Risk in business is unavoidable. Operating a store, owning or renting office space, hiring employees, driving a truck, giving insurance advice — all of these involve a certain amount of risk. Businesses can spend resources trying to avoid as much risk as possible by being cautious about introducing new products and services, opening new locations, or hiring additional workers. However, this approach could limit the organization’s future growth prospects while still not eliminating all the risks. Businesses face a variety of risks, including:
- Risk of violating laws or regulations
- Risk of property loss from sudden causes such as fires
- Risk of property loss and injuries from geographic perils, such as floods or hurricanes
- Risk of violating clients’ privacy should someone hack into computerized records
- Risk of business failure from competitive pressures
These are just a few of the risks organizations face. Those that do not prepare in advance for them will suffer serious negative consequences. However, organizations that do address the risks before losses occur and that make plans to seize the opportunities a loss can create will survive and even thrive.
Organizations can address risks in three ways. They can avoid a risk altogether (choosing not to manufacture a certain product, locating away from hurricane-prone areas, not hiring employees). They can reduce the risk of a loss occurring (having vehicles regularly maintained, implementing procedures to comply with regulations, installing computer security systems). Lastly, they can reduce the severity of losses that do occur (installing automatic sprinkler systems, implementing return to work programs for injured workers, creating a public relations plan to counter negative news reports). All three of these techniques are necessary, but to fully prepare, organizations need a risk strategy.
Risk management experts Mark Layton and Michael Corcoran write that a good risk management strategy will include procedures such as:
- Identifying the organization’s most basic strategic assumptions and asking whether they are true. Should the firm be offering a particular service or competing in a specific market? What are the risks that follow those strategies?
- Allocating resources appropriately between rewarded and unrewarded risks. Launching a new product line is a rewarded risk, because it might bring additional profits. Hiring a human resources consultant to ensure that the firm does not violate labor laws is an unrewarded risk, because it will not bring more profits but could save the firm from legal trouble.
- Focusing on the effects of potential losses instead of their numerous causes. How do the firm’s assets depend on each other, and how will a loss to one or more affect the others? With planning, can they function independently?
- Running different scenarios to see how the organization will respond to each. Are procedures flexible enough? What changes will produce more effective responses?
- Remembering that not every available tool to test risk preparedness is appropriate for a given situation. Strategic risk planning is not an exact science; there is no guarantee that taking certain steps will produce the desired result.
- Making risk management efforts efficient. This means promoting effective communications between managers, coordinating the work of different areas within the organization, and eliminating unnecessary duplication of procedures. As with any other part of an organization’s work, risk management should not be wasteful.
An organization that is implementing a strategic risk management plan must pay equal attention to financing its risks of loss. Our professional insurance agents can assist you in arranging a plan that combines appropriate insurance coverage and sensible deductibles and risk retention in a way that best meets your needs. Risk is an unavoidable part of business, but risk handled properly can spur your company’s growth.
