San Francisco, CA (PRWEB) February 11, 2013
Newport Board Group is a partnership of board directors and senior executive leaders focused on assisting growth, middle market and private equity portfolio companies to navigate transitions and improve performance.
Being an entrepreneur means taking big risks. But not all risks are equal—some risks are inefficient and annoying such as the loss of a key employee, while others can be catastrophic, such as a recession. Some risks are obvious; others are important but 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 some CEOs, particularly in private companies. Many believe that ERM is an unnecessary expense that does not promote sales or growth but in fact can impede the growth of a private company. As a result, many private companies find themselves in “No Man’s Land” a point where growth slows or stops because they did not anticipate the risks associated with a formerly fast growing company.
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
Many large companies and industries have used risk management programs to grow market share. Some 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 company and the competition face similar risks. Now consider that many companies view ERM as a cost and not as an opportunity for competitive advantage. At best only one half of a company's competitors are doing anything at all. Next, consider addressing enterprise risks as a key part of the company's growth strategy.
1. 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.
2. 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.
3. 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.
4. Supply chain – loyalty to long time suppliers is commendable, but risky. If the supplier has a strike, cash flow problems or worse, company production and sales may be affected. Contract with more than one supplier and have a backup. Creating competition will cut supply costs, which might result in a reduction in company sales prices and thus, increase sales.
No matter what industry or stage of growth, an effective ERM program can create a competitive advantage for private companies.
Michael Evans (Michael.Evans (at) NewportBoardGroup (dot) com) is Managing Director of the Northern California practice of the Newport Board Group.
Mark Rosenman (Mark.Rosenman (at) NewportBoardGroup (dot) com) is Newport’s Chief Knowledge Officer.