simply put, they’ve decided the biggest risk is in taking no risk at all. My bet is that they looked at the numbers and sales trajectory and saw a business with a terminal value of zero. And likely in a lot less than thirty years.
If you view your current business as having a zero percent chance of future success, then the status quo represents your riskiest path forward. As a result, if radically overhauling your brand, product, pricing, and distribution lifts your chances of success even a small amount, it isn’t risky; it’s now the risk-minimizing choice. That’s not to say it’s without risk. Clearly, there are huge risks that come with such a change, but if it shifts you from a 100% chance of failure to a 10% chance of success, it changes the calculus. Of course, if you think your business has a terminal value of zero, you could just make the zero-risk choice of trying to sell it or shutter it completely, which brings me to my second point.
You cannot talk about risk without also discussing reward. In the case of Jaguar, the folks in charge have decided that the potential reward of a radical change, even if the chances of success are low, is worth more to them than the alternative, which appears to be a steady slide into oblivion, or selling it for peanuts.
Putting this to practical use, when considering risk in my client work, I like to consider it relative to ambition and context. In my experience, the nature and scale of ambition relative to business context dictates any corporation’s appetite for risk and, thus, what they will or won’t deem a risky, radical, or brave move.
In the case of Jaguar, the base ambition is likely survival, with a stretch ambition of using the EV shift to carve out a unique niche for itself. Because doing nothing will result in oblivion, even the most radical alternative suddenly becomes something to be considered—not because it’s radical but because being radical has become much less risky than doing nothing.
This means folks from the outside lauding them for making such brave, radical, and risky choices are likely viewed with a somewhat perplexed expression from the inside.
In a slightly roundabout way, this brings me to the focus of what I wanted to talk about today: If we want clients to embrace work that is different/original/cut-through/stand-out, we need to stop telling them how brave, radical, and risky it is to do so because, without any other context, bravery and risk are…bad things to be avoided.
Ultra-simplified, the way most corporations work is that the board controls the corporation. It represents shareholders and has what is known as a “fiduciary duty” to do what’s in the best interests of the stock owners. Within the context of shareholder responsibility, the board hires a CEO to run the company, hire an executive team, set strategy for board approval, and operate the business in a way that will maximize shareholder value while minimizing risks to shareholder capital.
Nobody in the above paragraph is hired to be “brave,” “radical,” or “risky.” However, risk is always relative to ambition and context, so the risk/reward calculus will differ for different businesses in different situations, even within the same category. Let’s very quickly highlight three obvious situations:
The aggressive, ambitious startup, by definition, is extremely risky from the get-go. It has nothing to lose and everything to gain. Because it has so much pre-baked risk of failure, actions that might appear unreasonably risky for a market leader aren’t “risky” enough for a startup, where making conservative choices is almost certainly a surer path to failure than being bold.
As an aside, I genuinely believe that most startups fail this risk test as they use formulaic “playbooks” to scale beyond early adoption. To minimize their risk of failure and maximize their chances of success, they should be radically bolder, braver, differenter, and “riskier.” Instead, the startup landscape tends to be a land of beige, milqetoast copycats, with little to make them stand out. (This is exacerbated by VC deal flow, which tends to flood trending categories with money, massively increasing the number of same-same startups competing with each other, which often and ironically, benefits market leaders the most: Startup noise lifts category salience, too many participants create a paralysis of choice, customer defaults to the market leader).
The massive blue-chip corporation with a market-leading brand (or brands) faces a different risk. Unlike startups, market leaders have a lot of market share to lose, and because they’re already so big, there is little to gain in % growth terms (even if the $$ numbers might be huge). As a result of a differing risk profile, they’re managed much more conservatively.
Again, as an aside, although a greater degree of conservatism is entirely logical, it’s easy in these very large organizations to be too conservative for too long and accidentally miss shifts in the market until it’s too late; see bullet three below for more. If anything, the recent upsurge in Marketing Science-based practices among large, market-leading CPG/FMCG brands will likely exacerbate this problem as clients increasingly focus brand management around distinctive assets and an ethos of “make the logo bigger” rather than one of “make the proposition more compelling.”The once-great business that now faces extinction. Here, the risk of not changing greatly outweighs the risk of maintaining the status quo. As a result, no matter how bold, brave, or radical change may seem, they’re likely pursuing what they perceive to be a risk-minimizing path.
Again, in the aside stakes, we must be careful how we analyze the faded giant throwing a Hail Mary pass. For every Apple that had success being bold and rising like a phoenix from the flames, there are vastly more failures the world has now forgotten. While it’s easy to point to the big, bold, “risky” maneuver as the reason for failure, it’s often not the case. More often, such moves are symptomatic of a desperate attempt to dig themselves out of a much deeper problem, where bold change came too late, and the risk of failure was already overwhelming. In other words, the business may have failed despite risk minimizing boldness, not because of it. And we’d be wise to try and spot the difference.
Many years ago, after I left my former employer, I had lunch with the CEO of a competing brand consultancy. One of the first questions out of his mouth was, “How did you get away with selling clients so much crazy shit?” My immediate and heartfelt response was, “Because nobody thought it was crazy.”
Thinking back on it in hindsight, it was because of a few factors. First, we positioned ourselves as a firm doing bold, cut-through, transformative, and differentiated work that had impact. Second, this attracted clients seeking such difference, which meant they were already primed for something unique. Third, and probably most importantly, we spent a lot of time with these clients seeking to understand their ambition and context, which, in turn, meant we were able to present seemingly “brave,” “radical,” and “risky” work as the logical choice in light of what they wanted to achieve, where they wanted to go, and the context they were in.
We never called it risk minimization, and you probably shouldn’t either. But it’s what we were doing—thinking about it—and it worked.
So, yeah. If you want clients to buy brave, radical, and risky work, stop thinking in such terms. For them to buy it, you must instead show that doing something unique, original, and different is, in fact, the logical and most likely to succeed business choice relative to their ambition and context, even if that does, at first glance, seem contrarian.
Of course, you must also ensure this is true rather than fantasy. Bold work isn’t right for every brand in every situation, so I greatly encourage us to take a “First, do no harm” stance.