What is the difference between an impact and a risk?

Sit at any Risk Management 101 class or Risk Management introductory workshop and you will most certainly be introduced to the risk register. And in that risk register, you will be introduced to two columns: the Risk, and the Impact. 

You will be told that the Risk is an event that may or may not happen.  You will also be told that Impact is what will happen if the Risk occurs (or ‘eventuates’). Sounds clear, simple, direct. 

Now let’s apply what we’ve learned.  You are concerned (rightly) about crashing your car. Is that a risk? Or is it an impact?  (Avoiding the pun on crash and impact). It is not certain that your car will crash, so that is a risk.  What will be the impact?  Easy: you may experience fatality.  Or you may experience serious injury, or you may experience light injury. 

But why isn’t crashing the car an Impact? 

What caused the car crash? Did your brakes malfunction?  Was that a risk?  Was there a risk that your brakes would malfunction?  Were you hit by a drunken driver? Was that a risk you faced when you were driving? Absolutely.

So let’s say: Risk = Possibility of being hit by a drunker driver.  What is the impact?  Crashing your car.  What was the risk earlier is now the impact.

The distinction between risk and impact is not so clear.  What is a risk from one perspective is an impact from another.  But which perspective is the right one to take? And which perspective should you be taking when you fill in the risk register?  Do you put “Car crash” under Risk or under Impact?

Winning and Risk Management

There’s a highly-regarded self-coaching book called “Sail, Race, and Win”, by Eric Twiname and Cathy Foster. In the book is a neat description of how to win in a race.  They ask the reader to imagine a descending escalator, with lots of people, representing the competitors, walking up the escalator.  The goal being to remain in the same spot they started in as much as they could manage to. They can walk up to the same pace that the escalator is going down, but they can't walk up faster than that.

 

Since no one’s allowed to go faster than the pace of the escalator, the would-be winner will have to focus on not making mistakes rather than walking faster than the pace of the escalator.  Any mistake, no matter how momentary, will set you back a little, possibly allowing someone behind to move out in front of you.  The more mistakes and lapses you make, the more you are pushed back relative to your starting position, and relative to the other competitors.

Now since you can't go faster than the pace of the escalator, you can't make up the distance you lost by putting in extra effort. The best you can do is to make no more mistakes.  The only way you can get ahead of those in front of you is if they make mistakes.

I haven’t seen winning explained in this manner before, and despite its oddness, it has a certain valid point.  Twiname and Foster come from the world of sailing.  Perhaps the idea of not being able to outpace the escalator comes from their world, where your progress depends on the winds and the tides -- you can't go faster than what the elements or the environment allows.

The image seems rather useful when thinking about how risk impacts business.  A company cannot make more money than what its environment allows.  For example, if you are a consumer goods company, how much you can sell is moderated by the size of your market, the demand for your product, and the competitive dynamics of the industry you are in. In a market with 10,000 customers and 5 competitors, you just cannot make sales equivalent to a market of 20,000 customers.

And while you can't get ahead, you can definitely be set back.  The key to winning then becomes minimising the setbacks. From an operational basis, you are constantly being set back if your production costs are more than the competition’s. From a discrete and pulsating basis, you are set back each time a risk eventuates which impacts you negatively.  The longer and more expensive it takes you to recover, the more you are set back.  The key to winning in this case is to ensure that you minimise your risk eventuations and minimise their impacts.

You can look at risks as these setbacks.  It is in your interest to avoid them as much as possible, and to be able to recover as quickly as possible.  Even then, you can only recover to a point less better than where you started. Hence, reducing the occurrences of risks become a key factor in winning.