1. Advances your strategic or economic position.
2. Identifies and manages related risk issues.
3. You can afford to lose – meaning that you’re not betting the whole farm on this risk. But this item is flexible if you have little or nothing left to lose.

Dumb Risks
In most cases, a smart risk becomes a dumb risk when we ignore that second item that defines a smart risk. We get in trouble when we ignore risk or don’t deal with it effectively. Choosing not to effectively manage risk sets up a business activity that is common in many companies. It’s called “fire fighting.”

Make no mistake about it. If your company fights fires on a regular basis, your company has deliberately chosen to embrace a culture of firefighting. Firefighting is expensive and wasteful. But most firefighting is preventable. As shown in a recently published 20-year study from USC, companies that choose to manage risk and related crises – those who choose to proactively prevent fires instead of fighting them – have 60% fewer fires to fight and, as a result, enjoy 100% higher Return On Assets when compared to their reactive counterparts. Click here to learn more about the study.

What are the most common dumb risks?
They are simple and obvious. These are the risks that we choose to ignore until the bleeding starts. While there are hundreds of assorted dumb risks, most of them are created when we don’t reduce our client, supplier, employee and financial stakeholder risks to survivable levels. You can probably predict the biggest and most common dumb risk of all – it is not having a plan for finding and managing risk.

Dumb risks are easy to spot. Many of them are preventable. Of course, not every risk is preventable but at the very least, their danger can be substantially reduced so that even if trouble erupts, you can survive it and return quickly to profitability.

Learn how to break the cycle of dumb risks that stop businesses from making money and taking smart risks.
Taking smart risks is my definition of playing offense. Smart risks are the foundation for building wealth in our companies. Dumb risks get in our way, distract our focus on profits, bleed off key resources and stop us from taking smart risks. While the opportunity for taking smart risks is often brief and always temporary, the danger from dumb risks seldom goes away. That danger piles up and consumes an ever-increasing portion of our vital resources – people, time and cash. Let’s take a brief look at how this plays out in our companies.

Risks are pervasive in our companies – they are a part of everything we do, even the events we see as positive opportunities. Risks – also called “threats” – are the flipside of every new opportunity. Every new sale, new innovation, new distribution channel, new supplier, new employee or new financial stakeholder brings along its own chance to stray into expensive trouble.

Opportunities and risks pour into the top of our companies, shown in the illustration as pouring into the funnel. The CEO’s management team makes a decision with each one. Regardless of whether their decision is to take a smart risk or dumb risk, each decision consumes some of your resources. The illustration’s “Resources” box represents 100 percent of your resources – time, capital, people.

You succeed at business – you create wealth - by taking smart risks and building a string of economic hits. Each hit returns a small amount of value to your Resources. Of course, not all smart risks succeed. Sometimes you smart risk will fail to become what you had hoped to achieve. Opps! But you learn and gain something, even if it’s only knowledge, even from these failed smart risks. Knowledge is a highly prized resource.

Sometimes you decide to take a dumb risk. When confronted by a threat, you might tell your staff, “Give me just the minimum protection I need to get by today.” In essence, you create a “patch” over a problem. Over time you create a string of patches. Over time the patches will break. They consistently fail over time, so the risk you had hoped to manage returns to a loose and dangerous state. And, of course, sometimes we simply choose to ignore risk. This is a logical choice if the risk has little economic consequence – but it is an unwise choice if the risk’s economic consequence can seriously damage your company or distract your focus away from profit-making activities.

Patches break. Ignored risks come to life. Big trouble erupts and gets our immediate attention. Smart risks get put on the back burner until the fire is out and the damage is repaired. Your best executives and managers become firefighters, and these precious resources are consumed in firefighting. As dumb risks build over time, and as the growth rate of risks accelerates, firefighting consumes an ever-larger share of your limited resources – the resources you need in order to pursue smart risks.

You make a lousy economic return on assets when you consume them in firefighting. There is no way to make money playing this game. You must break the cycle before a big risk bites you hard – and breaks you.

You can break this cycle of risk with an amazingly simple solution, in a manner is that probably easier and much less expensive than you expect - a professional business process called PreAct™.

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