Risk - Before success occurs, failure has to hurt

We all prioritize. It’s part of being human. We go through the internal calculations of what actions lead to what consequences, deciding which consequences we desire most, and which we desire least. Then we act. As rational decision makers, we look at the potential upside versus the potential downside, and if we value the upside over the downside, we commit resources to that goal. There is uncertainty in the outcome, but good managers measure it, analyze it and move forward. In a business context, this uncertainty is called risk.

Risk is the single largest variable when making decisions. Making decisions without understanding the uncertain aspects of that decision is speculation. The vast majority of good investments are outside speculation simply because uncertainty is measured, understood and explicitly accepted by all interested parties. While understanding risk is not a sufficient condition for success, it is necessary for repeatable success. In order for those in the business/disability space to effectively convince allocators of capital to fund their endeavors, they must speak the language of risk.

In the business/disability space, the concept of risk does not currently exist. In North America, less than 0.10% of funding in disability is from the private sector. The public and philanthropic sectors are built by budget mandates, where accountability tied to returns is non-existent. This creates a massive imbalance relative to the make-up of the economy where profit seeking entities make up roughly 80% of US GDP according to the CIA. If you consider government investment as risk free, which taxpayers would argue against, these numbers denote a massive void of risk taking in business/disability.

The key question to answer is: why? Why do profit seekers choose to allocate capital elsewhere? The answer is simple, and has many models in economic history. Allocators of capital do not have enough information to understand the potential in the business disability space. Akin to entering an emerging market, managers must have at least a basic understanding of the landscape. Until today, disability has been a bastion of caretakers, providing no upside incentive for risk-takers, and therefore no incentive to engage in due diligence. The typical manager asks “How does this activity effect my upside/downside calculations?” The answer to date in the business/disability space has been chirping crickets.

Within private-sector organizations, risk is measured in profit and loss. More specifically, risk is tied to departmental/area budgets. If one wants to know what a firm believes is important, look at where it allocates capital. A global firm like a General Electric allocates more capital to businesses in China than to Lichtenstein because GE has assessed a larger opportunity in China. GE can back that assessment up through numbers like population size/scope, infrastructure spends, and aggregate incomes. The information in both markets is known, and the risks, both upside and downside can be measured in repeatable ways.

In the business/disability space, there are no processes, measures, or practices to assess risk. The upside/downside calculation amounts to an educated guess. In risk parlance this is called speculation. Shareholders of most corporations place their investment dollars understanding that the GEs, IBMs and Wal-Marts of the world are not speculative investment. The management of those firms must mirror that behavior, in order to keep shareholders happy and keep their jobs. Therefore, in order for disability to be treated as the large opportunity its demographics suggest, it must exit the realm of speculation and have its risk measured in comparison to alternative uses of capital.

Make no mistake, somebody with get this right. The market is so massive, at least one of your competitors will accept the higher risk to get involved for the returns later on. Experience in emerging markets proves this case. Investments in Brazil paid off for John Deere, where the world’s largest Ag economy is booming. Investment in China made Wal-Mart the lowest cost retailer. Entry into Chile made billions for copper and zinc miners. The list of successful risk-takers in emerging markets is long, and provides a solid case history for those charting a path in business/disability.

The benchmark in the business/disability space is to successfully pitch a project/product/service based solely on its economic merits to an allocator of capital who knows nothing about disability. The case must be made relative to the other potential uses of capital and must be superior. The ‘pitcher’ must speak the allocator’s language of risk so the allocator can compare apples to apples and assess the opportunities. Does this guarantee success? No. The idea must still be the best use of capital, a relative winner amongst other opportunities.

If you spent your career measuring the taste, texture and benefits of apples, and someone asked you to assess a kiwi, how would you react? The first step to show value to the allocators of capital is to speak their language. Their language is risk. The key to getting to the ‘next bite’ is to structure metrics around risk and deliver them a win they can clearly identity. That will ensure another kiwi does not end up in the compost.