If you've ever visited a hospital emergency room, you may be familiar with the frequently asked question - "On a scale of 1-10, how significant is your pain?" Since we know everyone tolerates pain on a different level, you have to ask yourself how the doctors calibrate individual patient answers. If there is any prioritization of patient care based on their describe level of pain, I'm guessing we'd all be smart enough to say we are at a 10 in order to get quicker attention.
Putting that scenario into a business perspective, there is a great deal of discussion and opinions on the topic of
But that requires buy in of the concept from all involved. There can be no sacred cows and
Think about it are budgets a form of risk tolerance? Company's spend countless hours and efforts developing strategic corporate budgets that provide managers guidance on acceptable spending limits. Those limits all roll up into an overall corporate threshold for spending. Isn't there some applicable method that can be used to provide guidance on decision making that incorporates more than just falls corporate budget parameters? Absent recommending some detailed matrices and grids that define multiple scenarios that might be expected to dramatically impact the company's strategic goals, it would seem logical to think there is some value to gain by establishing some basic parameters to ensure important decisions are all considered utilizing a similar "pain" scale.
Years ago I was with an organization that experienced some extreme operational issues that significantly threatened the ongoing viability of the company. The issues happened to occur around the same time frame as
The concept worked for this company because everyone bought into the theory and it was driven by the Board. At first, individuals were sensitive to the "high risk" classification issues but once they really understood the purpose of the matrice, it served as a useful tool in managing and operating the business.
That business sold in 2008 and I continue to follow the topic of risk tolerance and risk appetite and the continual debate that surround the issue. I have seen many companies resist the concept because they believe it isn't applicable to their business or it is to hard to define. Those that have attempted to embrace the issue will often relay the sensitivities to the high risk ranking.
Just like individuals all possessing varying pain thresholds, so do company's. I,understand why it can be a really difficult concept to embrace and apply. I saw it work in one organization and have also seen other organizations where the concept was not successful. There are varying reasons why. Some individuals who have been part of organizations that have experienced significant turmoil can attest to the importance of the concept because they have seen the really bad thing happen and understand how the definition and recognition of tolerance can be similar to managing a budget or even managing pain. There is truth to the fact that if you allow yourself to get to that intolerable pain level, it is much more difficult to bring under control. So by having an established tolerance level, the organization can institute mitigating actions before things get out of control.
By Lynn Fountain, CGMA, CRMA, MBA