Procurement experts are adept at dampening risk, but often less so at utilising it as a tool ©Getty Images
Procurement experts are adept at dampening risk, but often less so at utilising it as a tool ©Getty Images

How to master risk-taking in the current supply climate

Understanding how to take risks is key to effective decision-making, but the journey to gain the right mindset can be a challenge.

“Risks taken in an informed and structured manner have the potential to accelerate procurement’s position in a business,” says Sam Bugden, global head of business change at opticians group Specsavers. “Solving business challenges, unlocking supply chain issues, and finding the next great market-changing innovation are all within procurement’s gift when leaders become comfortable with risk.”

But procurement has a dualistic relationship with risk. On the one hand it’s par for the course, a regular agenda point to keep in check; but on the other it’s a constant pain point. And when operating in an ecosystem of continuously elevated risk, it can become a debilitating barrier, with the focus heavily weighted on mitigation and not utilisation. So how can practitioners redress the balance, to become comfortable using risk as a positive tool to drive procurement forward?

Fortunately, the need to take a certain degree of risk is widely understood in the profession. Risk analysis “informs the logic of sourcing, contracting and supplier relationship decisions”, says James Westgarth, senior director of procurement at airline owner Lufthansa Group, and stakeholders inside and outside of procurement benefit from understanding this logic.

“Knowing how to assess risk and, most importantly, how to formulate a robust mitigation strategy, is key to being able to utilise sources of supply successfully,” adds Bugden. “Equally, we’re seeing unprecedented innovation opportunities in many markets. These are often high risk, high reward situations where being able to minimise the risk to maximise the rewards is a key skill expected of procurement by stakeholders. The increasing importance of risk and innovation is driving a need for procurement to transform.

“Failing to become comfortable with and proficient at risk-taking will inhibit this transformation, to the detriment of the stakeholders procurement teams exist to support,” says Bugden.

Find the biting point

So how do you ensure the right degree of risk is being applied? Many experts would say the key is establishing the optimal risk appetite the an organisation is willing to accept in pursuit of achieving its strategic objectives, says Stephen Ashcroft, a procurement consultant and board adviser. “Before procurement and supply chain professionals can determine an organisation’s decision-making and risk behaviour, it requires some sense of the stakeholders’ appetite for risk-taking.

Hence, risk appetite and understanding risk is in an iterative dynamic process,” says Ashcroft, who recently completed a one-year position as director for real estate, procurement and corporate services at the African Development Bank Group. There is also the natural instinct for many leaders to err on the side of caution, particularly in the procurement and supply chain sector, but it doesn’t pay to be overly cautious.

An important starting point is to create a culture where procurement can be less risk averse, and for this it needs a strong voice in the organisation, says Phil Hicks, group head of procurement at Northumbrian Water Group (NWG). Is the division being respected as a “window” to the outside markets and best practice?

“Rarely will procurement teams in isolation make changes to business operations or processes that alter the risk profile, as even changing suppliers will require technical approval or stakeholder buy-in,” he says. “It’s about having procurement leadership and teams open to new ideas and willing to test stakeholders and getting them to consider the ideas. To do this, procurement professionals need to understand and communicate the benefits and risks.”

For Bugden, it’s about developing an effective framework. Procurement teams need to understand the risk framework they are operating in and how to leverage that to such an extent they can communicate it effectively to their stakeholders in order, he says, “to gain buy-in to consider risk as much as we typically consider the usual drivers of cost, availability, quality etc.”.

Finally, it’s essential to be honest with yourself and your stakeholders. “If a gamble on a risk is not performing as expected then risk-takers must be open to backing out or adjusting course, and not needlessly pursue a losing position,” he adds.

Adopting a risk mindset

But how do you actually transform yourself into a powerful risk taker? The behavioural side of risk-taking doesn’t receive enough attention, according to Michele Wucker, a Chicago-based strategic adviser and author. Yet understanding what’s behind our attitudes and responses is vital for developing an effective risk mindset and decision environment.

Part of the problem is the very broad set of biases that affect how each person comprehends risk. These range from very negative to very positive, when somewhere in between is often more appropriate, says Wucker, “especially if there are multiple factors to take into consideration when trying to assess risk”.

“We try to convince ourselves that we can measure risk accurately. But the truth is that each risk is different for each individual and organisation. The odds of something spiralling out of control depend on innate personality or organisational culture, past experiences with risks and how these factors combine to shape future attitudes.

“And then there are the processes and habits you put in place, the environment you create, which help you to make the best risk decisions for you or for your organisation,” she says.

Assessing a risk accurately includes a complex set of factors, including an individual’s ability to perceive and respond, not just the likelihood or impact of something happening, says Wucker.

Putting plans into action

“If you want to set up a good way of making risk decisions you start with self-awareness of your biases, whether towards risk taking or towards staying still, which is another type of risk. Then it’s a question of how risky you perceive something to be, versus how your colleagues and competitors and clients see it as being.”

When assessing a scenario that’s similar to one taken in the past, Wucker recommends identifying the specific circumstances of the previous event, what they were and how they may have contributed to whether the outcome was good or bad. “Did I have the right people around me to help make that decision? Had I sought out knowledge that made me fairly confident about what I was getting into? And did I do it on a day where I was feeling physiologically less stressed?” she proffers.

By understanding what worked and what didn’t, you can develop an optimal risk-taking environment. But don’t assume that what works for you is the same for your colleagues.

“Somebody else might have a completely different set of habits and environment that make them more comfortable with a risk. These can include things like the time of day or the day of the week, what you had for lunch, or even the temperature or music,” she says.

“One organisation might be full of people who intuitively lean toward moving fast and breaking things and assuming we’ll deal with any clean up later. Another one might be a legacy organisation where everything has to pass through a bureaucratic maze. So it depends on the organisational culture, and what’s okay, and might even include what risks have worked out in the past for the organisation or not,” says Wucker. However, she does not believe in a fully retrospective scenario – looking forward is important too.

Unconventionally, Wucker advises carrying out a “pre-mortem” when weighing the risks of various decisions. “Ask yourself: ‘If this fails, how’s it going to fail?’ This helps to prepare you to head off any unpleasant events. It also helps you to be more comfortable with the possibility that you might fail. It’s whether you see failure as a learning experience, or a stain of shame,” she says.

And this is where procurement still has a way to go. Though the profession is in a better place than ever when it comes to understanding how to manage risk, it would be a mistake to forget that within almost every risk there comes opportunity. So while it’s important to weigh up both sides, the key to putting positive risk-taking into practice is to allow for mistakes and approach each scenario with an open mind.

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