Well, Times Have Changed – It’s a Global Economy Now
It’s a brave new business world. The financial crisis in the United States sends a shockwave through global markets. A devastating earthquake in Japan halts manufacturing production creating disruptions in the supply chain. Revolution in the Middle East and Africa are sending oil prices ever higher. How is an organization to predict and avoid this type of risk? The short answer is, you can’t avoid it. You can, however, mitigate the risk and you can manage the risk but you can’t avoid it.
Nor would you want to. Risk is part of the game in the business world. If a company is avoiding risk then they aren’t making any progress. Sure, a company can milk a cash cow for several years, even decades, but eventually they stagnate. Accepting and managing risk is what causes companies to grow, to out manoeuvre their competitors, to bring a new product to market, and, most importantly, to produce profit.
Risk assessment and management is an important component of a progressive company’s strategic plan. And while many executives shy away from statistical analysis (who would blame them), there are risk management tools and software packages that takes the drudgery out of the exercise.
Assessing a Company’s Appetite for Risk
Assessing and managing risk due to supply chain disruptions, economic downturns, and the like are important to evaluate and to prepare contigency plans in order to mitigate the damage. But these are normally rare occurrences. Day to day and month to month risk management is a key component as well. To accurately assess and manage uncertainty, executives must also determine their risk appetite – the amount of risk they are willing to accept in the normal course of business.
This is a difficult process due to the uncertainty involved. And there are few real benchmarks to compare when evaluating risk appetite. While risk management software will crunch the numbers, risk appetite is determined predominately through the experience and intuition of the management group.
As the business world moves headlong into a global economy, risk management is becoming a more important component in the strategic planning process. The world’s economy is becoming more interconnected and, with that, comes a rise in risk variables that can disrupt local operations. While most companies are understaffed and management is busy steering through the landmines of the day, it is important to set aside the time to delve into risk management scenarios. As the Boy Scouts say “Be prepared.”
