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Risky shift, Management and Outsourcing

~ David Straker ~

 

Personal risk in peer groups | Managers and personal risks | Suppliers and risk | Understanding and trust

 

There is an interesting phenomenon that occurs in groups and teams called 'risky shift'. What this means is that the the group collectively takes either higher- or lower-risk decisions than its members would individually take. This is surprising as one might reasonably expect some kind of average collective risk being taken.

Personal risk in peer groups

What appears to be happening here is that critical change is occurring in the personal perception of the transfer of risk, based on beliefs and concern for the group. Risk homeostasis says that we each have a preferred level of risk and will hence be relatively consistent in our risk-taking, yet what actually happens is that we assess risk based on perception more than reality, which means that the actual risk we may take on might vary significantly. 

If I care about others in the group and seek to sustain group cohesion then I may feel responsible for the risk taken by other group members. I thus might personally take on the risk of others, increasing my felt risk and leading me to seek lower-risk decisions. If influential people or the majority of group members feel this way then group decisions will be less risky.

On the other hand, if I feel that I am are sharing my personal risk with others (and hence lessening my personal risk-taking) then I will be more inclined to take gung-ho high-risk decisions. Again, the extent to which this happens will depend on the dynamic of influence within the group.

Managers and personal risks

This principle may also explain a similar phenomenon that occurs in hierarchical management situations. Managers are responsible for a wider scope of activity than individuals, which they share out with their subordinates. But what happens to the perceived risk? For the manager to sustain their personal risk limit they have to either let go of the perception, truly transferring the risk to the subordinate, or otherwise act to reduce the risk in some way. Both of these approaches can become dysfunctional, resulting in what may be considered as poor management.

If I 'let go', transferring risk to subordinates, I need to feel it is their risk and not mine. To do this I must ensure I am relatively blameless in the event of failure and so might distance myself from them, providing them little support and preparing to punish them if they fail. I might, for example, claim I am 'empowering' them or complain to my manager and others of the incompetence of my staff. At worst I might give them work that is doomed to failure and them sack them when the inevitable happens.

On the other hand, managers might try to reduce risk by managing their subordinates more closely, setting goals and requiring regular reports. Sometimes called 'micro-management', this also helps satisfy the need for a sense of control.

Another, perhaps more canny method is to manage external perceptions by projecting high levels of apparent risk upwards and outwards whilst actually sustaining relatively lower risk work, thus reducing personal risk of being judged as a failure when risks do occur.

Suppliers and risks

Games of shifting risk also extend to third-party arrangements, for example in outsourcing and general use of suppliers. One of the key reasons why companies ask others to do work is to shift the associated risks of this activity.

Once this arrangement is made, the company, perceiving an apparent reduction in risk, may 'up the anti', for example by putting extra load on the supplier with demands for shorter timescales, lower costs and changes in requirement. This may significantly increase the risk of failure, but the company's managers don't see it as their risk. Meanwhile, the game may continue with the supplying company shifting the risk again, perhaps to a sub-supplier or perhaps back up to the first company through a pre-emptive get-out clause in the contract.

An alternative (and sometimes additional) scenario occurs when the original company's managers realize that their customers and senior managers will blame any failure on them. The company's managers have relatively little understanding or control over what happens at the supplier and thus perceive an increase in risk. A typical response to this is to seek greater control, with more reviews, meetings, metrics and general attempts to gain more control over the supplier's operation, much as the individual manager resorts to micro-management. Again the supplier may well fight back against this intrusion that might increase their costs and likelihood of failure.

Understanding and trust

So how can managers avoid these dilemmas? The first step is to recognize when they are happening. Real and perceived risks should be carefully differentiated. Understand also how individuals and groups (including yourself) behave around risk, with different responses outside preferred risk boundaries.

A critical additional activity is in developing and managing real trust. A lot of problems arise from the dysfunction of blind trust or paranoid distrust. Real trust comes from effective relationships, transparent interactions and ongoing evidence of trustworthiness. Any failure is dealt with by short-term reparation and longer-term corrective action that prevents recurrence.

Finally, and initially, we need to develop and sustain personal self-awareness and emotional intelligence, understanding how we decide, including all the biases and influences that affect us. This takes raw honesty and courage, but the alternative is to take risks way beyond those we would truly care to accept.

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