Being an entrepreneur means taking big risks. But not all risks are equal. Some risks, such as losing a key employee, represent a potential bump in the road. Others can be catastrophic, such as the impact of a recession. Some risks are obvious; others are easily overlooked.
According to a 2011 RIMS survey:
- Fifty-four percent of companies have partially or fully implemented Enterprise Risk Management (ERM) programs.
- Twenty-six percent are investigating or plan to embark on an ERM program in the next year.
- Twenty percent said their company has no ERM program and has no plans to look into it.
The reason why more companies have not implemented an ERM program can best be explained by how the function of risk management is viewed by CEOs, particularly in private companies. Many believe that ERM is an unnecessary expense that does not promote sales or growth and can impede growth. As a result, many formerly fast growing companies find themselves in “No Man’s Land” where their growth slows or stops because they did not anticipate and mitigate risks.
Smart entrepreneurs who anticipate and manage risks effectively can transverse "No Man’s Land" and create an advantage over less sophisticated competitors.
Enterprise Risk Management
ERM typically involves identifying particular events relevant to the company's goals across all activities of the company. The ERM process assesses those risks as to their probability of occurrence. It determines the magnitude of the potential loss (in terms of dollars, market share loss or cost to remediate), setting a response strategy, and then monitoring progress.
"Enterprising" Risk Management
Some successful companies have actually deliberately built the growth of their business around a risk management process.
Examples include:
- Customer loss is generally a significant risk for most businesses. Nordstrom’s established a customer centric reputation by establishing a policy that allows a customer to return virtually anything if the customer is not satisfied. The result: significant growth in sales and loyal customers.
- Reputation risk is a tangent of customer loss, as the perception of low quality will lead to customer loss. The creation of employee led quality circles in the automobile industry helped produce a transformation of the industry’s quality reputation.
- Cost control is generally not associated with risk management. But consider what the ultimate cost would have been to McNeil, a subsidiary of Johnson & Johnson, if they had not removed Tylenol from stores immediately after the famous tampering episode in the early 1980s.
Four "Enterprising" Risk Management Strategies
Consider that a smart company and its competition face similar risks. There is a good chance that many of its competitors fail to see the value of ERM. Here are examples of what the smart company can do to build risk management into its growth strategy.
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Product quality – Incorporate new product quality control procedures and promote those enhancements to customers. Alternatively, extend the return/warranty policy for the company's product. Both strategies will increase sales.
- Employee safety – an obvious but overlooked ERM strategy. No employee wants to work in an unsafe work environment and no reasonable customer wants an employee to do so. Create a safer work environment for employees and promote that to new employee recruits and to customers. The result will be improved hiring and increased sales.
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Capital and cash flow – always have a backup plan for unexpected cash flow needs or if the company's source of capital goes away. Consider making available financing to customers to fund purchases so that the company gets paid on delivery, thereby eliminating slow or “no pay” customers. Sales will increase.
- Supply chain – loyalty to long time suppliers may be commendable. But it’s also risky. If the supplier has a strike, cash flow problems or worse, your production and sales may be affected. Contract with more than one supplier and have a backup. Competition will cut your costs, which might enable you to cut prices to customers and thus increase sales.
No matter your industry or stage of growth, a well conceived ERM program can help private companies create competitive advantage.
Learn more about how to navigate through No Man's Land in our complimentary ebook - "5 Steps to Survive No Man's Land"
Mike Evans is a Newport Board Group Managing Director of Northern California. Learn more or contact Mike by clicking on his photo.
