Risk is part of the essence of business. It can be defined as everything that would prevent or interfere with the positive outcomes that entrepreneurs, investors and executives seek. Risk management is the way that companies identify, assess, mitigate, transfer (typically via insurance) and manage risks to their business. Only after risks have been identified can resources be allocated to try to minimize them.
Big companies may have an entire function or department dedicated to risk management. They employ consultants to create elaborate models of which risks are most important and likeliest to occur. Middle market companies typically lack the resources and structure to do this. They need to build a thoughtful consideration of risk into every important decision they make.
Below, our partners describe some of the most effective risk management techniques they’ve used in middle market companies and comment on why middle market companies need to prioritize and formalize such techniques. Here’s what they had to say:
Keith is a Newport partner in New England who has been president of operating divisions in four different Fortune 500 companies, in sales/marketing roles as well as other strategic leadership responsibilities.
"A tool from Six Sigma called FMEA (Failure Mode Effects Analysis) is extremely effective for risk management of any size company, initiative or process. It is completely explicit and formalized, though it requires a bit of training to use effectively."
Kim Denney is an experienced Houston area leader with a record of solving top-level problems as an executive with broad responsibilities in the Chemical, Petrochemical, Energy, and Manufacturing industries.
"Middle market companies rarely do detailed, data-based risk analysis. They can often benefit, however, from a much-simplified annual review of the largest risks and threats to their success. Imagine the value of the leadership team spending a morning once a year just thinking about what could go wrong and what they need to put in place to avoid the issue or to mitigate the risk. Considering potential risks as part of every major decision helps the executive team instill a mindset throughout the organization of considering risks and how to alleviate them."
Sam, a Newport partner in Atlanta, is a seasoned executive with a record of implementing strategies to enhance revenues and profits across a variety of industries. He has particular expertise in assisting clients in redesigning their sales organization and sales management processes.
"I recommend regular review by an outside advisor who has not been involved in shaping the company’s decisions. Too often this is not done or at least isn’t formalized because a company’s service providers have been associated with the company and its owner so they can’t really be objective about the risks that the company faces."
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Billie is a Newport partner in the Pacific Northwest who has been Executive VP and CIO of TrueBlue Inc. (NYSE: TBI) the largest industrial staffing firm in the U.S.
"A technique of identifying the top 5-10 risks that might take the company out is highly effective. Formalizing this process means making sure that all key team members are aware of the top risks and what the company's position is (i.e. how they impact strategy) and revising them at a frequency consistent with the pace of change. Such an approach vastly improves decision making and alignment of execution."
Ted Parrish is a Newport partner in Dallas. His background in advisory services includes solving strategic and operating problems for banks, financial service companies, manufacturers, distributors, retailers and transportation companies.
"I do not observe most mid-market executives formally addressing risk. They are concerned with risk to the extent of tracking the availability of working capital, margin management, regulatory compliance, competitive position and the risk of losing sales. Formal risk management structures tend to arise primarily when there is a regulatory concern. And willingness to accept the need for risk management and spend money on doing a better job of it occur in direct proportion to the risk of a penalty from regulators or a lawsuit."
Mark RosenmanMark is a co-founder of Newport Board Group and its Chief Knowledge Officer.
"My sense is that most middle market companies in effect build risk management considerations into their decision making process—implicitly. The kind of risk management exercise that boards of public companies go through, identifying risks and coming up with ways to mitigate them at least in theory-often with the help of consultants, strikes me as too theoretical and bureaucratic to be meaningful for smaller companies."
Patrick WorshamPatrick is a Newport partner in West Florida who has top executive team experience ranging from the Coca-Cola Company to a privately-owned, mid-sized wholesale distributor and a start- up advertising enterprise.
"Essentially, risk management for middle market companies means visualizing all that can go wrong and thinking through the cost and benefit of preventive and/or detective action. Those that pose the highest risk need to be communicated regularly to the people who need to know and the adequacy of controls/insurance and other risk mitigation measures needs to be regularly assessed."
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