Firing Line: Preparing for Risky Situations

There's little argument that a lack of risk management in many companies is one of the main reasons our economy has flamed out.

After the catastrophic collapse of the financial system, it's essential that we debrief to garner lessons learned so we can be prepared for the next time something like this occurs. And it will happen again. Rep. Barney Frank (D., Mass.) recently called upon Freddie Mac and Fannie Mae to ease lending standards to prospective condo buyers in distressed areas. Sound familiar?

When it comes to risk management in my finances or running a business, I apply a combat-tested methodology that I've adapted to the business world called ARSA: Avoid, Reduce, Spread, Accept.

Avoid: The first option is to simply avoid the risk. But this strategy has other implications. By avoiding a risk you may impact your original strategy.

Suppose I'm on an airborne mission with a target deep in enemy territory. If I discover there's a surface-to-air missile (SAM) site on the route to my target and no assets are available to take out the threat, I'll alter my flight path to avoid the SAM site.

In doing so, however, the mission is impacted. For one, I will need additional fuel. I will have to request tanker support from the Air Force or a sister squadron. In addition, avoiding the risk will add time to the mission, and the aircraft carrier may have to change its planned course and speed.