Navigating Business Risks with Kevin McDonnell

I've also kind of just come to understand that risk and reward is kind of foundational to our whole life, to everything that we do. And so few people really understand the dynamics of risk and reward. Even simple policy changes in how you maybe people would have fees for housing has affected our housing market because they've increased the fees thinking that the developers can just pay it, but at the end of the day that increases the risk and the cost of doing something so the risk reward isn't there to build new housing. That's why we have a housing shortage. Welcome to SuperCharge with Digital Marketster, the bi-weekly podcast where we discuss everything related to entrepreneurship and how marketing is important for your success in business venture. I'm your host and also the founder of Marketster, Crystal. In today's episode, we'll be breaking down the topic of the impact of risk on your business. And it is our pleasure to sit down with Kevin, a Senior Vice President and CFO of Aero Environment to learn from his experience. So for those of you who don't know, Kevin and I met through a PhD program at the Chigagot School of Professional Psychology and we are pursuing our PhD at the moment. I believe Kevin is focusing on business psychology at the moment. So hi, Kevin. Thank you so much for being here with us today. And just to get started, can you share with us a little bit about yourself, your work experience and what you find most passionate about? Thanks Crystal. Thank you for having me on today. I really appreciate it. Well, I've been a CFO for many years. Right now, as you said, I've been working with Aero Environment, which is a public aerospace and defense company, but before that, I've worked for in many different industries with many different sizes of companies. So I've been kind of a student of seeing how organizations bring about change, how they adopt a strategy and try to grow, and how they make decisions in general. So that's what I'm really passionate about is how do organizations make decisions? How do they empower their managers and their leaders to make decisions to change, really, because organizations only survive if they're able to make changes along the way and adapt to their environment. If they're stagnant and don't make changes, then they're doomed to failure over the long term. Yes. That is very good to hear. So with that, what do you think about the risk played in achieving a long term for business success and how can companies try a balance between risk taking and risk management? Well, somebody asked me on their day that since I'm a CFO that I don't like risk, but that's not really true. At the end of the day, you can only create value for any organization or even for yourself if you take risk. The key is to understand what the risks are and understand what the rewards are and balance the risks with the rewards. So you can make good decisions, but you don't just make decisions based upon not taking risk because that will get you nowhere. So if businesses to achieve long term success need to understand that, they have to take some risk, but at the end of the day, they need to understand what their goals are and how to allocate their resources to those goals and not get distracted by things. I mean, a lot of times organizations get distracted or as I like to say, they fall into what's called the good idea trap, meaning people think that if it's a good idea, they should do it, but reality organizations need to focus on the things that are going to get to their long term objectives and not try to do everything that's a good idea. It's not a trick to find a good idea, it's a trick to decide what are the top few good ideas that you should pursue as an organization, a startup or even a more mature company. How do you sort through all those opportunities and make sure that you're doing the best ones and you're putting resources to that? That is really the trick to business in a nutshell. Yeah, sounds good, but I've heard that you are very into like rich management and you say that business needs to take risks, right? And what makes you so passionate about risk? Well, I really thought a lot about how people make decisions and why they make certain decisions. And I've also kind of just come to understand that risk and reward is kind of foundational to our whole life, to everything that we do, and so few people really understand the dynamics of risk and reward. Even simple policy changes in how you maybe people would have fees for housing has affected our housing market because they've increased the fees thinking that the developers can just pay it, but at the end of the day, that increases the risk and the cost of doing something so the risk reward isn't there to build new housing. That's why we have a housing shortage. So it's the same thing for any organization. They need to understand the risk reward dynamic and people fundamentally in our nature try to avoid risk and we're educated probably to avoid risk, but they need to get over that and leaders really at the end of the day, leadership is about the people that are able to take risk to move beyond the status quo, which is taking risk in and of itself and do things that are going to change the organization for the better or in ourselves. Same thing. It's a personal thing also. As more we do things that are like doing this podcast, I've never done a podcast before. It's taking risk to do a podcast. So in order to move ourselves forward, to move organizations forward, we have to take risk, but again, we have to understand what the nature of those risks are and how to maybe mitigate them. And usually knowledge is one of the things, learning about something first and really understanding it before you jump into it is a big risk mitigation factor. Amazing. Yeah, I understand that because as a human nature, we are avoiding risk and we are taught to avoid risk from the start. So it's really hard for us to understand that risk come with reward. The higher risk we take, the more reward we're going to get. But yeah, it's really hard for us too, for everybody to understand that. And with that, you say that leaders in the organization have to take risk, right? In order for the organization to roll and in order to get more reward from taking risk. So what do you think, what are the company top risks and how severe is the impact and how likely they are to occur? Well, if you're in a company, one of your top risks is obviously your competitors and the environment that you're in. And so if you don't aren't responsive to that or understand that or have a systematic way to look at what your competitors are doing, they're going to surpass you. They're going to beat you in the marketplace. So then whatever you're doing becomes obsolete. So the biggest risk in particularly more mature companies is their competition, the environment, how trends are changing and things like that. Now, if you're startup, your biggest risk is running out of money. So you have to be very careful about how you spend the money. So you're spending on things that are going to increase value, you know, it doesn't make sense to me when a company says we're going to raise money and the first thing they're going to do is buy furniture and have a new office when that doesn't really increase the value of the firm. You have to do things that are going to increase the value so that you can take on more investors. So like if it's a new product, you want to show that the product is working and there's customers that like it. Now it might need a lot of improvement, but at least you've proved that the product has value. So again, for a mature company, it's your environment, your competitors. For a startup, it's really proving the business model, proving that the product works and spending money wisely on that goal. Yes. So it really depends on the size of the companies for taking the risk. And can you share to us a little bit about your personal experience of the little taking the risk in the company? What kind of risk are you taking and how can that risk improve your organization? Well, I mean, a lot of companies, particularly as they get larger, face the challenge of their systems, their accounting systems, all of their operational systems are too small for what they have. Like for instance, QuickBooks is a good solution for a startup business in terms of doing their accounting, but as you guess, the organization gets bigger and more complex, somebody has to put in a new system. Maybe it's a net suite or a more sophisticated system to allow the company to grow. Well, anytime you put in a new system, that's taking risks. So the fact of the matter is a lot of people don't even have that experience putting in a new system or how to set up a new system. And so it's very risky for them. So the person who goes out in front says, I'll put in the new system is taking a lot of risk. And I tell people when they're implementing new systems that the worst thing to happen is they start calling the system by your name. If they start saying it's Crystal's new system, you're in trouble because really everybody needs to say it's the company's new system, it's the organization's new system, and we all need to do this for the growth of the company. So that's what people need to understand. But that's a good example of where organizations have to take risk. Or risk might be a new product or a new market. If we're just selling something in Los Angeles, okay, now we want to sell it in San Francisco, or if we're in the United States and we want to sell it in Europe, that's a big risk. And a lot of people underestimate the cost of selling a new product in, say, Europe, where they have different requirements for different laws about privacy, maybe, or different requirements about how the electrical systems work. So there's a lot of complexities when you go into new markets. So going to a new market can be a high risk to take. However, do you recommend business to do that nowadays? Because there's always changing in the market, right? And in order for companies to evolve, they have to take new risks, they have to enter a new market, or implement new strategy for the business to grow. So do you recommend that business should always take in the risk of going into a new market? Well, definitely, that's a way to grow. So at the end of the day, you have to grow. So in order to grow, you need to take risk. And a lot of times, that growth has to be going into markets. But you have to go to the new markets for the right reason. So often, I see you decide to go to Brazil because somebody's brother-in-law knows somebody in Brazil that might be able to sell your product. But at the end of the day, if you listed the top 10 countries to expand, you wouldn't pick Brazil, but you just happen to have a contact down there. So companies need to be thoughtful, not reactionary to where they expand. They need to go, what's the next best market, not where do I know somebody? So find somebody, go to the market that is going to be the best next market for you, and find somebody that can help you expand there versus do it the other way around. Go with somebody who just happens to be a connection there at the end of the day. That might not be the best next market for you. So many companies make a mistake of making that decision based upon somebody has a contact there versus what's best for their product or service or things like that. Yeah, I agree because for companies, they have to really do a research before going to a new market or anything. And sometimes, it's just not about the connection, but it's about the market trend and what's the best for the company to take the risk on. And with that, how do you think that how can business maintain agility and flexibility in the face of changing market conditions and evolving risk landscape? Well, as I think I said earlier, really, it's about knowledge. It's having the information flow about what's happening in your market and not just to be inside your own silo of information, to really reach out, understand the market, use outside consultants to tell you about the market or evaluate your own position in the market. So you're not always just looking at it from an internal point of view. You're also getting an external point of view. That is very healthy to get somebody to say, we've looked at your product, we've looked at the market, and you're not in a good position or you have a good position, but you have to worry about this competitor. So getting that external point of view can be very helpful as you evaluate your situation in a particular market. Yeah, that's amazing. And what are some of the common pitfalls or mistakes to avoid when you implement a risk of management strategy and how can business recover from any setbacks from taking the risk? Well, I mean, again, be clear on what are you trying to accomplish and carefully monitor the milestones. So if you want to enter a market, maybe the first thing would be, we're going to open an office there, we're going to hire people there, but what is a good milestone to see if we're headed the right direction or not? Companies spend a lot of money getting set up, and before they know it, they don't have enough money to fully execute. So try to establish a proof point as early as you can in the process of whether this is the right market for you or not. And be reflective on what is working, what's not working, why is this going to be successful, why is this maybe not going to be successful. So any company's waste, maybe even years before they really evaluate if this is going to be a good success or not. Yes. So can you share with us about your experience with your company or your previous company about what is the biggest risk that you have taken and how that risk changed your company? Well, maybe the best example would be my last company. It was their pricing scheme, how they priced, it was a services company, the legal services market, they had a certain model that they were pricing their services, and I took a look at it and said it was out of sync with the market, meaning there was opportunity to get more revenue based upon making the pricing more consistent with the competitors. But bringing about a complete overhaul of the pricing scheme, of the different services, makes people nervous, how are the customers going to react to it? Reality was it simplified the pricing for the customers and the customers appreciated the new pricing even though it generated substantially significantly or significantly more revenue for the company. So the profitability of the company actually tripled through the new pricing even though the customers were happy with it, but it was a big risk and we took a lot of time educating our own staff on the change and why we're making the change, allowed them to have input into that, and that was all really helped make it a lot smoother process. So educating people on the change and what's happening is a critical part of reducing the risk. Yeah, I think it's fascinating about educating people about change because I think I had a class of change management and it's a challenge for leaders just to educate our employees to implement with the change because the change can be significant and it's hard to make them understand they hate how, why are we doing this and how we are doing this. So as a leader yourself, how do you convince or how do you educate your coworker or your employee to implement the change? Well I think my biggest learning is to educate people on why you're making the change. Maybe it's being responsive to the market. Maybe it's because you need to improve your profitability and maybe it's preparing for growth of the company and maybe that's why you're going to put in a new system. But no matter what you do, people is kind of like a bell curve. There's always going to be five or 10% that are going to resist it no matter what you say. There's going to be five or 10% that are on board from the beginning, they're all for the change, but then it's the people in the middle that you really have to educate and try to turn to the positive in terms of the change. You'll never convince that 5% that just don't like change and they just don't want to change at all. So you really focus on that middle group, educating them so that they understand why you're making the change. So for the 5% to 10% that you say that they don't like to change, but how do we going to change them or are we just accepting that they're not going to change and we just let them just go with it? Well my theory is as you get the other 95% or 90% on board and they pretty much have to change. Or they leave the organization, they're not comfortable with it. But once they see everybody kind of on board, it's hard for them to continue to resist. Yeah, and when change like that happen, do you see if there is any higher turnover rate when the change happen like that? I have not seen a higher turnover rate. And any change is hard, particularly if it's a new system. Not everything works perfectly. Usually sometimes in a new system, you're taking a step back. So it's really easy for the people that are critical to point out the problems. But after a period of time, the new system becomes the system and there's not as many issues with that. So again, it's all about educating people on why you need to make change, why organizations need to move forward and things like this. Got it. And yeah, let's moving forward to small business and start up. So I think one of the challenges that small businesses and start up are facing is taking risks. So because they don't have like a lot of resources, they don't have a lot of capital to take risks. So this is very hard for them to take risks and to change the organization. So do you have any input on how do they overcome that problem of taking risks? Well, they're taking risks. Like I said, you're a small company, you're taking a significant risk that you're going to run out of money. So when you start out, you've got to be really clear on what segment of the market you're going after. If you try to be too broad, you try to serve too many different masters or too many segments in the market, you're probably going to fail. You're better to prove your concept on a small segment and do it really well, and that takes less money. So the broader you go, the more money it takes. But if you focus on something, then it will take less money and you can do it well, prove out your concept and then take it to a broader audience. But the key is focus on a niche. Don't get distracted by all the possibilities, which is really hard because you're not really sure you're picking the right niche, right? So as an entrepreneur, you're never really 100% sure that you made the right decision. So you kind of have this temptation to hedge your bets into other areas. When reality is, is if you just focus on something, you'll have a much higher degree of success. I mean, people like, I like a good example I have, not a small company, but Apple, computer and Steve Jobs, everybody says, well, how brilliant he was. And, you know, he was a master designer of products. But the thing that struck me in reading his biography was that he took his team aside once a year and they picked the two or three things that they were going to focus on. And if you think about Apple, they could have done many, many, many different products. They had a good brand, all this, but they took the tact and the smart tact of focusing on two or three and doing them really well. And that's what small businesses should do also. They should pick a niche, do it really well, and then expand from there. Yeah. With that, I totally understand because for small business and stuff, it's a temptation to take on a lot of projects because for me, we are doing marketing, right? And our customer is very demanding. So they don't want just like social media marketing. They don't want just that. They want more. They want SEO. They want video marketing. They want influencer marketing. I mean, they're asking for everything in marketing, not just one aspect of marketing. And it's very hard for us just to say no to them because if we're not able to provide for them all of the servers, there's a higher chance that they say no to us. So yeah, I think that is our biggest challenge right now when it's come to focus on doing one thing. Right. Well, maybe you pick your thing and you partner with other people on the other thing so you can provide a complete solution because maybe they need the complete solution and that's important to them, but you don't necessarily have to do it all yourself. You could, it's like building a house. The contractor, maybe he's a good carpenter and he'll do all the carpentry, but then he hires everybody else to do other pieces of the project. Yeah. I totally agree with that too because for us, we are unable to focus on everything. However, partnering with another firm or another company is a good idea for us to roll at the moment. Yeah. With that, do you have any advice to give or to share for those who just start a business or planning to start one? Right. I think it's just what I've been saying about pick a niche, focus on it, be clear on, you know, if you have whatever funds you have that you use those funds wisely to get to your goals because then it'll be a lot easier to raise additional funds if you need to raise outside funds or start generating cash flow in the business, the broader you get and the less focused you are, the more chance that you're going to run out of money and you're not going to get the cash flow positive, you won't be able to raise investors. So, focusing, proving it out, be confident in what you choose because I think you shouldn't be second guessing yourself on the right that you picked the right niche or wrong niche or whatever. Maybe you didn't pick the best niche at the end of the day, but if you focus on that and do it well, then you can expand into other areas, but don't be too broad, focus. Yeah. So, in term of raising funds, when do you think it's the best time for a startup to raise funds? Well, if they have enough money themselves, that's the best because then they can, but you know, it just depends what your goals are. You know, I think you're obviously, when you raise funds, particularly from the outside, you're going to face dilution. You're going to face somebody who may have an influence on what you're able to do or not do. So, as long as you can push that off, the better. But when you get to a point where you've at least proven something and you know what the next goal is, then that would be the time to raise additional funds with somebody that can add value to the situation, an experienced investor that might have knowledge about your market or can help expand your customer base or things like this. So, you would look to raise money not just from somebody who has money, but ideally from somebody who can bring expertise and then be real clear on what the milestone is that you're trying to achieve with the money you get. So, in other words, if you raise a million dollars, what does that million dollars get me? It gets me a product that's in at least 100 customers hands or some specific goal. And then if you accomplish that goal, then when you go back to the investors, you go, I raised a million dollars. My goal was to get 100 customers with the product and I did it or I got 120. Now you have credibility and now it's a lot easier with less dilution. You've reduced the risk. Again, it's all about risk awards. So, the more that you can prove that you can take the money you get and establish the milestones and accomplish them, the less risk the investor is going to have for the next round and the less dilution that you're going to receive when you raise additional funds. Yeah. I agree. And just one last question. So I know that you're going to focus on the topic of risk for your dissertation. And I want to know just curious about why do you choose that topic instead of everything else. Well, like I've been doing this a long time. I've seen a lot of different organizations. I've kind of been curious always about, well, what makes organizations successful and what makes them successful is the ability to make good decisions. Well, who makes good decisions? Well, it's the managers. And why do they make good or bad decisions? Well, it's understanding this risk dynamic and creating an environment where those managers feel comfortable taking risk. If you're in a culture where if you take a chance and it does not successful, you lose your job, then nobody's going to take risk. So how do you create an environment where managers, particularly managers, are willing to take risk? It's in what I call empowering the managers. Everybody talks about empowering employees or customer service, meaning customer service person goes above and beyond to solve the customer's problem. But the manager side of it is how do I get managers to take the necessary risk to move the organization forward and create an environment where they're comfortable taking those risks? So that's kind of the basis of my dissertation is how do you create that environment? Yeah. So I think it's important too because with my experience, I have been in some organization that is not fostering taking risk. So they are very strict about like how the employee or how the manager should act and how they should make decisions. So it's an environment they are not fostering growth or fostering taking risk at all. And I feel most of an employee in that organization, they are very close minded and they don't want to do anything to just because they know if they do something wrong, they're going to lose their job. So I think it's very important for us to create the environment where everybody are freely to share their thoughts, their ideas and comfortable of taking risk. Exactly. You got it on the head there or so. Yeah. Amazing. That would bring us to the end of this episode. Thanks to Kevin for joining us today with the discussion of the impact of risk on your business. And we hope that this episode was beneficial to you. And as always, thanks for listening to SuperCharge with Digital Market Store. And if you enjoy our show, please follow, rate and review us on Apple Podcasts and Spotify. And be sure to come back next week for another discussion. Until then, this is Crystal and don't forget, don't stop and keep it living and see you next time. [BLANK_AUDIO]