14 December 2010
Manufacturers' bottom lines are at the mercy of a host of business risks. If you think there's nothing you can do to ward off disaster then think again, says Tim Astley of Zurich Risk Engineering
The factory roof could collapse, a second wave of swine flu might lay the workforce low, or trouble in the Balkans could send gas prices soaring. While the above scenarios are all theoretically possible, most site managers would consider their time too precious to indulge in a game of 'what if'. "Scepticism is common and risk assessment is often viewed as a necessary evil," reflects Tim Astley, principal strategic risk consultant at Zurich Risk Engineering. "People think: I've got too many things to concern myself with and I don't know what I'm going to be confronted with until it happens - so what's the point?"
Yet the process of risk assessment is an increasingly common trait of successful businesses, says Astley (pictured left). "Rather than look at risk management from a defensive viewpoint, it should be seen in a positive light. It's a chance to add value to your business and ensure it thrives."
Think of the business world being like the Serengeti. You can choose to act like a wildebeest, blindly following the herd as a predator sneaks up in the shadows. Or follow the example of the meerkat standing on tiptoes always alert to danger. "It's about taking an overall view," says Astley. "Don't just focus on day to day business. Take a more strategic view of what you require for an efficient and effective business. Where do you feel you are vulnerable and what can you do to mitigate those risks?" There's a reason why meerkats and not wildebeest front TV adverts for shrewd financial thinking. "Research has suggested that failing to manage risks properly can decrease your shareholder value," says Astley. "The more that you can do to tackle risk, the more external stakeholders stand reassured that this is a company that knows what it's doing." Firms that risk manage effectively will find it far easier when it comes to securing new finance, adds Astley.
But risk remains a very broad field. A manufacturer may face hundreds of possible dangers and infinite musings over which to prioritise. To streamline the process Zurich has developed a risk wheel, which captures the range of risks to be considered, neatly categorising them under five headings: strategic, financial, market, operational and people based. While different industry sectors face different challenges, Astley describes some of the risks from each category that commonly crop up in corporate risk registers.
lEmerging markets: The prospects for medium to long-term global economic growth are increasingly seen to be dependent on the developments in emerging markets such as the Far East, (centred on China and India), Brazil and eastern Europe. Entering and succeeding in new markets presents a multitude of challenges for even the most experienced operators, and companies in western economies perceive this as a key concern. Even if there is no direct impact, the diversion of focus of others in the same market might introduce changes in dynamics. Organisations large and small need to understand the influence this will have on their own businesses from the perspectives of competition, supply and delivery.
l Regulation and compliance: Regulation affects different sectors in different ways and to different extents. Any business operating in the European Community will be familiar with the apparent proliferation of regulation some of which has consequences well beyond the initial area of focus. As well as an aversion to over-regulation, the key difficulty is uncertainty and change or increased requirements for compliance with industry codes, standards and other frameworks.
l Green concerns: Perspectives on green issues vary widely but there is no doubt that as a topic it continues to seek greater attention, whether an organisation concerns itself with its impact on the climate or the impact of climate change on its ability to continue to operate.
l Corporate social responsibility: Most organisations are concerned about their reputation above most other issues. A damaged reputation affects the perspective of all stakeholder groups and can impact market share, profitability, the raising of capital and the ability to attract staff. A growing threat to reputation is reflected in the way in which companies position themselves as corporate citizens. Good corporate social responsibility is manifested in many ways from the manner in which a business deals with suppliers to the way it treats its staff.
l Under-funded pensions: While new key risks often appear, others like the concern over pension funds have been with us for some time. It is still a long-term concern of many organisations and has not yet been fully addressed.
l Mergers and alliances: As economic growth returns following the recession, acquisitions will increase which will add to the growing trend for partnership arrangements of one kind or another. It is notoriously difficult to ensure that such arrangements can succeed and thrive. Reliance on other organisations for outsourced services, together with the cost pressures which drive a slimming down of the supply base, demand greater appreciation of the agenda, needs and culture of partners.
l Global economic and fiscal conditions: The credit crunch, global recession and current fiscal crises, all have overlapping influences on the way organisations function. They continue to affect investment and market prospects, exchange rate changes and protectionist tendencies among others. Such a broad area of uncertainty will continue to affect the risk landscape for some time to come.
l Commodity availability: Uncertainties around economic prospects make it difficult to predict movements in the demand and supply patterns for key raw materials and commodities. Not only are market growth projections unclear, but the lag in re-investment in capacity following the recession has led to a squeeze in areas of basic supply such as semiconductors and some metals. Added to that are longer term concerns over energy, water supplies and some metal ores which both national governments and individual corporations are trying to address. Operational risks
l Supply chain: In 2009, the World Economic Forum referred to the threat of 'over-optimised' supply chains. This neatly describes the position many companies find themselves in following years of cost-based rationalisation, outsourcing and de-stocking. Added to this is the fact that many supply chains are stretched geographically as well. Organisations must adopt more of a risk-based approach to supply chain management in order to recognise and address the broader influences on their ability to function.
l Skills availability: The risks associated with skills management and retention is another long-lived issue for many organisations. Demographic imbalances, increased individual mobility, reliance on partners and suppliers and shorter term cost pressures all present potential threats to sustainable operation and differentiation.
Tackling each of these areas begins by bringing the key people in the business together, explains Astley. Workshops look to tease out the expert knowledge within the company to minimise each threat, he says. "In the supply chain it may involve switching from a single to a dual sourcing strategy to protect against potential difficulty," says Astley. The workshops produce key recommendations to tackle the risks. These can then be allocated to individual staff members. Some could be instant measures. However, risk management is rarely a quick fix process stresses Astley. "It requires resource and commitment from the organisation itself. Don't think risk management is one hit wonder."
Effective risk management is a constant process, he reflects. "It's something that can be part of ongoing business," says Astley. "It should be embedded into the way a company runs. But things must also be reviewed regularly. We live in fast moving times and risk is constantly changing." One common mistake is for firms to apply resources and controls to a problem which are disproportionate to the level of risk, reveals Astley. "One firm had very strong processes for managing expenses approval, yet the risk of management fraud was very low." A structured approach can ensure that appropriate priorities are set.
Another frequent difficulty is in failing to promote risk management from the top, he adds. "Often the process is started by middle managers with little or no drive from senior directors. Without that board level support it's very difficult."
So perhaps it's time to raise the risk wheel and its categories at your next board meeting - there can be no risk in taking a closer look.
For more details, speak to your insurance broker or see www.zurich.co.uk/expertise
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