For established businesses, risk is something to be carefully measured and minimised wherever possible.
But for digitally based startup companies, risk is something to be embraced. By their nature, startups are high-risk ventures, as their founding principle of creating value where none previously existed puts risk at their core. If their central idea proves false, the entire venture can fail.
Nine times out of ten, this is exactly what happens.
But for those that survive, the rewards can be enormous, and can lead to the disruption of entire industries. That can spell bad news for established organisations – especially those unwilling to embrace risk themselves.
In the era of digital disruption, where competition can emerge rapidly from unexpected quarters, taking a risk-averse stance can be the greatest risk of all.
Understanding and managing risk is one of the fundamental pillars of the finance function.
For finance leaders, their challenge now is to take that skillset in understanding and assessing risk, and adapt it to chart a course that enables their organisation to win against emerging competitors who may be willing to risk everything.
In 2016 SAP gathered a group of top-performing CFOs to discuss the role they play in the digital transformation of their organisation. They talked at length about the challenges of managing a modern finance function, and the reality of operating at a speed where traditional processes and procedures can prove unsuitable for meeting their organisation’s newfound need for agility and flexibility.
They agreed, however, that there are ways that CFOs can adapt to new imperatives without putting their own careers on the line. Surprisingly, some of these techniques can be learned from the startup community itself.
Learning from risk-takers
One of the key factors that drives startups is the notion that traditional business models can be disrupted through the application of innovative thinking and new technology.
The airline industry is no stranger to this thinking. According to Race Strauss, CFO at Jetstar Group, his company’s entire proposition is based on disrupting traditional models, and this inherently involves embracing risk – at least everywhere that doesn’t involve customer safety.
“Our whole culture at Jetstar is about finding new ways to do things that haven’t been done, before using technology as much as we can, being smart about the way we work, and not being afraid to get things wrong. We try things, and if they don’t work, we learn from them. So that is our way of life. It is a fun way of life as well, because it actually creates a culture and environment that is really exciting.”
This concept of rapid testing and learning is a core activity for many startups. It’s the “safe to fail” environment. Although the entire proposition of a startup is built on a foundation of risk, they minimise that risk through use of processes and disciplines evolved from the “lean manufacturing” methodologies developed in the Japanese car manufacturing industry in the last century.
This translates to breaking large projects down into small ones, which are executed in rapid succession, with evidence gathered and assessed before taking the next step. Often this evidence comes in the form of direct customer interactions, such as sales or other measures of customer conversions, and startups tend to make extensive use of multivariate testing to determine the best path forward.
This same process of iterative development is now being adopted by numerous established organisations, including the media company Sensis. Its CFO Joanna Hands says her company encourages large projects be broken down into smaller chunks which are executed over a 12-week period, with their outcomes assessed in depth before the next step is funded.
“I’m really risk-averse, which most finance people are. But as a finance person I’ve got to give the business the opportunity to fail if it is ultimately to succeed, and do that in a managed way. I try and give them some money and some leeway, but I also give them structure around how and what I want to see in 12 weeks’ time. And that really has worked.”
The concept of embracing risk – and potential failure – is something that Australian Leisure and Hospitality (ALH) Group CFO Siobhan Hammer is also seeking to promote within her own organisation.
“It is about setting a mindset that it is actually ok to get things wrong because we learn from it. And to have those types of words coming from the CFO is very powerful and impactful. That is a cultural shift: getting something wrong, learning about it, and moving on.”
At SAP we have our own examples, whereby our Global Finance Leadership Team puts future Board minus 1 leaders into a leadership program called the Global Leadership Development Program. This program brings together talent from all over the world to learn leadership from working on real business problems in a short time period (not even 4 months).
I worked on an Instant Quote to Cash system with 5 peers across 4 time zones, and we delivered a working system demonstration to the Global Finance Leadership team in June. These types of programs are what can be embraced in our own finance teams if we adopt this startup mentality and allow our teams a “safe to fail” environment.
The use of test-and-learn procedures within startups provides rapid feedback regarding the choices they make over time. This process can also be adopted by established organisations to reduce the risks involved within their own projects.
By adopting analytics tools and applying these in a rapid project development cycle, organisations can quickly determine which projects are likely to lead to positive outcomes, and quickly shut down those that won’t.
Modern analytics tools extract this data directly from operational systems, such as sales management tools or web content platforms, to provide a dashboard of data that can be used to assess the success or failure of projects. The outputs from these systems can be distributed through an organisation to improve overall risk awareness.
The collection of this data can over time lead to the creation of a body of knowledge relating to risk, such as what the considerations were and why courses of action were chosen or rejected, further enhancing the organisation’s risk management skills.
How finance teams manage risk in such a volatile economy is being transformed through the adoption of next-generation technology platforms and analytical tools, enabling corporate treasury teams to optimise working capital and collectively control cash by gaining up-to-the-minute visibility into cash positions.
The Murray Goulburn Co-Operative Co. Limited streamlined its financials through integrating SAP Treasury and Risk Management. Through increased automation, MG has increased security and data control and improved productivity. Read the full story.
Any discussion regarding the strategy and objectives of an organisation must take into account the risks associated with that strategy. By building a capability to quickly assess early indicators in a “small bet” scenario, organisations can more quickly determine if they are on track to the successful execution of strategy, and even gain insight faster into whether the strategy itself will meet their objectives.
So while it might be that disruptive startups provide a significant risk to many established organisations, it is also true that they hold the solution to managing those risks.
For more insight on risk management, see The Problem With Risk Appetite.