Accepting Risk and Reward

Quick Insight

When our performance is judged on individual projects, we tend to not pick the riskier projects which may come with higher profitability. It’s also easy to blame people for the outcome of the project, rather than the decision a group of leaders makes to take on the project. This causes companies to be risk-averse and pass on profitable projects.

One of the toughest decisions we have to make as business leaders is picking the bests projects to commit our scarce money and time to. You may be missing opportunities because of how you look at them.

We may pick the wrong projects when considering them one by one (called narrow framing) versus looking at choices grouped into a portfolio of projects (called broad framing).

Projects are more likely to be rejected when judged individually for profitability than when they're collectively looked at to be likely profitable. We tend to not pick some riskier projects which may come with higher profitability. We are irrationally afraid of being blamed for a potentially losing project than the benefit of the project's profitability. 

There are two solutions to this. One is to judge performance on a portfolio of projects and not on the failure of any single project. There is a chance that any project, even one that has a good chance of being profitable, won't go well. 

Decide on a portfolio of projects and judge success by the outcome of the whole portfolio. Some projects won't as profitable as you hope. You don’t know which ones will be profitable, but pick a portfolio where they are going to be collectively profitable. Go for all of them and accept the risk that some will be unprofitable.

Second, when discussing who manages the projects, only judge the outcomes based on information known when making the decision. It's only fair to judge the outcome based on information that was known when we made the decisions.

I wish you the best projects for your time and money. I wish you well.

- Rob Stephens

Further Insight

CFO Perspective Resources

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