How do businesses regain their appetite for risk?

By | March 4, 2014
Dr David Spicer

Dr David Spicer

Dr David Spicer is Associate Dean and Senior Lecturer in Organizational Change at Bradford University School of Management where he lectures in the areas of change management and organisational behaviour on undergraduate, postgraduate and executive programmes.

 

I took part in a breakfast debate with the business magazine Insider recently that looked at the future of our economy and what must be done to drive it ahead. I sat alongside some of the country’s leading economists and we agreed that the UK had dodged an “economic asteroid” and was finally back on the road to recovery.

Richard Buxton

Richard Buxton

One of my fellow panellists was Richard Buxton, the Head of UK equities at Old Mutual Global Investors, who said the UK was back on track and the major issue now was giving business leaders the confidence to invest. He told the assembled guests: “Three cheers – we are finally growing, but we’ve only been growing a year and we now need to see income growth and companies that are confident enough to start investing. Despite a lot of talk it is incredibly hard to find companies that are actually committing to investment again and we need that over the next year to help maintain the momentum.”

He’s right, of course, but I see the biggest barrier to business investment as a poor attitude to risk. While most entrepreneurs will say risk is an integral part of business success, the recent economic turmoil has meant few are willing to take risks. Indeed, our entire society is far more risk-averse following the recession.

Political uncertainty, continuing turmoil in the Eurozone and further afield, fluctuating exchange rates, soaring material, energy and transport costs and onerous legislation all still make for a volatile business landscape. All of these factors make it difficult for leaders to measure risk against return on investment and that has the potential to hold back growth and hamper business management.

International trade is seen as a key factor in fuelling the recovery of the UK as the returns and potential for growth is much higher. Unsurprisingly, the Government is pushing hard for more businesses to break into exports, but with greater rewards come greater risks.

Picture courtesy of freedigitalphotos.net / Stuart Miles

Picture courtesy of freedigitalphotos.net / Stuart Miles

Partnerships that share risk

My research has shown that businesses are finding new ways to target these lucrative opportunities, but are also able to mitigate the risk. There is a growing trend for businesses to partner up on new ventures and share the burden of investment and the exposure to risk.

In a recent Forbes panel debate about the growing importance of shared risk, the businesses involved said that many businesses were using the willingness to share risk as a major factor in selecting suppliers.

The shared risk model is happening in a number of ways. While some are entering new markets as equal partners, others are encouraging their supply chain to accept some of the risk by supporting the development of new markets or products and some firms are also looking to outsource their riskier operations to third parties so they shoulder the majority of the risk.

International collaboration

My colleague Christos Kalantaridis recently wrote about an initiative that saw international collaboration to help revive UK textile industry by sharing innovation and that is something we are seeing across a range of industries.

Picture courtesy of freedigitalphotos.net / coward_lion

Picture courtesy of freedigitalphotos.net / coward_lion

Rolls-Royce is established in most territories around the world but has also opted to find new ways to share risks. The development of an aero engine is a costly and lengthy process, but the potential rewards are significant. Under a new model pioneered by the business, they have developed strategic partnerships with a number of suppliers who have agreed to invest in the research and supply their own expertise in exchange for a share of the ultimate rewards.

In another example of seeking innovation and sharing risk, IBM and a number of other software companies released their grip on a number of patents and put them into the public domain. This open innovation model allows the businesses to “crowd-source” fresh ideas without having to invest significant amounts of money into potentially risky new projects and helps to reduce exposure while creating new revenue streams.

You can also see daily examples of shared risk with the Government’s cost-cutting drive as swathes of public services are outsourced to private companies. While this process has attracted a fair amount of criticism, it is a valuable tool in cutting the Government’s exposure and retaining key skills.

Accepting business risk

Risk will always be an integral part of business life and it’s something that every entrepreneur must accept. In another of our blogs, Julian Rawel talks about making peace with not having all the answers in business and accepting that some risks will fail.

However, one thing you can rely on business leaders for is innovation and the latest thinking in the corporate world is how to minimise risk. This new appetite for collaboration and outsourcing as businesses aim to still take a gamble – but with the minimum amount of risk – will inevitably grow and develop as more businesses find ways to achieve their ambitions with the help of others.

At the minute, that growth is primarily being driven by the technology sector but I’m sure we will soon begin to see more industries embracing this model as they seek the growth markets beyond Europe.

Risk is always a balancing act and I’d welcome your thoughts on how you manage risk and whether partnerships with other organisations to share the burden are the answer to driving future economic growth?

About Dr David Spicer

David is Senior Lecturer in Organizational Change at Bradford University School of Management where he lectures in the areas of change management and organizational behaviour on undergraduate, postgraduate and executive programmes. He is also a visiting professor at TiasNimbas Business School in Holland and Germany and alumnus of Harvard Business School’s Global Colloquium for Participant Centred Learning. He holds degrees from the Universities of Bristol, Stirling, and Plymouth.  His research is concerned with organizational learning and change, and he is currently working on a major project looking at the dynamic capabilities of Motorola and Intel.

Specialties

+        Organisational learning in small firms

+        Organisational learning in a downturn

+        Styles of leadership – East vs West

+        Cultural change in mergers and takeovers

6 thoughts on “How do businesses regain their appetite for risk?

  1. Pingback: Making business collaboration work | Bradford Management Thinking Blog

  2. MC

    Mitigation of risk along the Value Chain of a company can lead to new healthy partnership formation, however if deals are not struck due to fear that the risk is too high, then there is a danger that time, effort and funds are lost in the process. Whilst risk mitigation is important, it is equally important that confidence is raised amongst all stakeholders. This can be helped by the media and financial organisations. The broadcasting of good news needs to increase and the financial institutions need to re-engage with their customers to boost confidence and in turn increase stakeholder confidence.

  3. Sam Perry

    I disagree with Richard Buxton that companies that are investing are few and far between. I am now seeing companies making the decision to invest on a daily basis in Yorkshire however I do agree that we aren’t yet where we need to be.
    Partnerships that share risk can be an important mechanism for businesses of all scales and can often work well but are not always available, or viable, for all businesses in all sectors and where they are can involve / create their own risks as MC suggests.
    It is vital that there are other mechanisms and stakeholder relationships that can be leveraged to share, or manage / reduce, risk of investment (government schemes, local agencies and, despite the common view, Banks and FIs) but we must all do more to bring these options to UK SMEs.

  4. Chris Rushworth

    After an unprecedented shift in the global economy, risk appetite has had to evolve. Businesses are now re-defining the markets they want to play in and what risks to accept. The balance between being risk adverse or just accepting low yield “reasonable risk” has becoming very subjective. Dr Spicer mentions that, “the biggest barrier to business investment as a poor attitude to risk”. In my opinion risk adversity, and/or a more pragmatic approach to risk is not necessarily a “poor attitude”, potentially it is exactly the opposite. Perhaps businesses are currently too risk adverse, however, who is qualified to make this as a definitive statement. Many an academic did not see the events of 2008 coming. If joint ventures offer a middle ground to give businesses the comfort to invest until they become confident to proceed on their own, fantastic.

  5. ME

    Businesses that can sensibly afford to invest can steal a march on their competition. Agree with Sam Perry in that we can all play our part in not just talking up the economy but by doing – by putting our money where our vision and ambitions are. This will invariably generate further confidence in the marketplace on all levels.
    It is certainly encouraging to see new collaborations in like minded firms especially in the Technology or in healthcare sectors where joined up thinking, created by the power of “hubs”, are bringing a total output, greater than the sum of their constituent parts.

  6. Dave Spicer

    Thanks all for your comments. Chris’ points about risk adversity are well made – I won’t disagree – this is part I think of my own argument. Its not necessarily about being more or less risk adverse – it is about understanding and managing risk properly – too many businesses I talk with are trying to manage all the risk out. I’d also support Sam and MEs comments about investment – research on the longest lived businesses (over 100 years old) shows they all share one characteristic – they have invested throughout – carefully – that strikes me as another aspect of a health attitude to risk and the returns that might come from it – and its the balance of these that’s key.

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