Monday, January 5, 2009

Understanding Risk: The Fine Line Between Insanity & Inner Peace

The investment community calls it Risk Tolerance but back where I grew up, it was called The Hit. It all boiled down to a simple question: how much can you afford to lose? How big of a Hit are you able to take? Everyone has a different answer. The secret to taking risks is to know that answer. How much of a Hit can you take? When you know that answer, you will sleep much better.

Now, for most people, that Hit comes with a dollar sign attached, though not always. The next question is how much money can you lose? Obviously, during hard financial times, that answer is Very Damn Little. The problem is that no two situations are the same. So, now we need to be flexible with that dollar figure depending on a simple analysis. You need to ask yourself a simple question: Is the amount of money involved worth the risk of checking out the offer?

Let's face it, we have all fallen prey to a great salesman who promises the world and delivers a complete piece of junk. I bought a lovely mop-thing that exploded into a dozen pieces in my hands three days later. But I really didn't care because it cost $5. At $5 my risk tolerance is pretty high. I can afford to make a bet on the product or service.

Now, a $5 mop-thing is the low-end example. Risk tolerance starts getting complicated the larger the dollar signs. As the numbers climb, so does the anxiety. Obviously these are the decisions you must weigh carefully. I think you know what I am talking about, so I'll move along...

Protecting Yourself
Now that you know more about hidden costs, you know that you have to do your homework. The questions you must ask are:
  • Do the advantages out weigh the disadvantages?

  • Will the learning curve be a problem?

  • Will this be disruptive?
You need to answer those questions in as much detail as possible. You've got to do your homework! You need to take your time and get those answers.

Homework
  1. List out all the advantages and the disadvantages; you need to assign them a dollar value based on their benefit to your business. Try to be as accurate as possible. Add both columns and then subtract the disadvantages from the advantages. If you were accurate in assigning dollar values you will have an honest assessment of the financial value of the purchase.

  2. Examine manuals and online product reviews. How do users of the product feel? The Internet has liberated countless voices. See what people are saying. Don't just read one review! Get multiple opinions while working to build a consensus. Get a demo, if possible, and get your team involved. If they are part of the selection process, they will accept your decision easier.
  3. How long will it take for your team to get up to speed with this product? Every day you lose productivity there is a real dollar value involved. The longer you are getting up to speed, the more it costs you. No matter what, you should never try to "go live" on any new product or service during your industries "busy" season. So, if you are in retail, December is a bad month to be testing new mission critical systems. Plan new product deployments during your slow seasons, when possible.
  4. And finally, the great bogey-man: Will it be disruptive? This is the hardest question of all. Every change brings some disruption. It is inevitable. The problem is will the glitch cause your business to grind to a terrible halt? Will this bug cause me to lose money? Every change brings risk, sometimes they are catastrophic. The real question to ask is can you reverse the distruption quickly. Can you just uninstall the software and get back to normal? Can you just unplug the crazy gizmo and everything will be OK? Find out.

Inner Peace & Other Myths
Sorry to burst your bubble, but some people are just naturally wired for stress. If you are one of these lucky winners, it will take lots of meditation and whatever else the yogis prescribe before you will have inner peace. As for the rest of the world, once you understand how much of a Hit you can take and you have done your homework, you'll sleep well.

R-Squared Computing - Business Technology Experts