Risky business

Your chosen field of success will have its own areas of key risk. If you’re a sports person or a dancer, say, the risk of physical injury or breakdown may be uppermost in your plans. But in most business projects, I think the key risks boil down to two areas: the people and the project.

People risks

People are your key resource in a business project – so they are also a key risk area. The wrong people, or loss of important people, can wipe you out. I remember a story told to me when I first started out in real estate: another one of those helpful fables...

The fable of the frog and the scorpion

Once upon a time there was a scorpion, who wanted to get from one side of the creek to the other. Being unable to swim, he asked a passing frog if he could catch a ride on his back. ‘But...’, said the frog. ‘How can I be sure you won’t sting me?’ ‘Why on earth would I do that?’ objected the scorpion. ‘I can’t swim. You might die – but I’d drown!’

This seemed sensible to the frog and he agreed to carry the scorpion across the creek. Half way across, swimming steadily, the frog felt a sharp pain in his back. ‘What have you done?’, he cried, as his legs grew weak and he began to sink. ‘You’ve killed yourself as well as me! ‘ ‘I couldn’t help it,’ said the scorpion, as he went under. ‘I’m a scorpion.’

There are people in business who will sting you – complicate things, cause conflict, look for problems, cheat you – regardless of the effect on their own reputation, effectiveness and prosperity. Perhaps, like the scorpion, it’s just their nature: either way, you can’t change them. But you can see them coming.

Then there are ‘sand castle’ people: people who build their sand castles really close to the water’s edge and love it when the wave comes in and wipes them out... How do you pick the scorpion and the sandcastle person? Look at their track record. If you want to do business with somebody, you’ve really got to know what projects they have previously done; what motivated them to undertake those projects and whether they succeeded (or didn’t succeed, but acted with integrity, and learned from the experience).  You’ve got to know whom they have done business with in the past, and how those relationships (with partners or consultants) worked out.

Ask those few tough questions – and don’t take the answers at face value: arrange to talk to the past partners and look at the past projects. (If your prospective partner takes offence or puts barriers in the way of this legitimate investigation, warning lights may go on...) You’re looking for signs that a person has motivation to do the right thing well, and to see it through to completion. You are looking for signs that a person conducts business relationships with integrity and flexibility. If you get a glimpse of conflict, pending or past litigation, partnerships where ‘everybody else’ did the wrong thing, or great projects that collapsed for lack of resource, planning or perseverance... don’t give this person a ride across the creek – and don’t contract to build sandcastles with them!

You have to assess this risk unemotionally. Scorpions and sandcastle people are great fun. They’re very persuasive. They can be the nicest people. They will tell you that they’ll look after you; they’ve learned from their past mistakes; they thrive on risk and adventure... But it’s simply too risky for you to do business with them. Let them prove themselves on a couple of projects before you have anything to do with them.

However good the credentials and track record of the people you enter into partnership with, as with any business project, it’s good to have an exit strategy – and to have your exit planned, going in... It’s not negative or ‘untrusting’ to go into a partnership with a clear idea of how it can be unravelled. The point is to be able to unravel it in the simplest and most positive way for both parties (ideally without involving a third party who has an interest in dragging out any potential conflict: for example, lawyers!).

I’ve often backed out of joint venture agreements, because we couldn’t agree on a clean way to unravel the partnership if things went bad. I can assure you that you don’t want to be tied to partners who don’t want to be in the project, or who have lost heart for the project: they can make life unbelievably unpleasant. There has to be a clear trigger for unravelling the partnership: some objective marker which tells both of you that you have got as far as you are going to get together. And there has to be a clear process for unravelling the partnership.

Discussing this up front, before you sign into a partnership, may feel a bit like proposing marriage to someone – and immediately negotiating how you would go about getting a divorce. (That’s exactly what ‘pre-nuptial agreements’ are for.) You’re not ‘jinxing’ the partnership, or stating that you don’t think it will last: it’s just sensible risk management. If your prospective partners are scorpions or sandcastle people, it will weed them out – or enable you to protect yourself when their different agendas emerge. If they are people of good intent and motivation, it will be an opportunity to put all cards on the table – then forget about them, in fruitful collaboration, until (or if) the worst happens.

Have the discussion. Include in your partnership agreement terms which state exactly how, at the election of either party, you can part ways: what notice periods are required, whether one partner can buy the other out, how assets will be divided up, who will value them and so on.

Project risks

Obviously, every particular project and environment will have its own distinctive areas of risk. Most business ventures, however, will have:

• Demand-side risks: i.e. the risk that not enough people will buy your offering/product/service at a price that will give you the profit you need. As with people risks, you need an exit strategy. In commercial terms, this means that you need to make sure as far as possible in advance that you have a market which will be willing to pay a profitable price for your offering. In my field of property development, most financing organisations are going to want pre-sales (a percentage of the building sold off the plan) before they commit to funding. Whatever you’re planning to develop or sell, it’s a good idea to go out and canvas some potential buyers. Would they buy this particular product or service? How much would they pay for it? If you pre-committed to delivering this particular product or service at that price, would they pre-commit to buying it?

This not only gives you a head start on sales: it’s an essential part of marketing. It enables you to gauge what the market wants: how much your potential customers are prepared to pay, what features they want and value in the product or service, who/what they think your competitors are, and so on.

• Supply-side risks: i.e. the risk that you will not be able to provide the product/service as specified, at the specified price and time, and do it repeatedly in response to demand.

You might be surprised to learn that most builders and developers go bust in booms – not downturns. Why? Because they commit to pre-sales at a certain price, and then find that they can’t do it on time and on budget – and end up selling a building for less than it cost to build... Wherever possible, try and control or lock-in the key factors in your ability to supply your product/service as promised: whether they be cost or time or quality. When my company produces our educational products, we (naturally) get competitive quotes for printing and assembly of our folders, CDs and so on: it’s amazing how the unit cost varies, depending on where you get the work done and how many units you order. You can get unit costs down by ordering higher quantities – but that’s false economy. I always aim for a small initial production run, which I can use in a market test: a test run, evaluating the supplier’s quality, delivery, co-ordination and reliability – and (if necessary) refining the product in response to market feedback. I don’t want large stocks of a product that nobody quite likes. And I don’t want to be making quality or delivery promises to customers (based on suppliers’ promises to me) which we turn out not to be able to fulfil. I’d rather pay double or even triple the unit cost of 10,000 units, to get 1,000 units at a lower overall cost, which is invested in this market test. It’s like a racing car that comes in every few laps for a pit stop. They don’t make major changes: they just do a little tweaking here and there and send the car back out again; tweak and send back out... Remember the Japanese concept of kaizen: a process of continuous small improvements...

• Finance risks. Some non-financially-minded people are put off by the term ‘budget’, but budgets are simply plans with money values put to things. You’ll need a budget for where you will get the money to fund your plans: a capital budget. And you’ll need a budget for weekly or monthly cash incoming and outgoing – to make sure that you can meet your commitments at any given time: a cash flow budget. (Cash is like oxygen: if you run out of it, everything goes dark pretty quickly...) I’m not going to teach you about budgeting: I recommend that you get a good accountant onto your support team. But it’s important to realise that if your success plans depend on finance, you will have to build finance into your success plans! Give some thought to (or talk to your accountant about) financial risk management. Think through worst case scenarios. Budget for unexpected expenses, delays and cost rises. Take out relevant insurances.