Any risk in business introduces a certain level of uncertainty. An organisation’s approach to risk will be determined by its inherent risk appetite. However, regardless of this fact, a standardised Risk Management approach can be a valuable process-based method that removes some or all uncertainty of change with managing business risk.
As an organisational leader, it is common for Business Risk Management to be included as part of your role. What is equally important for both Financial Executives and Operational Executives is to begin to develop a holistic Risk Management Programme that allows them to mitigate and manage risk, as a comprehensive approach across the business. Those organisations who are tempted to short-change or negate their Risk Management efforts will find that potential consequences can be severe – from a loss of market competitiveness or towards the extreme situation, whereby having to cease their operations altogether.
Yet, business owners or Executive Management Teams cannot circumvent every single risk. With attempting to avoid all risks (at all costs), this thought process is virtually impossible and can impede an organisation’s goals and objectives. Change or the basis of organisational change does not occur without a certain amount of “calculated risk” and is necessary for an organisation’s growth that minimises negatives and maximise positive outcomes.
So, just how much risk should businesses take on?
Why an effective Risk Management Programme determines the success of your business strategy?
Nothing is more fundamental or important than business success. In pursuing this strategic goal, organisation’s need to identify their top drivers, then pinpoint the threats to those revenue drivers, and distinguishing between predominantly two (2) risk categories – ’downside’ risks and ‘variable’ risks.
Risk Categories – ‘Downside’ vs. ‘Variable’
While both categories of risk deserve attention, organisation’s may discover the effectiveness of their Risk Management Programme are most effective if they devote more of their attention to controlling risk and rather than transferring risk to external parties or insurance companies.
‘Downside’ Risks
- The risks that can be most directly controlled are known as ‘downside’ risks, which are most likely to threaten organisation’s top revenue drivers.
‘Variable’ Risks
- The risks that your organisation creates and are, for the most part, unique to your business operation are known an ‘variable’ risks.
However, businesses create ‘variable’ risks all the time. But when ‘downside’ risks are dealt with first through prevention and control, it enables your Executive Management Team to deal more aggressively with ‘variable’ risks.
With the expectations of driving the best risks outcome, your Executive Management Team become more proactive, engaged, and strategic with their Risk Management approach. They need to help steer their underlying Senior Management (and teams) towards resilience and value, by embedding strategic risk capabilities throughout the organisation.
Defining your Risk-based approach (and priority)
A risk-based approach provides the organisation with a framework to understand risk and an operational plan for dealing with risk. By helping to identify the highest compliance risks to your organisation, this assists with making them a priority for the organisation’s compliance controls, policies and procedures. Once your Risk Compliance Programme reduces those highest risks to acceptable levels, then it is time to move onto your lower risks and prioritise accordingly.
What are the five (5) main types of Business Risks?
Regardless of the business size (e.g., small business, SME, corporate, or enterprise), all organisations attract an element of risk. Business Risk Management is a key process to help build confidence in an organisation’s strategy from both your internal and external stakeholders – people want to be assured that each business decision is properly vetted (and agreement with the decision) before being executed, that business losses are minimised, and successes are maximised.
The decision to implement a robust Risk Management Plan puts in place procedures that can help your Risk Manager identify, forecast, and avoid potential threats of business risk – or minimise their impact. Here are five (5) types of business risk that every organisation should address as part of their ongoing strategy and planning process.
1. Strategic Risk
Strategic Risk arises when an organisation does not operate in accordance with its business model or plan. When an organisation changes and pivots direction or does not operate according to its core business model, its strategy becomes less effective over time and may struggle to reach its defined goals and objectives.
An organisation may face strategic risks and any business model or plan can pose an inherent risk. Likewise, a lack of efficiency in a business model can pose a strategic risk for organisations. Because of these factors, it is important that Executive Management Teams and Senior Managers need to continuously evaluate their methods for areas that require improvement.
2. Operational Risk
Operational Risk arises from within the organisation and relates to the unexpected failure of operational day-to-day processes and procedures. These risks can be internal, external, or maybe a combination of both examples and can manifest in several ways; depending on the nature of the business and its operations.
But your own organisation is also a source of risk! When processes fail or are insufficient, businesses start to lose customers (and revenue) and their reputation takes a battering. In the everyday course of business, customers are becoming less willing to wait for support and in the hope to receive a wonderful experience (not to mention, receive a bad one). If an organisation’s Customer Service Team fails or delays to resolve their customer’s issues, then they might find an alternative solution in your market competitors.
While these events can seem quite small, operational risks can still have a significant impact on your organisation. Most businesses have a Business Continuity Plan to tackle operational risks, which often explains the actions you should take before, during and after unexpected events and situations. It is designed to outline ‘proactive’ measures – identify, prevent, or reduce risks where possible, prepare for risks that are out of your control, respond and recover if an incident or crisis occurs.
3. Financial Risk
Financial Risk refers to an organisation’s monetary resources and can significantly influence business operations, usually because of limited funds. These risks might be a product of debt, fluctuations in the economy, a pandemic, or a natural disaster.
Managing risk is related to financial and business profits. Financial risks are caused by multiple factors such as economic changes, market movements, foreign currency exchange rates, commodity price fluctuations, etc.
Markets can experience downturns, which can be challenging to predict and yet try to navigate. These market changes might influence your customer’s spending habits and decrease the value of goods and services. Strategies to mitigate financial or economic risk usually aim to ease cashflow issues, accessing insurance, diversifying income streams, and limiting the terms or amount ($) of loans.
4. Compliance Risk
Compliance Risk primarily arises in industries and sectors that are highly regulated. They may also arise upon the introduction of new business operation regulations, which can significantly affect an organisation’s strategy (and direction).
Are you complying with all the necessary laws and regulations that apply to your business? A simple and yet equally valid question.
The natural progression of your organisation and core business model can also change (and grow) over time. This brings not only new risks but new compliance requirements. For some industries, state and federal legislation sets requirements for businesses to operate within. Compliance risks can happen when companies do not meet these requirements.
Compliance can be very tricky for many reasons since the legal landscape is constantly changing and evolving. Laws related to occupational health and safety, equipment certification requirements, taxes, etc, are constantly being updated. Therefore, claiming ignorance of these regulatory changes is not a valid defence!
5. Reputational Risk
Reputational Risk arises when a business acts in an unprofessional, immoral, or discourteous way. This leads to customer complaints about your organisation’s products or customer service level, and creates a negative impact towards your brand loyalty, which may result in a potential loss in sales revenue and profitability. Notwithstanding, with the rise of social networks, reputational risks have become one of the major concerns for businesses.
However, there are also other areas of your business that might be affected. Your employees may become demoralised, morale and productivity suffer, and some employees may even decide to leave. You may find it hard to hire new replacements, as potential candidates have heard about your bad reputation and decide not to join your business. Suppliers may start to offer you less favourable trading terms. Advertisers, sponsors, or other partners may decide that they no longer want to be associated with your organisation.
The reputation of any organisation is critically important. There are many kinds of businesses, but they all have one singular item in common: no matter which industry sector your organisation is aligned to, your business reputation is everything!
Summary
Risk and Opportunity represents the two (2) sides of the same coin. Simply accept risk, but plan!
There are many types of risks that businesses will regularly encounter but it is the overwhelming range, complexity, and speed of events that they now face. While some threats may be hard to anticipate, strategic Risk Management enables businesses to continually review their strategies (and performance) to improve their products, services, and deliver to customer’s expectations.
When considering an integrated risk-based approach, organisations already have the experience to guide them, to identify and manage risks, thereby minimising financial and operational repercussions. This level of risk maturity brought about by current legislation encourages your Executive Management Team to look at risk through a ‘safety lens’ and drive the organisational transformation (and growth) needed to futureproof operations and unlock their full performance potential.
An organisation encounters the usual roadblocks to change and with finding the available time, budget, and resources (internal / external) necessary to implement or maintain a strong Risk Management Programme, but it is invariably your Executive Management Team who MUST demonstrate leadership in championing and authorisation for funding risk initiatives.
Need some guidance on your next steps? Let’s start a conversation…
