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OPPORTUNITY/RISK ASSESSMENT
Risk is the flip side of opportunity. Once an organization begins pursuing any opportunity (e.g., new products or international market expansion) it is exposed to the risks associated with that venture. Risks can be viewed categorically (strategy, capital, finance, operations, and business continuity) or holistically across the enterprise. Although risks may seem overwhelming when viewed holistically, it is worthwhile for the board and senior management to view the entire risk profile. Otherwise, inter-relationships, which may compound a potential loss, may be overlooked.

Business risk management, also referred to as ‘enterprise risk management’ or ‘strategic risk management,’ is an outgrowth of the risk management field. Because of its foundation in insurance, traditional risk management was concerned only with those risks that were insurable, e.g., liability claims, property losses, workers’ compensation awards, and health benefits. In the mid-1990’s, significant losses to financial institutions (e.g., the destruction of Barings Bank) highlighted the restrictive view of risk management in financial institutions and consequently in other organizations.

Today, it is recognized that organizations are subject to a wide variety of risks outside of those that are insurable; and CFO’s and risk managers have begun to apply risk management techniques to their organization’s risk portfolio. For example, all organizations have reputation risk—the possibility that reputations earned over many years may be quickly sullied by a product liability scandal (e.g., Bridgestone Tire and Ford Motor Company Explorer SUV rollovers) or by negative publicity on web sites (hit sites) due to customer dissatisfaction. This can have a disastrous impact on a company’s sales. And for a nonprofit, a scandal involving an executive’s excessive pay or benefits package can damage its reputation and its ability to attract donations and grant funding. Organizations must look beyond insurance to protect against such risk.

One of the greatest risks to virtually every corporation today is the probable high cost of petroleum products in the next ten years. Some oil industry personnel have suggested that gasoline could reach $10.00 a gallon in the United States in a decade. The likelihood of this occurrence has not been measured to date. Given the extensive use of gasoline and diesel fuel and other petroleum products in manufacturing and distribution, however, a precipitous rise in oil prices will have widespread, and painful, economic impacts for all industries. Contingency planning to prepare for, and respond to, such an eventuality should be underway.

Adrian Slywotsky, writing in The Wall Street Journal recently, talked about disruptive strategic risks that “… can be a much larger source of value destruction for a firm.” Strategic risks include sweeping customer preference changes away from your products, a new technology that displaces your products or services, or legislation that dramatically changes economic incentives. Risk transfer is not the answer here, but rather adaptive strategic thinking to stay on top of the wave.

Organizations are best served when senior management undertakes a comprehensive analysis of its risks. This may be conducted at the same time the company does its annual strategic planning, when personnel are looking at corporate global issues. Or it may be done as a separate exercise. In too many cases, however, the review is not initiated until the occurrence of a significant loss.

The easiest way to start is to develop an opportunity/risk map—a graphic display of your major opportunities and their associated risks—with a measure of their likelihood and possible severity. The map can be refined to show attendant issues for each risk. For example, business continuity planning takes in how to operate at another facility if a company plant is severely damaged and out of service. Planners often fail to consider the many attendant issues. How will payroll be paid in the event it was conducted at the damaged plant? Employees worrying about their paychecks can overwhelm an HR department. Who will be the public relations point person with the press following a severe loss? And who contacts key customers? What do they say? How will down time affect your market share when customers turn to secondary and tertiary suppliers? And what do you tell employees? Will they have jobs to return to after the many months it often takes to rebuild?

Drilling down into each major risk will raise questions, the answers to which will highlight how well the corporation is prepared. The exercise also allows management to determine if the loss associated with each risk can be minimized or transferred to another party. Up until the mid-1960’s, pollution liability was transferable to insurance companies because it was not a standard policy exclusion in liability or property insurance policies. Then, following recognition of the insurance industry’s extensive exposure, insurers added absolute pollution exclusions in an effort to avoid any liability. Today, although it is still a standard exclusion, many insurers will write pollution liability coverage after an underwriting process. Terrorism risk will probably follow a similar path.

The pivotal issue for those conducting risk assessments is that the personnel have the experience to foresee the many types of losses to which the enterprise may be exposed. As Daniel Boorstin is quoted as saying, “Planning for the future without a sense of history, is like planting cut flowers.” Outside consultants with broad experience in a number of disciplines, including enterprise risk management, can be valuable to senior management in facilitating the process.

Call Brian Gagan, Senior Consultant, to discuss a free initial consultation.

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