Formal Risk Management – Is It Just For Business Owners?

Part I

• Successful businesses and business owners are not reckless.  Just as successful investors are not speculators and gamblers.

Both understand the need to mitigate risk.

But business owners also understand the need to continually adapt to change – both internal and external and here lies the opportunity for a more formal risk management process to be integrated within strategic planning.  How to approach change with enthusiasm.  How to innovate to progression and growth whilst understanding and measuring the risk.

• Formal risk management comes down to a combination of consequential loss (what happens to my bank balance should this risk occur) and probability (what is the likelihood of the event occurring)

• Within a specified time frame.

• As a business owner you are in the best position to determine answers to all three criteria – consequence, probability and time.

• But you need a formula with which to measure.

A formal risk management structure provides that formula and allows a strategic action plan to be prioritised in a simple way.

• The process identifies risks on a broad scale
• Natural / Environmental
• Economic
• Legislative / Political
• Social / Human
• Technology

This allows assessment within each area to create a strategic allocation of time or prioritisation: acceptance, avoidance, reduction or transfer.

An action plan then identifies events, tasks, responsibility and timing – the implementation of the plan.

Part 2

I’m writing this blog the day after Brazil self destructed in the semi final against Germany.  Most sporting teams and successful sports people strategically consider defence (or in an investment or business sense – risk management).  The greats of course (All Blacks, Tiger Woods, Bradley Wiggins, Don Bradman, Roger Federer, and Manchester United) are likely to take more risks than the “average”, but they will structure their game plan around a platform of strong defence and structured and opportunist attack.  You knew when watching sporting teams with “flair” that on their day they can beat anyone, but consistency comes through with a more balanced approach.  But we like to watch the risk takers.

Fund managers call it managing downside risk.

Business insurance specialists call it “offsetting” business risk.

Successful businesses innovate, adapt and change to a continually changing environment – they do not simply wait to be run over by the oncoming market “freight train” – driven by a maniacal driver:  called technology, or politician, or staff, or economic environment, or foreign exchange, or interest rates, or earthquake, or key person loss.

Brazil was blind sided by a key person loss:  their captain and their striker.  The impact was catastrophic to team morale.  The attitude on the field was watched, measured and criticised in real time.  There was no escape for the stakeholders – the people of Brazil, their players, their management – it was an unmitigated disaster not befitting a great football nation, especially one who had invested to such a degree on stadiums and infrastructure.  There will be much ongoing fallout from this result – yet the tournament up to this point had been a fantastic spectacle for the country and their morale.

Some investors and businesses behave like Brazil.  Others like Germany.  The secret is to combine flair and innovation with risk mitigation.  Governance, leadership, strategic planning, requires investment (advice) and team work (attitude, game plan).

The problem with professional sporting teams made up of individuals whose income and future lie externally (playing and being remunerated by overseas clubs) means they don’t “burn the boats” if and when beaten or disgraced.  They simply slip back to their overseas benefactors.  Much like failed entrepreneurs or investment schemes.

Management and culture become the differentiating factors.  Same in business.  Same with investment.  You might get lucky “on your own” but eventually take your eyes off the ball. Brazil took their eye off the ball and had no answer to a relentless competitor – excuses will flow.