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Managing risk is not just about handling everyday hazards and potential physical perils.

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“EVERY BUSINESS should have a strategy for managing risk,” says E David Bishop, head of risk assurance services at international PricewaterhouseCoopers.

“But many companies too often consider risk manage­ment as just compliance with regulation or prevention of hazards.”

Traditionally, businesses have tended to view dealing with risk along the lines of “we’ve installed a fire alarm, nominated a Health & Safety officer, implemented an IT security system and are always on the lookout for fraud. Job done.”

But this established view of risk management is now being called into question by experts who believe it’s too narrow, particularly in light of recent terrorist events and advancing technology.

As a result, risk management has been pushed to the forefront of political and economical debate and press coverage about the need for all manner of security against risk in business has gone through the roof.

Protecting value is the core

“Businesses have to operate in an entirely different environment compared with that of ten or 20 years ago,” says Bishop.“Staff are more mobile, customers are more demanding, prices are less static and the idea of a global market is far more real.”

Many business advisers now believe risk management should include creating and protecting the value in a business, and even using that to seize opportunities, not just securing a company against acts of god, vandalism or terrorism.

Being risk aware must involve weighing up trading volatility and probability and turning it to your advantage. Decisions you make or actions you take as a result should also be included in your overall strategy.

Management consultant Dr David Hilson, says,“Some of the uncertainties in business that expose you to risks can also provide unexpected opportunities.”

Succeeding often requires you to do something radical or different from your competitors and that can be daunting. However, the lifeblood of an organisation is often its ability to innovate or take gambles with new markets or products. Therefore, an overly cautious approach can result in companies shying away from the very thing that could give them a competitive edge.

Get a risk champion

Of course, it’s all about taking the right risks, yet the line between good risks and bad risks is a hard one to draw. Experts say if you are managing risk well, then you should be aware of all areas where dangers might arise and plan accordingly.

But, in reality, risk in various forms is spread across all areas of a company and some risks will be viewed differently by different departments.

Because it’s a function of so many processes, it’s hard to get a handle on either qualitatively or quantitatively.

Insurance experts suggest companies should appoint a ‘risk champion’: a member of internal staff who is responsible for overseeing the analysis and implementation of risk strategy.

It’s better for ‘non-specialist’ risk assessment to be handled in-house; one person is more likely to ensure a consistent approach than several people with fractured responsibilities.

Insurance is critical

Some risks you can eliminate or reduce by your own efforts. Others, particularly hazards, may pose a potential threat whatever steps you take.

So, it’s important to judge whether your company can afford to cope with some of these risks you cannot avoid, and if you would be able to deal with the potential outcomes.

If not, it’s advisable to seek some form of insurance, where available and affordable, to cover this residual risk.

...and so is advice

One of the key benefits of seeking insurance is that you will receive advice from insurance companies and brokers who will be able to suggest ways to reduce your risk in those areas.

Utilising an outside perspective from specialists to shed new light on your risks will bring a valuable new perspective that can inform your management strategy.

“Until recently, risk has had very negative connotations,” continues David Bishop.“It’s all been about what can go wrong.

“But leaders in business should think much more strategically about what drives the creation of value and what destroys it.”

David Hilson agrees, saying “Risk management acts as a forward-looking radar, scanning the uncertain future to identify things which might pose a significant threat to be avoided or an important opportunity to be explored.

“Even though it may not be possible to discern every last detail of the uncertain future, the risk process aims to expose areas of particular uncertainty and indicate the best path to follow. In that way, it is invaluable to all growing businesses.”

Categories of risk

The Institute of Risk Management in the United Kingdom has identified four chief categories of risk, each of which involves internal factors within your company and external influences, all of which should be part of a growing company’s risk strategy.

Financial risks

Financial risks arising from your own company chiefly concern liquidity and cash flow, your ability to extract money from your customers in time to pay your suppliers and other creditors.

External financial risks include changes in interest rates and exchange rates, as well as the availability of credit — which is, of course, also affected by your own creditworthiness.

Strategic risks

For the longer term, strategic risks that your company can influence directly include the chances of a worthwhile return on your investment in research and development and, conversely, the risk of losing business by failing to spend in that area.

Integrating other companies after mergers and acquisitions is another risk that falls into the strategy sphere.

External strategic risks include issues concerning competitors, such as a tough new rival launching onto the scene, or the loss of a key client.

Operational risks

Operational risks within your company include issues such as your accounting controls, IT systems and technology, recruiting and retaining key staff and changes to your supply chain.

These you are likely to have more control over than external operation risks, such as legislation and regulation that impacts on your business.

Hazard risks

Potential perils to consider as hazard risks include damage to plants or machinery, staff illness or injury, accidents, industrial action, theft, fraud, vandalism and natural disasters.

SOURCENOTE: Business XL