www.ceotodaymagazine.com 44 EXECUTIVE INSIGHT There is a constant tension in business between making the right decision and making a fast decision, focusing on positive outcomes, and seeing the potential landmines on a route that could trip you up or more. As business leaders, we are constantly reminded with facts about the speed of change and the risk of getting left behind. However, when we overvalue speed and undervalue risk management, it can ruin a business. Imagine any one of these scenarios happening in your business: - A worker on your site falling from a height or caught in a machine without protective equipment in place. - Contracts signed with “greater than contract value” or unlimited liability where the liabilities are then triggered. - An exchange rate pivot or commodity price with a cost change that wipes out margin on a long term fixed contract - A sole source supplier that would take more than 6 months or a year to replace that goes into liquidation or fundamentally changes their strategy. - A customer that has more than 30% of your business that drops you as a supplier - A fire on a site that destroys 30% of global capacity in the industry. - A component costing 0.15$ that stops a product being delivered with a value of over 40m$. - A regulatory change or behaviour in your company that puts you on the wrong side of a major compliance issue. I have seen each one of the above and many others in businesses I have owned or led with suppliers, customers, and with clients over the last years. So today, let’s look at the practical risk management techniques I use that support and protect accelerated growth in a business: Identify the Risks First, we need to identify the key risks we have in our business and our business plans. When I look at a business, I model it considering the critical resources and assets on the left supporting the value proposition with customers and markets on the right, supporting the revenue and growth. Doing this helps me step back and take an objective view on where and what are the risks to the business model that will slow down the creation of value or could destroy value. I separate these into four main categories; • Category 1: Critical resources – For example, people, equipment, suppliers, partners, buildings, cash and lines of credit. • Category 2: Critical activities – projects, new product introduction, marketing, recruitment, sales, sourcing, funding, supply chain and logistics • Category 3: Markets - For example key influences - political, economic, social, technological, legal, environmental and competitors • Category 4: Key customers and factors influencing their buying behaviours that could impact revenue For example, we have identified a specific sole source supplier as a risk. Assess the Risks When assessing risk, we first need to consider its two components: 1. Likelihood of an event happening 2. The impact (often financial) of an event if it takes place Simple stuff, right? Set the boundaries on impact concerning what your business would consider an acceptable low, medium and high impact on your profits. Then categorise each risk with the probability of the risk occurring. Like any huge to-dolist, a list of risks needs structuring, prioritising, actioning or putting on the not to do list. The prioritising or categorisation comes from the simple matrix of impact against likelihood. In the example model below, the vertical axis represents the potential financial impact of the risk, and the horizontal axis represents the likelihood of that risk occurring. With our sole source supplier, we consider the risk of their insolvency as the primary risk and therefore, the loss of supply during the period of resourcing to a new supplier. The disruption we calculate to be five months given the six months sourcing and qualification plus start time and the one month of stock we hold. This would hit one
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