Risk Management Will Enhance Business Growth
“The capacity to manage risk, and with it the appetite to take risk and make forward-looking choices, are key elements of the energy that drives the economic system forward.”
— Peter L. Bernstein in Against the Gods – The Remarkable Story of Risk
Growing businesses deal with at least three components of risk: 1) eliminating the risk of setback from uncovered loss; 2) being free to make bold business decisions knowing that risks are managed; and 3) using risk to achieve competitive advantage.
When your business is growing, you cannot afford to be distracted by unexpected but inevitable losses that cause you to lose momentum or even move backward. To the person who is not prepared for an event, when it happens it might be somewhat comforting to say, “Who knew this would happen?” Better yet, “What could we have done about it?” Your bosses, customers, board or other stakeholders might not see it exactly that way, though!
In reality, risk management is all about anticipating and preparing for loss events. Risk management is not all about reaction – it is about anticipating and planning. The prepared company does not expend time and effort bemoaning the event, it simply continues to move ahead without interruption. On a personal level, the responsible individual is not defending his or her job, but continuing to move ahead as well.
When losses are anticipated, minimized and where possible financed, you will feel greater freedom to make bold business decisions knowing your risks are managed. A maker of medical devices can move ahead aggressively into new product areas without concern that product liability will wipe out profits. A real estate developer can acquire substantial concentrations of property within a given geographic area without worrying about a single storm destroying the entire portfolio. Your net income and your payroll can be insured, so neither your income statement, nor your company, suffer from a temporary shut down.
Companies can utilize risk to achieve competitive advantage. When you assume some of your customer’s risk, you make your product or service more attractive vis-a`-vis that of your competitors. For example, if you are in the IT services business, it is common to have a very broad limitation of liability in your customer agreements. This means the customer assumes all risk, even loss due to your own negligence. To the customers, this seems unfair, but they have no choice. Now you come along with a more user-friendly agreement that assumes at least a part of their risk and you immediately create the competitive advantage that makes you the product/service of choice. How can you assume such risk when your competitors cannot? Either:
- it’s simply custom and no-one has broken that ice, so you can,without major consequence, or
- you can in turn pass on the liability by contract to another party who is passive in the contract management area, or
- you have creatively found a way to insure your assumption of your customer’s risk.