Revenue Risk: Why Managing It Beats Crushing It


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In 2011, the New England Patriots offered Aaron Hernandez, a promising young tight end who played just two seasons, a contract extension worth $40 million. If you’re curious to see the talent the Patriots bought for this tidy sum, you’ll be disappointed. This season, Hernandez probably won’t catch a single pass for New England’s offense—or anyone else’s.

Hernandez faces a murder charge, and “if the allegations prove true, the Patriots, a team long considered a model of fiscal prudence and solid character, were the unlikely conduit for one of the most ill-advised contract offers in NFL history,” The Wall Street Journal reported (How the Patriots Lost Their Way, July 12, 2013).

“Interviews with NFL executives, agents and former players suggest the Hernandez contract was the result of a decision the Patriots made to embrace more risk . . . they also suggest the NFL’s current economic climate played a role in encouraging that decision, and that all teams may be more inclined to make serious commitments to a riskier pool of players.”

Whether you’re selling sports entertainment, IT services, or industrial pumps, risks swirl through and around organizations like poltergeists. We give tacit nods to their presence when we talk about funnels, pipelines, and forecasts. But as we know from the Patriots, executives who ignore risks or downplay their significance often pay a large penalty. The dangers are especially acute when marketers assign attributes like surefire and guaranteed to business development strategies and tactics. If only such claims were true.

Mostly, risks are just misunderstood. As Bob Thompson wrote on CustomerThink, “Unfortunately, many companies look at risk as something to be avoided. Which means they limit future opportunities as well.”

If you set aside the negative connotations for a moment, risk simply means uncertainty toward reaching a goal. Anyone entrusted with growing revenue, and gaining or keeping new clients should appreciate that definition. Not everyone is going to buy from us. Deal with it! Or find another job—dictator, maybe. Though lately, even good dictators face a risk or two.

The right question isn’t how to avoid risks, but how to manage them. And that requires identifying them, then assessing their likelihood and impact. Regarding Hernandez, had the Patriots performed even a perfunctory analysis, they would have learned that before the 2010 draft, a scouting report gave him a one out of a possible ten in “social maturity,” and it stated that “he enjoys living on the edge of acceptable behavior.” I can hear the discussion in the Patriots front office now. “What else should we do to sweeten this $40 million contract? We sure don’t want anything to go wrong . . .”

Schadenfreude, for those of us who aren’t Patriots fans. But let’s not get smug. Risks can smack anyone in the head, even if you’re aware of them. For business developers, here are some ways to manage them:

Add risk. New market development, new product launches, expansion of market boundaries. Yes, there are many reasons why adding risk makes good business sense.

Accept risk. Not every prospective customer will buy. It’s surprising how few companies adequately plan for this ubiquitous risk. But it’s table stakes for any company that intends to compete in a market.

Reduce risk. Shorten sales cycles! Increase lead flow! Improve selling skills! Make the right sales hiring decisions! Monitor, measure and reward! There are many ways to reduce selling risks—or at least to create the perception they are being reduced. The question is, do these initiatives improve operational or financial performance?

Eliminate risk. Penn State Football, Enron, News Corporation. Some business risks, such as ethical impropriety or felonious behavior, can be so catastrophic that they must be eliminated.

Transfer risk. Outsourced IT development. Outsourced sales. Consignment retailing. Third-party receivables collection. Many companies have been created for the purpose of absorbing risks others don’t want or can’t handle.

Share risk. The idea that sustains product co-development between supply chain partners, and channel sales strategies.

Which risk management strategies are best for your sales organization? Likely, a combination of these. The ones you use depend in part on your company’s capacity to carry risk, or RBC (Risk Bearing Capacity)—a strategic differentiator that can’t be seen, felt, or touched. The reason that some companies can develop technologies to launch commercial rockets, engineer driverless cars, and compete for long-term government contracts, when others can’t.

While RBC is calculated in different ways, the common basis for the calculation is “how much risk the organization can bear before [it becomes] insolvent,” according to Carol Fox, the director of the strategic and enterprise risk practice at the Risk Management Society. Most companies don’t want to test that limit, preferring to keep it theoretical.

Whether the NFL can control the increasingly risky environment in which their teams operate has been the subject of much debate. But the Aaron Hernandez contract painfully demonstrates what happens when risks aren’t well understood and aren’t properly managed. For NFL teams and every sales organization, there’s an important connection between RBC and how people manage risks. That will be the subject of a future blog.

Republished with author's permission from original post.


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