Prevention is better than the cure. Those are the words of the German Poet, Johann Wolfgang von Goethe more than 200 years ago, but they are more important than ever today.
International business is risky. In previous articles, we identified the 5 common risks companies face when doing business internationally. But, how do you prepare to overcome those risks?
The simple answer is plan.
Benefits of a risk management strategy
A solid risk management strategy can help your company plan for possible foreseen risks while also establishing a process to deal with them. This will save you time, money, unnecessary disruptions and ultimately safeguard your company’s future.
“While a company can’t predict the future, it can be valuable to use your past experiences to develop a risk management program to help you avoid unnecessary risks and help ensure your future success,” explains Judi Smith, Business Development Representative at AON.
Intact Insurance, the largest provider of property and casualty insurance in Canada, has defined 7 benefits of developing a risk management strategy.
According to its subsidiary BrokerLink web site, risk management plans help by:
- Saving valuable resources: time, income, assets, people and property can be saved if fewer claims occur
- Creating a safe and secure environment for staff, visitors, and customers
- Reducing legal liability and increasing the stability of your operations
- Protecting people and assets from harm
- Protecting the environment
- Reducing your threat of possible litigation
- Defining your insurance needs to save on unnecessary premiums
Key to the success of any risk management plan is to make it part of day-to-day business operations which will help deal with challenges in real time.
How to develop a risk-management plan
While there’s no single solution or approach to developing a plan, it hinges on procedure. Developing the correct processes can ultimately make the unmanageable, manageable.
There are 6 steps to developing a plan:
- Identify the risk
- Analyze the risk
- Rank the risk
- Assign responsibility to address the risk
- Monitor the risk
- Respond to the risk
1. Identify the risk
If you don’t know what risks you are facing, you can’t address them. But where to start? Identifying risks can start with a brainstorming session that involves staff from all departments.
It’s important to look at current risks and have a vision to identify future risks.
EDC developed a risk checklist: Country-Political, Economic, Cyber Supply Chain (C-PECS) based on the 5 types of risk identified in a previous article—for you to utilize. It ranks risks in order of priority and will help you address your most pressing concerns first. As you work through the checklist, take the time to research areas you are less familiar with.
2. Analyze the risk
Once you’ve identified the potential risks, the next step is to conduct an in-depth analysis.
Analyzing risk can be difficult due to a lack of information, but the checklist can best prepare you to identify those risks and how they can potentially impact your business in both operational and financial terms.
3. Prioritize the risk
Not all risks are created equally, and the C-PECS checklist can help you evaluate the risk as well as the resources you’re going to need to overcome it.
A large list of risks can be overwhelming. That’s why it’s critical to prioritize the risks so you can address the most pressing concerns first. Once you complete the checklist, you can go one step further and classify risks as high, medium or low.
4. Assign responsibility to the risk
Once you’ve identified and prioritized the risks, you need to ensure there is someone in the organization that’s going to manage and oversee those risks. Determining who will be responsible is an internal company decision; it could be someone who works in a specific risk area who is best suited to tackle the risk or an arbitrary choice. It’s a best practice to develop a risk management team consisting of both internal and, if applicable, external people in your supply chain.
5. Respond to the risk
Responding to potential risk is contingent on developing a strong risk management plan. EDC has developed a Risk Management Worksheet that’s a great tool to help assist in the development of the plan.
It covers 6 areas:
i) Risk management team
ii) Market information
iii) Market entry information
iv) Contracts and getting paid
v) Quality & performance systems & processes
vi) Insurance and cash flow protection
If you identify any risks, the planning that you have just undertaken can help you address the threats to your company.
For each major risk identified, create a plan to mitigate it. You develop a strategy that includes a preventative or contingency plan.
Acting on the risk depends on its priority level. Discuss with the risk management team and act collectively on how you will address it.
6. Monitor the risk
Every risk management plan is a living document. Things will change in your company and, as a result, so will the risks. As these changes occur, it’s critical to update your plan to ensure that you don’t become complacent or lose sight of potential threats to your business.
Incorporating an ongoing review of your risk management plan into the company’s planning activities will ensure you are on top of any potential risks.
Doing so, will make your company more agile and prepared, two elements that are critical to sustainability as well as innovation.
As you can see, adhering to the adage of prevention is better than the cure. It will help solidify your business operations and give you a competitive advantage in the global marketplace.
Case Study: Do you need a company risk management strategy or not?
Daren Givoque, CDFA, Partner, O’Farrell Financial Services, shares in this case study the difference for your company’s long-term survival when you adopt a risk management strategy versus not.
John built his business restoring classic cars from the ground up and developed a unique value proposition that is both service-oriented and cost-effective.
Moving into its 30th year, his company has 20 employees and brings in about $5 million annually. It is very much a family business, with his wife acting as the company’s financial controller and his two early- 20-year-old sons in the shop. The business is well known and is considered a pillar in the community in terms of giving back.
Although it’s a family business, John is reluctant to share his knowledge with his family and team.
He wants to be a point person on every job to ensure a certain level of customer service and quality. His wife looks after the books, but only has access to certain bank accounts, and has no idea about the processes that go into keeping the business afloat. His young sons are simply in the shop and John has not shared any of his knowledge with them. Every employee works in a silo and John is the only person that can bridge the gaps.
Just as the company is getting ready to celebrate its 30th anniversary, John suddenly passes away.
No one in the organization has enough knowledge to take over. John’s wife is left trying to piece the puzzle together. Because John kept such a tight lid on everything, many of his assets were privately held and locked up in his estate. This causes a serious liquidity problem and his wife is left wondering how she’s going to make payroll. Since John was the primary owner of the company, she is not able to secure financing from the bank because his estate hadn’t been settled yet.
As a last resort, she has to rely on John’s small life insurance policy to pay the staff. She makes it through the first six months using family loans.
Just as the dust was settling, tragedy struck again when she passes away. The company is left to the two sons who are now responsible for 18 employees. The company is left in a precarious state with the possibility of bankruptcy looming.
The sons are faced with 3 options:
- Go bankrupt
- Try and find leadership within the company
- Sell the business
Risk management strategy: Different outcome
This whole situation could have been avoided had a proper risk management strategy been in place. When it comes to risk management, no one person within the company should hold so much knowledge that the business cannot survive without them.
It would have been beneficial for John to sit down with a risk management expert to walk through the risks from a financial perspective, knowledge base and marketing position.
Identifying the “what ifs” resulting from a death or loss of employees, is key to risk management and survival.
Securing what is called key man insurance—insurance on the key person in the business—ensures the cashflow is protected if someone in a critical position passes away and allows other partners (if there are any) to buy out their shares.
Part of risk management is also identifying the roles of all employees and clarifying and documenting all their daily activities. Finally, a risk management facilitator will help business owners prepare an exit strategy to ensure the company remains viable.
If John had a strategy in place, the scenario for his company would have been extremely different. While his death would still be devastating to his family and employees, the company would have had a much better chance of survival.