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ChangingMinds Blog! > Blog Archive > 27-Nov-06

 


Monday 27-November-06

Risky shift, management and outsourcing

 There is an interesting phenomenon that occurs in groups and teams called 'risky shift'. What this means is that the the group collectively takes either higher- or lower-risk decisions than its members would individually take. This is surprising as one might reasonably expect some kind of average collective risk being taken.

What appears to be happening here is that critical change is occurring in the personal perception of the transfer of risk, based on beliefs and concern for the group. Risk homeostasis says that we each have a preferred level of risk and will hence be relatively consistent in our risk-taking, yet what actually happens is that we assess risk based on perception more than reality, which means that the actual risk we may take on might vary significantly. 

If I care about others in the group and seek to sustain group cohesion then I may feel responsible for the risk taken by other group members. I thus might personally take on the risk of others, increasing my felt risk and leading me to seek lower-risk decisions. If influential people or the majority of group members feel this way then group decisions will be less risky.

On the other hand, if I feel that I am are sharing my personal risk with others (and hence lessening my personal risk-taking) then I will be more inclined to take gung-ho high-risk decisions. Again, the extent to which this happens will depend on the dynamic of influence within the group.

This principle may also explain a similar phenomenon that occurs in hierarchical management situations. Managers are responsible for a wider scope of activity than individuals, which they share out with their subordinates. But what happens to the perceived risk? For the manager to sustain their personal risk limit they have to either let go of the perception, truly transferring the risk to the subordinate, or otherwise act to reduce the risk in some way. Both of these approaches can become dysfunctional, resulting in what may be considered as poor management.

If I 'let go', transferring risk to subordinates, I need to feel it is their risk and not mine. To do this I must ensure I am relatively blameless in the event of failure and so might distance myself from them, providing them little support and preparing to punish them if they fail. I might, for example, claim I am 'empowering' them or complain to my manager and others of the incompetence of my staff. At worst I might give them work that is doomed to failure and them sack them when the inevitable happens.

On the other hand, managers might try to reduce risk by managing their subordinates more closely, setting goals and requiring regular reports. Sometimes called 'micro-management', this also helps satisfy the need for a sense of control.

Another, perhaps more canny method is to manage external perceptions by projecting high levels of apparent risk upwards and outwards whilst actually sustaining relatively lower risk work, thus reducing personal risk of being judged as a failure when risks do occur.

Games of shifting risk also extend to third-party arrangements, for example in outsourcing and general use of suppliers. One of the key reasons why companies ask others to do work is to shift the associated risks of this activity.

Once this arrangement is made, the company, perceiving an apparent reduction in risk, may 'up the ante', for example by putting extra load on the supplier with demands for shorter timescales, lower costs and changes in requirement. This may significantly increase the risk of failure, but the company's managers don't see it as their risk. Meanwhile, the game may continue with the supplying company shifting the risk again, perhaps to a sub-supplier or perhaps back up to the first company through a pre-emptive get-out clause in the contract.

An alternative (and sometimes additional) scenario occurs when the original company's managers realize that their customers and senior managers will blame any failure on them. The company's managers have relatively little understanding or control over what happens at the supplier and thus perceive an increase in risk. A typical response to this is to seek greater control, with more reviews, meetings, metrics and general attempts to gain more control over the supplier's operation, much as the individual manager resorts to micro-management. Again the supplier may well fight back against this intrusion that might increase their costs and likelihood of failure.

 

So how can managers avoid these dilemmas? The first step is to recognize when they are happening. Real and perceived risks should be carefully differentiated. Understand also how individuals and groups (including yourself) behave around risk, with different responses outside preferred risk boundaries.

A critical additional activity is in developing and managing real trust. A lot of problems arise from the dysfunction of blind trust or paranoid distrust. Real trust comes from effective relationships, transparent interactions and ongoing evidence of trustworthiness. Any failure is dealt with by short-term reparation and longer-term corrective action that prevents recurrence.


Your comments


"What this means is that the the group collectively takes either higher- or lower-risk decisions than its members would individually take."

Presumably the risk taken would not be higher or lower than the most risk taking individual or lowest risk taking individual. My guess would be that they would represent the end points of the range, and that risk taken would fall inside the maximum and minimum, although possibly higher or lower than the average. Is it your observation that this is true?

"Once this arrangement is made, the company, perceiving an apparent reduction in risk, may 'up the anti', for example by putting extra load on the supplier with demands for shorter timescales, lower costs and changes in requirement. This may significantly increase the risk of failure, but the company's managers don't see it as their risk. Meanwhile, the game may continue with the supplying company shifting the risk again, perhaps to a sub-supplier or perhaps back up to the first company through a pre-emptive get-out clause in the contract."

So I do a lot of outsource management and I've never observed this kind of behavior. Economically speaking it is very much not in my interests to drive a supplier or provider to fail unless I'm anti-outsourcing and want it to fail. Do you have real life examples of this happening, or this this just a supposition.

P.S. -- I assume you meant "ante" and not "anti", or is that another British'ism for me to be aware of ;-)

Overall I would say that a fault in almost all established companies is being too risk adverse. By avoiding risk they fail to take timely advantage of shifts in their markets, technology, or their business in general. I'll refer you to "The Inventor's Dilemma" for examples of this happening.

-- Carl Peterson

Dave replies:
Hello Carl and  thanks for the thoughtful challenge. I do like a good prod. Yes, there is supposition in the article, but there's also experience and study. And as you have done, it's intended as much to provoke thinking rather than request blind acceptance.

On the first point, the group risk level is determined both by internal influence and also external situation. A classic risky shift happened in the groupthink of Kennedy's staff in the Bay of Pigs affair, where they escalated to Defcon 'almost-nuclear-war'. Individually I suspect they might not have done this. Consider also how 'normal' people who are in crowds that turn into mobs will behave - I'd suspect that there's been lynch mobs before now where no individual would do what the mob had done.

Personally, I've been in teams and meetings where, despite significant work and evidence to the contrary, there is a flight into the 'safe' option when difficult change is proposed. For a change manager it can be frustrating when they individually agreed beforehand to the change, yet together would not ratify this.

You're a rational and intelligent outsourcer who works in a mature organization and is probably  pretty self-aware. I have seen decisions driven primarily by cost and with little concern for relationships and cultural alignment -- with subsequent difficulties. I currently work in a government organization in which some of the actions around suppliers (on both sides of the fence) are not conducive to efficient and effective working. We are working on this, by the way, but it's not always easy.

Risk is indeed generally not well understood or managed. I do have Christensen's book and like his ideas.

(and pps, you're right, it's 'ante' - thanks for the correction (now made).


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