Not Managing Risk is Risky Business
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“Risk management is not just about avoiding or mitigating risk. It's about knowing which risks to take.”
If there's any lesson that has been learned from the global financial meltdown, it is the importance of risk management. So how does this affect private companies? After all, aren't risk management systems the stuff of the financial sector and large corporations?
Not so. With the exception of very small businesses in which owner-operators make all the decisions, having a risk management system is vital to ensuring that everyone in the organization is on the same page. In fact, in the current economic environment, many would argue risk management has become a necessity for most companies. In the post-recession landscape, with the heightened awareness out there on the importance of risk management, it's also likely risk management will play a much bigger role in business success. That means that private companies without a sound risk management process in place could be at a competitive disadvantage.
Effective risk management can help private companies grow on solid footing. That's because a risk management system gives companies contingency plans to deal with sudden risks such as a market downturn or the loss of a major client. But it also provides them with the strategy and methods to carefully assess the risks involved in taking new opportunities and plot their course with the confidence of knowing they are prepared to deal with these.
"Risk management is not just about avoiding or mitigating risk," says Mike Harris, an Advisory Services partner in the Toronto office of PricewaterhouseCoopers LLP who also leads the Canadian Corporate Governance practice. "It's about managing risk, knowing which risks to take. You don't want to become so conservative and so risk averse that you don't take any risks and miss out on growth opportunities."
Know who you are and where you're going
In many ways, risk management is about in-depth awareness and analysis that can help guide you through the road to achieving your business goals.
- The first step is for the leadership to take a very honest and thorough look at their company. "Do they really know themselves? Have they decided what their risk appetite is? Do they know the key risks they should be looking at? And even if you understand your risks, are your plans for dealing with them aligned with your strategic plan or objectives as a company?" says Harris, who is a past member of the Risk Management Governance Board of the Canadian Institute of Chartered Accountants (CICA).
- Look at your business strategy and assess key risks to achieving it. "This goes beyond looking at the downside, the catastrophe, or major issues that can hit your business. You also have to look at what new sales or growth opportunities are out there and the risk of not achieving them or the risks of not achieving them well," says Harris.
Identify your true unique risks—don't rely on standard formulas
- There is no one-size fits all strategy for risk management. Every industry has its specific top risks. Every company within those industries also has its own unique risks based on its culture, maturity, place in the market and so on.
- Find your concealed risks, such as compensation based strictly on gain without factoring in loss. "If it's one sided, you could be creating a culture of excessive risk taking," says Harris.
- Expand your outlook and data. "Most companies use data and risk-management modeling that builds on data from the past, but we live in such a fast-moving economy, you have to have something that's more forward-looking," says Harris.
Weave your risk management process throughout your company
Risk management starts at the top of the company but it is a team effort.
- Your risk management strategy has to be integrated throughout the company and with clear communication. "As a start, you want to have really good data to base your decisions on. You also want to have really good processes to make sure you haven't overlooked considerable risks and you're focusing on the right methods," says Harris. "But even if you get those right, you have to have the right people mechanisms, culture and technology. It all has to work together. Your risk management approach has to be embedded into your culture and your people have to be empowered to act on it."
Don't leave for tomorrow what can save you today
Many companies are in survival mode — "holding-on-to-dear-life" mode — without thinking ahead.
- "If cash flow is paramount, that is probably your greatest risk and you should be focused on it. That being said, if you get through the cash crunch, what are you going to do?" says Harris. "Don't be caught one step behind your competitors. You avoid bankruptcy, but what are you going to do if someone else is taking the right risks now and growing?"
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Let's Talk is part of our PwC Private Business Exchange program — a dynamic, interactive community of private business owners and executives. To read all articles in the Let's Talk series, please follow the links below:
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