Running away from risk is a no-win proposition. Sometimes,
you come across a project that looks positively risk-free. In the past, you may
have looked at such an endeavor as a slam dunk and thanked your lucky stars to
be given an easy project for a change. We've had the same reaction. What dummies
we were. Projects with no real risks are losers. They are almost always devoid
of benefit; that's why they weren't done years ago. Save yourself some time and
energy and apply it to something worthwhile:
If a project has no risks . . . don't do it.
Risks and benefits always go hand in hand. The reason that
a project is full of risk is that it leads you into uncharted waters. It stretches
your capability, which means that if you pull it off successfully, it's going
to drive your competition batty. The ultimate coup is to stretch your own capability
to a point beyond the competition's ability to respond. This is what gives you
competitive advantage and helps you build a distinct brand in the market.
Flight from Opportunity
Companies that run away from
risk and focus on what they know they can do well are ceding the field to their
adversaries. The 1990's gave us some charming examples of this. There were, broadly
speaking, two major things going on in the nineties:
Companies were moving applications and databases from the old mainframe-and-terminal
mode to client/server mode.
Companies were transforming
themselves to interact directly with their customers and suppliers in new and
previously unimagined ways: via the Internet and through integrated supply chains,
auction mechanisms, and disintermediated transactions.
Unfortunately, there were lots of companies that dedicated
themselves substantially to the first of these and ignored the second. Once you've
done one client/server conversion, the rest are easy and mechanical. You could
do them in your sleep. In fact, if you spent most of the nineties doing client/server
conversions, you were asleep. You missed the action.
A case in point is Merrill Lynch. They looked long and hard
at the so-called trend of on-line trading . . . and decided to ignore it. They
crossed their fingers in the hope that the era of the full-service brokerage (with
fat fees and brokers who could keep you endlessly on hold) would come back, that
direct trading would be only a passing fad. What a forlorn hope. Today, the full-service
brokerage is as much a thing of the past as the full-service gas station. And
today, Merrill Lynch offers its customers on-line trading at a reduced fee. But
it took them nearly a decade to catch on. They were the latest of the Late Adopters.
The Early Adopters were Fidelity,
Schwab, and E-Trade. E-Trade and its look-alikes were new companies, created to
exploit the change. So, if on-line trading had turned out to be only a passing
fad, E-Trade would have gone belly-up with no loss beyond the capital the company
had raised explicitly to put at risk. Fidelity and Schwab, on the other hand,
were well-established companies with a lot to lose. In this sense, they were not
so different from Merrill Lynch. But Fidelity and Schwab were willing to take
the risks.
The IT people at
Fidelity and Schwab had to be aware of the risks of the new venture. Here is our
two-minute brainstorm list of the risks that would have been easily apparent to
Fidelity and Schwab when they began to take on Web trading in the early nineties:
Building the system
is completely beyond our capability; we'll have to learn protocols, languages,
and approaches like HTML, Java, PERL, CGI, server-side logic, verification, secure
web pages, and many new technologies that we can't even name today.
Supporting the system is completely beyond our
present capability; we'll have to set up user help desks, audit trails, monitoring
software, tutorials for use of the system—things that we've never done before.
The security risks
of on-line trading are truly daunting; we will be attacked by hackers and crackers,
by organized crime, and by our own customers and employees.
We may not be able to acquire the experience and
talent we need to do any of this.
We may find that the business we do via the Web is just what we would have
done with the same customers at higher fees if we hadn't built the Web trading
system.
We may find
that people try on-line trading and then go back to telephone trading, leaving
us with a busted investment.
We may ease our existing customers into this new mode and then lose them to
competitors that cater to these newly savvy traders.
Undoubtedly, Merrill Lynch was aware of the same risks.
But Fidelity and Schwab decided to run directly toward those risks, while Merrill
Lynch chose to run away from them. The result was that Fidelity and Schwab grew
aggressively in the nineties while Merrill Lynch struggled to stay even.
What's Different About Today?
We are in the midst of a sea change that will probably cause
turmoil for the rest of our lives. The world is suddenly much more tightly connected.
There is an ever broader-band web of digital connection that touches all of us:
Individuals are more connected to each other, to their companies, and to the service
providers that they depend upon; companies are more connected to their clients
and employees, to their markets, to their vendors, and to the government agencies
that affect their work. And all of this is still evolving.
In this period of turmoil, a willingness to run risks is
utterly essential. It matters a hell of a lot more than efficiency. Efficiency
will make you, at best, an attractive takeover candidate—probably for a less-efficient
competitor that has stolen a march on you through greater risk-taking.
