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Taking Risks in Tough Times

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Cross-posted from Harvard Business Online

You're probably familiar with lab experiments in which mice are conditioned to behave in a certain way by receiving sugar pellets for "good" behavior and electric shocks for doing the opposite. But what happens when the consequences are random or contradictory, i.e. when the same behavior sometimes is rewarded and sometimes is punished? The answer is that the mice become highly stressed and confused, and start to take no actions at all. In other words, they stop taking risks, which is the safest possible behavior.

I was reminded of this dynamic recently when I interviewed managers and key contributors in a hi-tech firm to find out what it would take to accelerate growth. I discovered that while executives genuinely wanted innovation, they simultaneously wanted to control costs and report consistent earnings. So while a few people had been recognized and rewarded for innovation, many others had been laid off. As a result, the strongest and most consistent message from the interviewees was that people in the company, at all levels, were risk-averse. Like the mice in the lab experiment, managers and employees were anxious about the consequences of failure and felt it more prudent to continue doing what they had always done.

Such behavior inevitably creates a self-defeating pattern. If the firm does not create an environment where people can take risks and occasionally fail, then innovation will be stifled. And if innovation doesn't occur, the firm won't grow and will need to continue making its numbers through cost-cutting. Such an environment will create more anxiety and trigger a continuation of the cycle. Eventually, the firm will shrink itself out of existence.

Unfortunately this pattern has been emerging in many other firms, in multiple industry sectors, over the past couple of years. The mixed messages of "we need to grow" and "we need to cut" leave employees confused, stressed, anxious, and risk-averse. The reality is that in an economy with high unemployment, most people do not want to do anything that will put their jobs in jeopardy.

So how can managers and executives break this vicious cycle? To better help companies grow faster, while still allowing employees to feel safe about taking risks, let me suggest the three following steps:

1. First, evaluate. Take an honest look at your own company or business unit and assess the extent to which people are avoiding risks. Utilize interviews, skip-level meetings, or anonymous surveys to gauge whether people are feeling anxious or insecure -- and holding back ideas. If indeed this is happening, talk about it to get the issue out in the open.

2. Second, facilitate safe idea-sharing. If indeed your people are shying away from taking risks, create a "safe space" forum where managers and employees can voice their concerns, feedback, and ideas -- without fear of retribution or negative performance assessment. For example, use a consultant or person from outside your division to interview team members anonymously and report back with their collective ideas; or have that person facilitate an innovation-idea session without senior managers present. The key is to make it comfortable again for people to share their ideas. Once the ideas are on the table, you can work with your team to select and implement the best ones.

3. Finally, experiment. If you have specific areas of the business that you want to grow or improve, ask a team to conduct rapid-cycle 100-day experiments to test new ways of working. Most important, make it explicit that failure is acceptable as long as something is learned. For example in a large bank a team was assembled to focus on ways to better describe and sell a new product offering for large corporate clients, and to test their ideas with several customers. Only one customer actually signed on for the product, while others provided useful feedback about what else they would want to see. So while the experiment had mixed sales results, it provided insights into customer requirements that helped accelerate the uptake of the new product over time, and the team was applauded as a success.

Just like the mice in the lab, managers and employees need to be rewarded and reinforced for taking risks, and not given mixed messages about whether or not it's acceptable. If you want to encourage more risk-taking in your company or your unit, you'll need to reduce the conflicting signals and create an environment where the benefits of taking a risk outweigh the costs.

To what extent does your company encourage risk-taking? How else can managers create a risk-friendly environment in tough economic times?