Think Smarter About Risk

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Today’s Wall Street Journal used page1 of its section R on assessing risk.  The title is “How to think smarter about risk,” by Moshe Milevsky.

The article is about investing risks, but I believe it carries a more general message.  Risk assessments, in isolation from the system, are not very adequate.  They speak of the risk of an investment, such as a stock.  Is the reported institutional risk assessment enough to consider in your decision?  The author says that it is not.  He speaks about an evaluation of that risk and its relationship to other aspects of your financial world.  If your income and the investment are subject to the same risk, then the problem is way bigger than you expect.

An example could be investing in your employer’s stock.  Is there a correlation between the stock value and your other investments?  Yes, to other stock values because the market does move in big ways.  So we are told to diversify into different investment vehicles, such as bonds, precious metals…   But what we do not consider is that the employers’ stock and your ability to have income are quite correlated.  A big drop in this stock probably goes along with a cut in pay or even a loss of your job.  He talks about how correlated your ability to generate living expenses is a function of the economy and the forces that drive stock value.  For an academic or many government workers, there is very little if any correlation.  If you are a temporary contractor, the correlation may be near 100%.

This leads to my advice to all younger workers: Diversify your income sources!

Now, how does this relate to Lean Six Sigma and the Integrated Enterprise Excellence System?

At the end of a project, you need to consider the risk to the system  because of your recommendations.  I saw a large manufacturing corporation set off on a big plan to combine all the customer service databases in the corporation in an effort to save IT support costs.  There is little risk that this change would reduce the support costs.  But what additional risks did it add to the corporation?

If the corporation does a poor job in the new system, there is a risk in losing customers.  How do you assess that?

If the system goes down, all support databases go down.  Before there was a single system, any failure was a local failure.  How do you assess that?

How about the risk to the corporation IT development, in that the project managers took nearly all the programming resources for this project and delayed most other IT efforts, this choice creates the risk of delays to the market with a technology.  How do you assess that?

Now consider a pure Lean type improvement, where you remove non-value added activities.  In most organizations the Kaizen team makes a group decision of NVA on a process step.  A best-in-class Kaizen leader will validate these decisions with the Subject Matter experts outside of the team before removing a process step.  All looks good; end the action.  What is the risk that they were wrong to remove it?

I lived through one of these in manufacturing, where we removed a 2-hr bake from a printed wiring board product.  No one saw the value in the step.  The material suppliers indicated that no-one else had a bake at that point in processing.  A quick look at past development work showed we that we had the bake in place for as far back as we could look.  So we took it out.  Two weeks later, when the first non-bake product made it to final quality control, we experienced a 15% yield loss jump.  All of our risk assessments showed the risk to be near zero, but what we had missed was a correlation with a unique and proprietary process we had used prior to the bake.  The benchmarking efforts did not know about the step.  We had had this step in place for ever and knew it to be a real positive to our capabilities.  No one realized that that step made the bake very important.  We did not understand the system.

We should have pilot-tested the removal to ensure that there was no unknown risk existing.  Most organizations are so driven by the group-think and belief that we fail to fully estimate risk to the system because we focus too much on the process.  We can all learn to make better risk estimates.

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