Anyone searching for 'Risk Management' or 'Business Risk' will find literally millions of responses on the Internet many of which will , probably, say more or less the same thing.
This is a well-trodden path for business managers most of whom have been on a course or read a book or even commissioned a consultant to deal with risks which might affect their business.
And yet risk never goes away. It is impossible to be involved with the business world without engaging in some risky activity – the question is how it is approached and what the outcome is after taking the risk.
The cliché – 'the greater the risk the greater the reward' has, like all cliches some element of truth provided it is clearly understood that the greater the risk the greater the chance of failure – and the greater the chance that management will be condemned by that most popular of techniques beloved of politicians and critics - 20/20 hindsight.
Everyone is an expert after the event. The Americans have a term for it – it’s called being 'a Monday morning quarterback'. In other words it is being someone who can tell where the teams who lost the Sunday night American football game went wrong and what the quarterback should have done to win the game.
There are plenty of people who will let management know where it all went wrong after the event and this can be a trigger for action which may not, in the long run, benefit the organisation. Suppose, for example, the business does its research and its projections and embarks on a market expansion – say overseas. After three years and a great deal of money it is obvious that the venture isn’t working and the management reluctantly close it down and write off the investment.
This adversely affects the results, reduces the dividend to shareholders, causes a cash flow problem etc and the shareholders don't like it. Then comes a lot of 'I told you so' (they didn't), 'well I always knew it was a big risk (you never mentioned that') etc etc. and to pacify them a couple of the senior directors fall on their swords and depart. This is not because the previous management were reckless and foolhardy – they tried and it didn’t work. But the price of failure can be high.
The knock on effect of this can be to make the incoming management very risk averse. The willingness of the business to initiate change, to expand , to try new things and refresh the activities of the business is diminished because the previous management tried and failed. The danger is that the tendency to maintain the status quo is encouraged with the result that the business responds more slowly to pressure and there is an increasing reluctance to innovate. Other more aggressive competitors can then start to impose themselves on a business which is unwilling or unable to change quickly enough to respond.
Another aspect of business risk which is not usually apparent from the books and courses is hidden risk. The disaster of Piper Alpha was not caused by stupidity, a reckless disregard for consequences or incompetence. It was caused by a combination of factors which came together to create a disaster in which 167 people were killed and the cost to the business was colossal. It really came down to a missing piece of paper – an engineer's notification which advised that a valve had been removed for maintenance and capped with a temporary cap so that pipeline should not be opened. Nobody saw it because it was filed in a different place to where the operators were – they opened the pipe and the cap blew off.
One piece of paper – how do you cope with such a small thing that had such big consequences – particularly in an industry with a strong safety culture for obvious reasons.
By thinking the unthinkable - by gaming the scenarios – by saying 'what if…' or 'maybe this might happen..'. The airline industry is good at this – they train pilots on simulators to cope with dozens of 'what if' situations and this is an example business can follow. Of course cover the obvious risk management stuff and make arrangements to deal with conventional, foreseeable risks – but , at the same time, accept that gaming the unthinkable is something that you may never have to use – but, if you do, you'll be glad you were prepared.
Eliminating uncertainty as much as possible is the art of risk management which, if managed well, will both help deal with the kind of small stuff which triggered Piper Alpha and help counter those who could have managed the company much better than you if they'd only known then what they know now.
John Taylor is an author for accountingcpd. To see his courses, click here.