Managing Relational Risk or managing risk relationally

risk management in business relationshipsExec Summary: Paying attention to your organisation’s relational dynamics (internally & externally) is not only good relational risk management but it is good risk management in general. It can help minimise the uncertainty and increase the ability to influence and handle the consequences. Taking a relational risk management approach does not replace existing risk management strategies, but it can make them more effective.

Taking a Relational Risk Perspective

If the relationship with a client or an employee is dysfunctional, that is a problem. But it also means that you are unlikely to hear clearly about other problems. Paying attention to relational dynamics can address the two classical elements of risk; the uncertainty regarding outcomes and the consequences of different outcomes. For example, uncertainty can be reduced not only through improved communication but with greater understanding of the relationship, which enables each side to better assess what information will get distorted or delayed and in what ways. Similarly, because assessment of relational dynamics tends to be forward looking, there is time to work out ways to mitigate any consequences together.

It is worth noting that relational risk is present when

  • A client perceives that the relationship with your company is not how it should be,
  • Your staff perceive that the relationship with a client is not how it should be, or
  • A third party perceives that the relationship between your company and a client is not how it should be.

Of course, as with any risk management, circumstances may trigger consequences that no one perceived, but these will be easier to handle if the relationships are already healthy. Relational capital is most valuable in a crisis but a crisis is the worst time to start investing in it.

Identifying Relational Risk

In order to manage relational risk, it is necessary to identify the presence of weak relationships and the nature of those weaknesses. To illustrate the point, employee or customer satisfaction surveys regularly identify the presence of relational issues in an organisation but they are not generally effective at analysing the nature of those issues. Indeed, the fact that the surveys don’t match up responses from each side of the relationship mean that crucial perspective is lost. Identifying the simple fact that the relationship manager does or does not agree that there is a problem is significant information. Even where satisfaction surveys use follow-up interviews, they may still not get to an accurate diagnosis of the relational dynamics at play because the issues and culture will influence how participants respond to the questions.

Thus an expensive time-consuming process can result in little more than information that there is some sort of problem. In response, executives then issue an instruction to the managers to address the problem, even when the problem may be the relational dynamics experienced by the managers themselves. It can be bit like saying, “The lever is broken. Use the broken lever to fix the broken lever.” No one should be surprised that it is only the most excellent of managers that can fix such problems with little assistance.

What is required is a systematic structured approach that takes multiple readings of the relationships. Just as the patterns of responses in a personality test or a mass spectrometer can be used to build up a fuller picture, so using a systematic relational scan (e.g. can allow experienced professionals to identify both the presence and nature of good and bad relational dynamics. Looking at the patterns of signals provided by respondents from a range of stakeholders can identify systemic relational risks as well as risks in particular relationships.

To give a simple example, generally speaking, the more powerful party in a relationship will be more satisfied with the power dynamics. So if a regulator scores lower on measures of power dynamics than a regulated organisation, it is worth checking what other factors are at play.

Mitigating Relational Risk

Identifying the presence and nature of relational risk is only part of the story. Organisations need to be able to address those risks in a way that reduces them (rather than exacerbating them or creating new risks). For example, the relational risk in bullying is often addressed by issuing a policy which increases the sanctions of managers to punish misbehaviour. The escalation of consequences in order to address relational risk is far too common with regulators and managers alike.

The advantage of paying attention to relational dynamics is that the analysis of dynamics can be used to design the right approach to improving the relationships. In addition, in many cases, the analysis can be used transparently by both parties to explore how a better relationship can be achieved. Of course, such exploration often needs to be facilitated by a third-party until such a time as the relationship is healthy enough to maintain itself. In my experience, engaging both sides to understand and address the issues is the most effective way of mitigating relational risk. As with international reconciliation, care needs to be taken to build trust and reduce the jeopardy for all while working on the improvement. That is why facilitators or trust brokers can be so useful. It can take courage and hope but ultimately if the relationship is going to work, the parties to the relationship need to be actively involved in making it work.

At the end of the day, relational risk management is not just about having forward-looking risk data but having relationally proficient risk management available to understand and address the risk. There will be some risks that will be addressed by getting closer relationships, some that need more distant relationships and some that just need the dynamics adjusting. One way or another, your risk management strategy needs to be relational.