• FREE RESOURCES
        • Accounts Payable
          Finally! The trick to securing greater T&E compliance
          Benefits
          Rooting out folks who don’t belong on your health plan: A 6-point dependent audit checklist
          IT
          3 costly misconceptions about biz email compromise
          Credit and Collections
          Collecting via email: 4 must-make moves in your subject line
          Accounts Payable
          5 Tough-to-spot signs that an invoice is fake
  • PREMIUM CONTENT
        • Staff management
          120 Proven Communications Tips for Today’s CFO
        • Payroll
          Handling Nonexempt Employee Pay: Stay Compliant and Avoid DOL Audits
          Accounts Payable
          T&E Best Practices: Complete Guide to Ensure Compliance
          Payroll
          Payroll Best Practices: 4 Ways to Save Time and Money
        • Staff management
          Email Best Practices: A 6-Question Quiz
          Staff management
          Innovative Communications Strategies: An Email Case Study
          Staff management
          A 5-part Framework for Successful Workplace Communications
        • SEE MORE
          PREMIUM RESOURCES
  • CORONAVIRUS RESOURCES
  • LOGIN
  • SIGN UP FREE

CFO Daily News

  • FREE RESOURCES
        • Accounts Payable
          Finally! The trick to securing greater T&E compliance
          Benefits
          Rooting out folks who don’t belong on your health plan: A 6-point dependent audit checklist
          IT
          3 costly misconceptions about biz email compromise
          Credit and Collections
          Collecting via email: 4 must-make moves in your subject line
          Accounts Payable
          5 Tough-to-spot signs that an invoice is fake
  • PREMIUM CONTENT
        • Staff management
          120 Proven Communications Tips for Today’s CFO
        • Payroll
          Handling Nonexempt Employee Pay: Stay Compliant and Avoid DOL Audits
          Accounts Payable
          T&E Best Practices: Complete Guide to Ensure Compliance
          Payroll
          Payroll Best Practices: 4 Ways to Save Time and Money
        • Staff management
          Email Best Practices: A 6-Question Quiz
          Staff management
          Innovative Communications Strategies: An Email Case Study
          Staff management
          A 5-part Framework for Successful Workplace Communications
        • SEE MORE
          PREMIUM RESOURCES
  • CORONAVIRUS RESOURCES
  • Accounts Payable
  • Credit and Collections
  • Payroll
  • Accounting
  • Benefits
  • Finance Technology
  • More
    • Employment Law
    • Strategy
    • Policy and Culture
    • Fraud
    • Payments and Transactions
    • Budgeting and Forecasting
    • Banking
    • Staff Management
    • Cost Control
    • Supply Chain
    • IT

Managers too afraid of risk? 5 ways of being responsibly risky

Rich Coleman
by Rich Coleman
August 15, 2012
2 minute read
  • SHARE ON

In tight financial times, it’s smart to be conservative when it comes to risky investments. But new research shows those with decision-making power may be playing it just too safe.

A strict adherence to risk aversion may be a real problem with some businesses, as research from McKinsey Quarterly (via Wall Street Journal) suggests.

Imagine this scenario: You’re faced with two investment opportunities. You can invest $20 million with an expected return of $30 million over three years, or you can invest $40 million with an expected return of $100 million over five years and a dip in earnings in the early years. In each case, the chance of failure is the same.

According to research, when faced with multiple variations of the same small- to mid-sized project, like the aforementioned scenario, a typical manager will choose the smaller investment over the larger investment.  As long as that smaller option is enough to meet earnings goals, the risk of a larger project outweighs the benefits. Keep in mind, the latter presents little additional risk to the company and that additional risk is offset by an increase in net present value.

So, what does it all mean?

It means that managers are too comfortable with playing it safe, and it may be happening in your company right now, costing you potential gain.

Responsibly risky

McKinsey offers five things you can do to make sure your team isn’t running from risk.

1. Encourage managers and senior execs to explore ideas beyond their comfort zone. Ask for project ideas that are specifically risky but offer high returns. From there your team can alter those plans before a formal proposal.

2. Explore every scenario. Ask yourselves, “What will happen if this is an absolute failure? What will happen if it’s a complete knockout success?” Be prepared for every single outcome there could be.

3. Don’t use a higher discount rate when evaluating just because an outcome is more uncertain. If you’re concerned about risk exposure, adopt a rule that any investment amounting to less than five to 10 percent of the total investment budget must be made in a risk-neutral manner with no adjustment to the discount rate.

4. Evaluate managers based on performance of a portfolio of outcomes, instead of punishing for pursuing risky individual projects.

5. Eliminate the role of “luck,” good or bad. Evaluate how well project managers actually performed and don’t just look at the end result.

Keep Up To Date with the Latest Finance News

With CFO Daily News arriving in your inbox, you will never miss critical stories on accounting, benefits, payroll & employment law strategies.

Sign up for a free CFO Daily News membership and get our newsletter!
  • This field is for validation purposes and should be left unchanged.
CFO Daily News Logo
  • ABOUT CFO DAILY NEWS
  • ADVERTISE WITH US
  • WRITE FOR US
  • CONTACT
  • Accounting
  • Benefits
  • Payroll
  • Policy and Culture
  • Employment Law
  • Fraud
  • Finance Technology
  • Accounts Payable
  • Credit and Collections
  • Strategy
  • Payments and Transactions
  • Budgeting and Forecasting
  • Banking
  • Staff Management
  • Cost Control
  • Supply Chain
  • IT

CFO Daily News, part of the SuccessFuel Network, provides the latest Finance and employment law news for Finance professionals in the trenches of small-to-medium-sized businesses. Rather than simply regurgitating the day’s headlines, CFO Daily News delivers actionable insights, helping Finance execs understand what Finance trends mean to their business.

Privacy Policy Terms of Service
Copyright © 2021 SuccessFuel

WELCOME BACK!

Enter your username and password below to log in

Forget Your Username or Password?

Reset Password

Lost your password? Please enter your username or email address. You will receive a link to create a new password via email.

Log In

preloader