Damage Control

Elon Musk faced a big risk. In fact, in trying to create an all-in-one financial services supermarket on the Internet, he faced risks that, taken as a whole, were too big to understand, much less deal with.

So Musk, a 28-year-old entrepreneur who'd graduated from the Wharton School of Business at the University of Pennsylvania in Philadelphia and already had one successful Internet start-up behind him, split the risk into pieces when he started his Palo Alto, California, Internet company, X.com, this past March. To reduce the chances of running afoul of government regulators with his innovative venture, for example, he and his investors chose to buy an existing bank rather than face the hurdles of licensing a new institution. He similarly separated risks associated with marketing, financing and other aspects of X.com. Then, separate strategies were devised for dealing with each area of risk.

Musk's technique of disaggregating large, unwieldy risks into smaller, manageable chunks is part of the practice of risk management. Along with tools such as real-options pricing, portfolio theory and leveraging familiarity advantages, risk management is used by a number of large companies and almost all major financial institutions, according to Lowell Bryan, a director at management consulting firm McKinsey & Co. in New York City.

In Race for the World (Harvard Business School Press), a book on global business strategies Bryan co-wrote with three other McKinsey consultants, Bryan identified risk management as one of the most important abilities for surviving in a 21st century business climate abounding in complexity, globalization and competitiveness. "Changes going on in the economy," he says, "are making this essential."

Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for nine years.

This article was originally published in the November 1999 print edition of Entrepreneur with the headline: Damage Control.