Not so long ago, leading consulting firm PwC conducted a survey of almost 1,400 chief executives from more than 90 countries. It was the kind of annual global survey the company is renowned for, given its status as one of the few corporations with the scale and reach to tap into the minds of literally hundreds of top executives from such a diverse array of locations and industries. With one eye on the direction of the global economy, the survey drilled down for insights into a few of the hottest talking points in boardrooms including growth, artificial intelligence, data and analytics.
Among many topics, the CEOs were asked to think carefully about the data they use to make decisions and, specifically, how it related to the risks their businesses were exposed to. The findings were stunning. While more than 87% of the chief executives said receiving data to profile risk was incredibly critical to success, only 23% felt the information they received was comprehensive enough to mitigate such risks. Worse still, they overwhelmingly believed the comprehensiveness of the data they received for quantifying and communicating risk had not improved during the previous decade.
Such learnings highlighted the frightening prospect that while many businesses place importance on risk management, they often do not have precautions in place to deal with the unexpected. It is somewhat ironic that PwC conducted the above survey in late 2018, a time when a global pandemic was still the stuff of Hollywood films rather than a real-life nightmare. Almost four years later and how many business leaders no doubt wish they had dedicated more resources to risk management before they heard the word ‘COVID’ for the first time? This year has also reinforced that risk and crises are not a matter of if but when, with the war in Ukraine, soaring inflation and a global labor shortage putting unexpected strain on budgets, resources and employee morale.
Risk management is not a new concept. It has long been bounced around boardrooms and placed high on meeting agendas. However, as PwC’s survey showed, it often runs its own risk of being rushed past, set aside for another day or, in some cases, ignored completely. Given the countless risks businesses face on a daily basis, that is not good enough. It is time for business leaders to lead the way by placing a priority on developing or enhancing risk management strategies.
What is a risk management strategy?
Oxford Languages defines risk management in business as “the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact”. It is all about considering the threats to an organization’s capital and earnings and, as anyone who has owned or managed a business knows, the list of threats can be extensive. From financial uncertainty and legal concerns to government intervention, accidents and natural disasters, there are many traditional concerns that can impact the profitability of a business, not to mention more modern risks such as technology failure and social media crises.
With so much at stake, a quality risk management strategy is no longer a luxury but an imperative for companies of all shapes and sizes. It provides a structured and coherent approach to identifying, assessing and managing risk and is best approached not as a series of steps but as an ongoing process that addresses new and existing threats. By committing to regularly updating and reviewing one’s risk management strategy, business leaders give themselves the best chance of protecting their organization, people and assets.
What are the benefits of a risk management strategy?
Every business confronts project and operational risks but not every business adequately prepares for the moment they strike. Those that do invest in developing and deploying a risk management strategy will not regret doing so as there are many benefits to be gained.
Ensure business continuity
The very nature of risk means issues and crises can surface at any time and from any direction. Be it a cybersecurity threat, an unreliable supplier or a COVID-inspired staffing crisis, one of the most common impacts is a sudden inability to deliver the very goods and services that define its success. Every business lives and dies by being able to operate effectively and that is why an established risk management framework should be a top priority. Risks are a fact of business life, just as preparing for them should be. Your business continuity depends on it.
Remain competitive
Few businesses have not been negatively impacted by the fallout of the global pandemic but there is a stark difference between those that had a quality risk management strategy in their top drawers and those that did not. Risk management helps companies minimize losses when hard times strike, as opposed to unprepared organizations that suddenly find themselves struggling to stay afloat. No one wants to navigate rough seas but those skippers who are ready when they arise inevitably emerge stronger after the storm. Companies that employ quality risk management practices often not only stay afloat during recessions but end up facing less competitors when the dust settles. Ensure your organization fits that bill the next time hard times hit.
Mitigate catastrophic events
An exhaustive risk management strategy should prepare organizations for headaches of all sizes. While many risk managers focus on the small shocks that impact daily business (e.g. staff illness, unpaid invoices), they also need to turn their attention to events that may seem extraordinary, even unlikely, as they are the risks that can do more than just inspire a momentary loss of sales. The lingering impact of truly catastrophic events such as natural disasters has caused many seemingly well-run businesses to go bankrupt but a strategic plan for dealing with such incidents can help others stay afloat long enough to survive.
Enhance communication
You cannot develop effective risk management principles without quality conversations and that can only be a good thing for businesses. From project teams and senior leaders discussing difficult subjects and potential matters of conflict to reaching out to suppliers about their own risk factors, the risk management process can be the impetus for colleagues and key stakeholders to raise the level of their conversation and work better together. When people start to realize their ability to navigate difficult times and ultimately enjoy success is linked to other departments and teams, it’s surprising how willing they become to build better relationships.
Budget better
Incorporating risk management into regular or project planning has an organic impact on balancing the books. Companies that tend to tackle issues on the run not only risk losing more money at the height of a crisis but miss a golden opportunity to regularly crunch their numbers and trim waste in preparation for potential hiccups. Instead of relying on guesstimates, contingency budgets are based on scenarios that could require extra time or money, thus leading to more accurate and efficient allocating of resources both now and into the future.
How do you develop a risk management strategy?
The breadth of a risk management strategy will be guided by the size of one’s organization but it should not be a daunting task as it all centers on a few key steps.
Identify risks
Whether through a dedicated identification process or chancing upon possible concerns, a successful risk management strategy requires red flags to be raised whenever an issue is pinpointed. It is crucial to be proactive when identifying risks as a reactive approach normally means rushing to deal with crises or situations at the worst possible moment – as they are unfolding. Invite colleagues and teams to contribute during the identification process as they will typically know the risks that most concern them better than anyone.
Analyze risks
Once identified, each risk should be assessed to allow audit teams to prioritize them. Think about the likelihood of it impacting the business, how severe that impact would be and the probability of it occurring. The assessment process should be systematic to ensure the appropriate focus and resources are dedicated to managing the risk. It is also important to create a documented register of risks, with a reassessment to be scheduled at least annually.
Assign responsibility
Ownership of risks is crucial to ensure they do not get lost amid the thrust of daily business life. Determine who will be responsible for managing and overseeing individual risks, with people who work in the specific area they impact often best suited to take on the challenge. On a wider scale, it is highly recommended to form a risk management team to oversee the bigger picture of managing the overall register of risks.
Respond to risks
The next step is to develop and implement plans and controls that allow the company to address risks when they become reality. The key to stemming the financial, emotional and physical toll of crises and unwelcome events is dealing with them efficiently, effectively and as quickly as possible. Your strategy should include both preventative and contingency plans, with priority given to risks that are more likely to occur or create the most negative impact.
Monitor risks
Developing a risk management strategy is just the beginning. Risk monitoring is an ongoing process that requires individuals and teams to remain committed to regularly reviewing current risks and identifying and managing new concerns. Likewise, it is essential that such strategies are ‘live documents’ with a focus on regularly monitoring identified risks to enable swift action if the likelihood of them occurring rise beyond acceptable levels.
Outsourcing - a simple way to mitigate risk
While the specific risks an organization faces depends on many factors including industry, size and geographic location, all businesses have access to a common tool that can mitigate their exposure to certain threats. Outsourcing has rightly earned a reputation for helping reduce costs, improve efficiency and increase productivity but it also doubles as an effective risk management strategy for several reasons.
Fill skills gaps
Given the current global labor shortage, an increasing number of businesses are at risk of a gap in specific skill sets that make them more vulnerable to business disruption, non-compliance and low productivity. Outsourcing to hotspots such as the Philippines allows businesses to diversify their workforce by accessing offshore talent pools filled with highly qualified and hard-working people.
Provide reliable service
The combination of low labor costs and different time zones is a godsend for organizations that would otherwise only be able to dream of implementing 24/7 customer support, not to mention around-the-clock employee assistance such as IT helpdesks. Utilizing offshore workforces to manage key tasks is a smart way to ensure business continuity when trouble strikes onshore.
Reduce costs
When potential risks turn into harsh realities, one of the first things to fall is often your bottom line. The financial toll associated with such crises can be extensive and every dollar saved in other areas becomes a blessing. Arguably outsourcing’s greatest benefit is cost reduction, with the combination of lower living costs in offshoring destinations and better use of in-house resources more than welcome during times of hardship.
Can your business afford to not be prepared?
If the past couple of years has proven anything, it is that effective risk management is crucial for success in any industry. The global pandemic highlighted the importance of being prepared for the unexpected and that means not only identifying potential threats but developing strategies for how to deal with them. In an ideal world, you will never need to roll out your contingency plans.
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