What is Risk Aversion and Friction at Your Company?
Every business faces challenges based on size, field, and other factors. As a company grows, it must navigate the difficult balance between risk and reward. In the process, most companies struggle with friction and risk aversion during their growth. So, understanding the pros and cons of friction and risk aversion helps you identify when these forces impede your progress.
The reality is that both friction and risk aversion are natural forces. These concepts help keep companies safe from unwise risks or poor decision-making. They prevent companies from moving too quickly or making rash decisions in business. However, too much of either paralyzes your company’s growth and profitability. So, let’s explore both concepts in detail, so you can identify if your company has too much friction or risk aversion at any given time.
What is Friction?
By definition, friction is the force that acts between two surfaces to slow them down. Similarly, in business, friction refers to the obstacles that make it difficult to move forward. Friction comes from various sources. For instance, it could result from management styles or organizational structures. In business, friction gets created by the distance between departments, disorganization, and inflexibility.
It’s fascinating that at a time of great ease of communication, friction still creates communication challenges, slowing progress on essential projects. Friction also happens by a lack of transparency or a lack of trust. If employees don’t feel like they can be honest with leaders, it creates a communication breakdown. Further, friction occurs in companies that aren’t flexible to accommodate your new methods or approaches.
How to Recognize Too Much Friction in Your Company
The reality is friction can help a company progress. It adds texture to processes and prevents rash decisions without informed analysis and wisdom. But too much friction impedes your organization’s growth. So, how do you know if there’s too much friction in your company?
Too many secrets: There’s too much friction if you notice silos and a lack of clarity between teams. Secrecy is a sign that people aren’t comfortable with each other or leaders. Moreover, employees may feel their voices aren’t heard.
Too much control: You can’t account for every circumstance. And while data is absolute, situations aren’t. If you’re trying to control every variable, you probably have too much friction at your company.
Too many roadblocks: If managers or teams constantly put up roadblocks to moving the company forward, you probably have too much friction. Too much naysaying isn’t dynamic, and it’s a clue to too much friction.
What is Risk Aversion?
Alternatively, risk aversion refers to the preference for reducing the amount of risk. Risk aversion is natural in business. Every company wants to avoid unnecessary risks. The reality is that risk aversion is healthy for a business. It can help keep companies from making rash decisions that could lead to costly mistakes. However, risk aversion can be a debilitating force that keeps businesses from making progress. In short, as a leader, you need to strike a balance.
Risk aversion is often associated with excessive caution or doubt. It encourages teams to think in black-and-white terms and to put our feelings above data or facts. Risk aversion varies depending on an organization’s culture, management, and team personalities. An insightful leader must know how not to stifle innovation. In other words, they have to eliminate the fear of negligent failure (i.e., not doing the due diligence) to avoid risk aversion.
How to Recognize Too Much Risk Aversion in Your Company
Again, risk aversion is a natural part of growing and running a business. However, too much risk aversion can hold your company back. You can identify too much risk aversion in your company by looking for the following signs.
Too many meetings: If your employees spend too much time in meetings, you may have too much risk aversion. Why? Excessive meetings are a sign of too much analysis and not enough action.
Too many challenges: If too many challenges are brought up, there’s likely too much risk aversion. Challenges are good. They help teams learn and grow as an organization. However, too many challenges signal teams don’t feel they can make decisions quickly.
Too many complications: If various teams frequently address difficulties, there’s too much risk aversion. As we know, we live in a time of increasing complexity. But, if the processes and people management gets too complicated, there’s a problem.
How Risk Aversion Decreases Innovation and Agility
Risk aversion sometimes makes sense. However, it often becomes a barrier to innovation and agility. Risk aversion means you’re careful in your approach. You’re trying to make sure nothing goes wrong. However, your risk-averse approach can sometimes trip your company by causing needless friction in the business process. A great tension story is related to Formula 1 (F1). As we know, Formula 1 captured Americans’ imaginations—finally.
F1 is a highly competitive sport, and a lot of money is on the line. Mercedes and Red Bull teams are the undisputed leaders. And it’s a sport where every win makes the difference in the ‘drive to survive.’ The Racing Point team decided to ‘copy’ the winning Mercedes, and other teams weren’t happy. Moreover, they challenged it with the regulating body. What would your company do? What would your lawyers say? And what would your R&D say if you copied a competitor? Do you see the tension between innovation, agility, and risk aversion?
Strategies to Overcome the Challenge
Friction is often a result of a company’s growth. Too much friction can signal that your company is growing at a rate that’s too fast. Further, risk aversion can be a healthy way to stay safe, but it can also become paralyzing. To overcome both challenges, consider some of the following ideas:
Communicate: Clear communication is the first step in overcoming friction and risk aversion. The reality is that you have to dismantle the silos. How, with so many ways to communicate? A single spine tech frame, and back to basics in language.
Put streamlined and flexible systems in place: If your company has a culture of silos, you can create systems that encourage openness. Also, ensure that your processes are flexible. You can’t plan for every eventuality. We live in a world of ambiguity.
Celebrate transparency: Celebrate transparency in every form at your company. Make it clear that your employees are expected to be honest with each other, including leaders, even if it’s uncomfortable.
Lighten up: If your company has a culture of extreme caution, you can try lightening up. It doesn’t mean you should be careless. But you can take steps to ease up on the excessive analysis and doubt in your business.
Hold productive meetings after decisions: If you notice that people are over-analyzing decisions, discuss them after the decision. Doing so helps you encourage your team to move past the analysis and jump into action.
Encourage empowered decision-making: If your team is constantly putting off decisions, encourage them to take action. Empower your team to make decisions without the threat of management repercussions.
Balancing in the Knowledge Age
The internet and other tech have created the knowledge age. The reality is that knowledge is now cheap. You no longer need to spend $100,000 on an education to get the information you need. In the knowledge age, friction and risk aversion are especially problematic because everything happens quickly. The key to balancing friction and risk aversion in the knowledge age is to recognize that these forces are necessary (wisdom). And that you can use it to your advantage (perspective). You can balance friction and risk aversion by creating the right company culture and moving past the unnecessary barriers they might impose on themselves.
Ben Stroup is Chief Growth Architect and President at Velocity Strategy Solutions where he helps leaders design, develop, and deploy smarter business growth strategies. Ben is a futurist, disruptor, and data champion. He leads a team that takes a structured learning approach to business challenges, which allows them to assist leaders in bridging the gap between ideas, innovation, and revenue—taking ideas from mind to market.
Velocity Strategy Solutions is an on-demand, next-generation business strategy and management consulting firm which provides clients with a relentless focus on data, execution, and results that positively impact the bottom line. Velocity delivers integrated people and revenue strategies combined with a disciplined approach to growth architecture that elevates the capacity of leaders, teams, and organizations to succeed and win more.