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Execution Risk 

Updated on April 3, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

Execution Risk Definition

Execution risk refers to the possibility that a business’s plans might not work out. Businesses must take necessary measures to reduce or completely eliminate this risk as they might incur significant financial losses or experience reputational damage because of poor implementation of daily business tasks. 

Execution Risk

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Usually, such a risk arises in business when an organization looks to make certain changes, introduce new systems, or at the time of exploring entering an unexplored market. There are some key factors influencing this type of risk. A few examples are weak leadership abilities, inadequate technical skills, poor incentive structure, limited financial runway, and weak structures and processes. 

Key Takeaways

  • Execution risk refers to the risk that organizations will be unable to fulfill their promises and deliver on the plans created. As a result, they may lose customers and investors and suffer substantial losses. 
  • There are various factors influencing this type of risk. Some of them are limited financial runway, poor leadership abilities, and an unfavorable incentive structure. 
  • The strategies to manage execution risk involve setting adequate incentives for employees, establishing a detailed product roadmap, and taking measures to win essential stakeholders. 
  • There are different types of this risk, for example, resource risks and social, cognitive, and emotional risks.

Execution Risk In Business Explained

Execution risk refers to the possibility that an organization’s plans, typically concerning a new project, will not work. This type of risk usually results from insufficient human or financial resources. Moreover, it may arise due to poor orchestration or planning of resources available to the business. If a business does not take measures to minimize this form of risk, it can incur significant losses. Besides that, the organization may lose investors and partners. Eventually, it may fail.

A significant part of a business leader’s job is to comprehend and deal with such a risk within the organization. There are various drivers concerning business risk having to do with forces that are external to the business. That said, execution risk in project management arises because of people not performing their tasks in the manner required by the organization. 

Types

The different types of execution risk in project management are as follows: 

Broadly speaking, the different types of execution risk can fall under three categories — resource risks, process and alignment risks, and social, cognitive, and emotional risks. Let us break them down. 

#1 – Resource Risk 

  • Workload Any kind of change within a business requires effort and time. That said, usually, the people driving the changes have very little or no extra capacity to implement the plan. Such a challenge can get more difficult if the organization goes through a challenging period. 
  • Systems And Data These days, various change initiatives need supporting data and information. That said, in transition labs, such resources can become a recurring limitation for various businesses. As a result, information technology (IT) infrastructure and core data may need upgrading. This, in turn, often leads to higher project-related costs and delays.
  • Talent Employees having the required skills and knowledge are vital to drive any change initiative. Existing employees often have limited capabilities in the necessary areas. Hence, hiring new people can solve the issue. However, bringing in new talent requires both time and money. 

#2 – Process And Alignment Risks 

  • Governance Executing a governance system can help in sustaining stakeholder commitment. This happens through the continuous alignment of the mechanism with the organization’s change initiative. Note that governance can have multiple layers. For example, in crucial IT projects, a business technology governance team comprising multiple senior sponsors may set the business’s direction, make decisions regarding important IT investments, ensure aligned incentives, and allocate funds.
  • Stakeholder Commitment – Changing efforts about an organization requires sponsorship, alignment, and commitment from important stakeholders. Without the required commitment level, these initiatives can be very difficult to implement. 

#3 – Social, Cognitive, And Emotional Risks 

  • Fear The fear of the unknown or losses can inhibit change. Let us look at the example of cloud computing. A few management teams were reluctant to accept the idea of cloud computing as they feared the risk of losing private data and cyber-security risks. That said, with time, users gained confidence, and more data and applications moved to the cloud. 
  • Habit – Previous habits can prove to be powerful constraints in different organizations. Such habits impede change as the employees who stick to the previous way of performing their tasks might not want to adopt a different approach. If employees keep following the prior method, there might be two systems running simultaneously within the organization. This would not allow the business to get the new system’s full benefits.  

Examples

Let us look at a few execution risk examples to understand the concept better. 

Example #1

Suppose Company ABC decided to launch a new enterprise resource planning (ERP) system. It made significant investments in research and development (R&D). Moreover, it hired multiple software developers to create a user-friendly and feature-loaded product. That said, the organization faced different challenges, like lack of funds, market competition, and changes in leadership structure as it approached the last few strategies of the development process. In other words, the business faced execution risk on different fronts. 

Despite the above challenges, whether or not Company ABC can successfully launch its ERP system will determine whether this new move is ultimately a success. 

Example #2

Per the Mid-Market CFO Sentiment Report, a gap exists between several mid-market organizations that are running after new technology initiatives and various accounting or finance teams having planned investments of capital or time into training and upskilling. This implies significant execution risk concerning new technology initiatives. The chief financial officer (CFOs) can overcome such risks by making sure they dedicate appropriate time for development and learning for themselves as well as their teams. 

As more teams understand system applications and data architecture, the better they can comprehend the business requirements concerning technology executions. This will result in saving costs and time. Both these factors are associated with substantial downside risk.

How To Mitigate?

Let us look at the different methods of execution risk management:

#1 – Creation Of An Extensive Product Roadmap 

Managers or business owners may consider creating an in-depth product roadmap illustrating how the business’s offering may change with time, considering all the available resources. This type of roadmap is a key element in the business’s strategic planning process. This is because it describes how the allocation of time and resources takes place against different projects the organization is executing to enhance and increase its offering.

#2 – Achieving Team Alignment Through Management Tools 

Another method to address this type of risk involves building internal processes that are in line with the business’s team to make sure that leadership can support as well as monitor all efforts concerning delivering on the above-mentioned roadmap. A useful and proven technique concerning such an alignment is to establish objectives and key results (OKRs). 

In OKRs, the staff outlines the important goals concerning quantifiable and measurable actions. Moreover, such actions get categorized into buckets aligning with the business’s overall goals. OKRs are extremely useful tools that ensure that everyone within the organization is doing their work to fulfill a common objective. 

#3 – Setting Sufficient Incentives For The Team 

Establishing internal processes involves creating sufficient incentive schemes that motivate the staff to fulfill expectations and even exceed them. Such incentive schemes must go beyond the business’ employees to cover agents, contractors, and other members of the organization’s sales and distribution departments. In the case of scarcity of financial resources, motivating factors can include vacation time, shares of the company, team retreats, and other perks.

Some other ways to reduce this type of risk are as follows:

  • Winning important stakeholders 
  • Adaptive execution processes 
  • Careful communications 
  • Effective Governance 

Execution Risk vs Market Risk

The concepts of execution and market risk can be confusing for new entrepreneurs or business owners. The key differences between them are as follows:

Execution RiskMarket Risk
It refers to the possibility that a business’s plan will not turn out to be successful when it puts the same into action. Market risk is the possibility that investors will incur losses owing to factors impacting financial markets’ overall performance.  
This type of risk covers resource risk and process and alignment risk. Foreign exchange risk, commodity risk, and equity price risk are common types of market risk. 
It applies to businesses. Market risk applies to financial markets. 

Frequently Asked Questions (FAQs)

What are the factors influencing execution risk across different business lines?

Such factors may be as follows:

– Retail Banking: Failures on the part of external suppliers, pricing errors
– Payment And Settlement: Failure to carry out procedures, data entry errors
– Commercial Banking: Processing error, incomplete loan documentation
– Agency Services: Processing errors

What is execution risk in trading?

It is the risk in trading that the execution of an individual’s buy or sell order will not take place at the price desired by them. A reason behind this can be slippage. It refers to the difference between a trade’s expected price and the trade execution price.

What is execution risk analysis?

It is an analysis that involves reviewing the risks associated with a project at the time of execution. Such issues can be regulatory or financial.

What is the difference between execution risk and compliance risk?

Compliance risk arises due to the failure to follow the codes of conduct, laws, organizational standards concerning practice, and regulations. On the other hand, execution risk is the possibility that an organization will not implement its plan correctly, which can ultimately lead to failure.

This article has been a guide to Execution Risk and its definition. Here, we explain its examples, types, how to mitigate it, and comparison with market risk. You may also find some useful articles here –

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