High-Damage, 1%-Chance Risks

One of the more unfortunate things about people is the intersection of responding to incentives and recognition primarily, thinking short-term in time, and not reasoning through events that don't happen.

When an engineer or surveyor goes on and on about improving earthquake or hurricane measures, they're generally perceived as a nag, burden, and hassle -- until you get a bad hurricane or earthquake that costs lives, causes immense human misery, and does millions to billions of dollars in possibly preventable damage.

In business, you wind up with lots of these too. There's dozens of little things that only have a 1% chance of occurring, but the majority of people will perceive you as a hassle if you try to bring them up.

For instance, a friend of mine owns a large bilingual IT firm in a highly developed, non-English country. 

At the advice of one of his mentors, he moved his salespeople's commission structure from the old system that was based just on revenues, to one that had "diversification" as a criteria. This was because his firm was doing most of their business with just a few very large clients, and they had immense leverage over his company. And if one of them should switch providers, they'd have gotten hit with a serious crunch, and potentially would have had to lay some of their excellent team that had taken many years to build.

Of course, predictably, everyone except his wife (who works with him and supports him wholeheartedly) hated the change and wanted to rebel against it. He eventually, through sheer of force of will and determination, pushed it through and then re-improved morale.

But in this case, there was a never a "happily ever after" ending where people realized the wisdom of what he'd done. His business is now much less likely to hit a cashflow crunch, and they have more negotiating leverage and less desperation when dealing with big clients.

Will it ever be noticed? Probably not. Only in a nightmare scenario of losing two of their top clients in a short period of time, which has a low likelihood of happening and hopefully never will. He de-risked and shaved off a couple percentage points of risk that his business gets hammered, but no one notices that and no one cares, except in the math of the Armageddon-type events that you hope never occur anyways.

There's tons of other examples, from getting your legal documents tight, to getting structures set up correctly, doing tax-planning in advance (which might not be fatal if you fail to do it, but will very likely be your largest single cost if you're making significant profits, and could have been much lower with some pre-planning a year or two earlier)...

...and you see this everywhere, on a personal level with people who don't floss, don't stretch, and so on. The downsides to not doing these activities are far off, there's no recognition or immediate payoff, and so they rarely happen.

The solution? Well, it's difficult. Some education of key people you're involved with into thinking about these low-odds high-damage risks can be good. Building a set of partners, collaborators, key executives, a board, whatever, that appreciates and thinks this thing through periodically is probably the best way, but people that think in this way are rarer than not.

And y'know, to add insult to injury, you've also got to do all those day to day imminent pressing things like growing revenues, dealing with operations and fulfillment and customer service, and all the other high-recognition obviously valuable tasks. 

Yet... making those computer backups, actually testing your backups, having just a little bit of emergency plans if you're operating in an unstable country, diversifying your client base, diversifying your currency of payment if your primary payment currency is unstable, having a lawyer look over your contracts, getting your tax-planning and legal structures correct, taking the time to get a decent relationship with a decent bank, doing just a little bit of planning in case a key employee, contractor, partner, client, or supplier leaves your company or goes under...

...you don't win awards for that sort of thing, and it isn't sexy. But devoting just a bit of time to it is key if you're going to build something big. Those small-chance high-damage risks can be absorbed by a gigantic conglomerate, but it could spell the end of a fledgling successful company. A couple hours a month thinking them through, and some resources devoted to cleaning them is a wise play.