We’d never progress without some measure of risk-taking. Children excel at estimating the flexibility and strength of outward and upward reaching branches. Mixing intuition with experience strengthens their talent. Honing the skill enables ever greater achievement.
Of course, we reach a point where we need to do more than climb trees, however, the development of these early skills helps us to identify and manage other hazards allowing us to push more important boundaries. Risk is inherent in business and investment. It tends to increase where the greater rewards lie so it’s useful to learn to acknowledge it, provide for it and manage it. It’s good to encourage a culture of understanding of risk at every level of a business, from customer service to strategic planning.
Predict
Whether launching a new business, taking on a new project or evaluating a long-term investment, considering and anticipating the risks, both upside and down, should be an integral part of the process.
Outcomes may be influenced by environmental (external) risk; operational (internal) risk; and financial risk. Identifying them and assessing their potential severity is the first step.
To put that in context, let’s say you’ve developed a new product and identified high demand in Europe and the US. Material inputs and viability analysis suggest manufacture in China. Embarking on such a project without sound risk processes can leave loose ends that may dilute the total benefits or worse.
Avoid
The next step is to formulate ways to avoid specific risks. Operational and financial risk can often be managed out of an equation, provided they’re foreseen.
In our example, there is currency exposure both in manufacturing and distribution. Sudden movements in any of the exchange rates could produce either windfalls or losses. If currency dealing is not core business the risk is unnecessary. To avoid it the exposure can be removed by hedging at modest cost.
Control
For the risks that can’t be avoided, contingency plans can be established to share, limit or mitigate consequence.
Operational risk exists with using an external, offshore manufacture. Damagingly inadequate quality or intellectual property leakage both have high potential. These may be mitigated by researching manufacturers, producing tight specifications, working with experts to develop sound contracts and appointing a reputable quality auditor.
The political risk is beyond control. A sudden escalation of US-Chinese tensions could render the Free Trade Agreement somewhat irrelevant, so contingencies must be considered. An alternative manufacturer may be available at slightly higher price in South America. Understanding how quickly a transition could be made might indicate it’s better to produce in South America from the outset. On the other hand, the cost differential might suggest it’s better to proceed with China and switch only when necessary.
Evaluate
Change is our constant, so review must also be constant. Evaluating projects or investments as they progress and referencing updated risk, particularly environmental, is an important part of the process.
Risk management should become embedded in process and is especially relevant toconsider when entering new investment or business environments.
Better than going out on a limb.
