Calculated Risks

Got a nagging feeling that you’re taking too many risks in your business – or, worse, not enough? Put that hunch to the test with the new Risk Exposure Calculator.

Developed by Harvard Business School professor and research director Robert Simons, the Risk Exposure Calculator is a simple self-test that gauges a company’s level of risk to determine whether the organization is, at one extreme, flirting with disaster or, at the other, failing to foster the innovation necessary to be successful.

Simons devised the calculator over a period of about six years during which he studied the successes and setbacks of companies that had achieved rapid growth. “I found that people were being caught unaware [by risk],” Simons says. “Their companies had grown and business was very good, but sometimes along the way they had forgotten some of the little details necessary to keep business running properly.”

To determine the level of risk, the calculator totals individual scores on three key topics – growth, culture and information management – asking executives to rate their businesses’ levels of pressure in such areas as rate of expansion, level of internal competition, and transaction complexity and velocity. When tallied, a final score of nine to 20 points falls within the safety zone of low-level risk, while 21 to 34 is the caution zone, and 35 to 45 is the ominous danger zone.

Of course, “safety” isn’t always the best place for a company to be and “danger” isn’t necessarily the worst. Sometimes, Simons says, business executives see their low scores and realize they aren’t taking enough risks – calculated risks, that is – to be innovative and achieve growth. And leaders who are flush with their companies’ success suddenly blush when they realize that maybe they’re taking too many risks and could be in danger from within. Two-thirds of companies score in the midrange of the risk levels, Simons says, leaving executives to ponder whether to retreat to safety or plunge headlong into danger.

The fun part about the Risk Exposure Calculator is watching people quiz themselves, Simons says: “You can see them squirming.” And although individual scores vary, he says, people’s reactions are almost invariable. “Typically, they say, ‘I had this nagging feeling there was something I needed to worry about, but I didn’t know where to look.'”