How do you reduce risk in your business? According to the 12th Annual Global CEO Survey, 92% of CEOs agree that information about risk is important or critical to long-term success. Only 23% reported having a comprehensive knowledge of the potential risks to their business.
Risk is about uncertainty. If you can put a framework around that uncertainty, then you effectively de-risk your activity. Sounds simple, but how?
We believe that by following 5 steps, every business can:
- Step 1: Identify the Risk:
Uncover, recognise and describe risks that might affect your project or its outcomes. There are a number of techniques you can use to identify risks (and we can help with these) but the output includes the creation of a Risk Register (a simple table).
- Step 2: Analyse the Risk:
Once risks are identified, you determine the likelihood and consequence of each risk. You develop an understanding of the nature of the risk and its potential to affect project goals and objectives. Add this information to your Risk Register
- Step 3: Evaluate or Rank the Risk:
You evaluate or rank the risk by determining the risk magnitude, which is the combination of likelihood and consequence. Make decisions about whether the risk is acceptable or whether it is serious enough to warrant treatment. Add this to your Risk Register
- Step 4: Mitigate the Risk (Risk Response Planning):
Assess your highest ranked risks and create a plan to mitigate these risks to achieve acceptable risk levels. Create risk mitigation strategies, with preventive plans and contingency plans in this step. Add the serious ones to your Risk Register.
- Step 5: Monitor and Review the Risk(s):
[THIS IS THE ONE THAT REALLY MATTERS!] Use your Risk Register to monitor, track and review risks. Do this by getting your team together to have open and honest discussions about the risk, the actions you’re taking and how well they are working to reduce risk in your business.
What is it?
In a way, reducing risk in your business is similar to supplier relationship management: both require analysis to determine their significance and how much time and attention they require. Businesses also tend to be very reactionary; they focus on what goes wrong rather than prevention.
Whose fault is it for not knowing what your risks are? Who’s responsible? If you haven’t allocated them a level of importance and urgency together in one place, you’re not going to be able to do anything about them.
This effectively means you’re in a constant cycle of putting out fires rather than preventing them. This costs time and money. Imagine how this could be turned into profit if you can reduce the amount of time you and your business invest in risk management.
But what can go wrong?
According to the LNS Research 2012-2013 Quality Management Survey, over 50% of manufacturing executives saw quality as a singular department, rather than an integral part of the company’s operations as a whole.
Cost increase: The Office for National Statistics has found the rate that business costs for SMEs in the UK have risen faster than national inflation. This will impact those who failed to mitigate risk most.
Change of law:
Brexit is arguably the biggest source of uncertainty in the UK, and indeed European business. There’s a potential issue that new laws relating to Brexit might negatively impact various sectors, making it more challenging to reduce risk in your business.
Supplier going bust:
If a major supplier to your business goes bust, you might be able to find another fairly quickly. But, if you can’t, then you risk losing revenue that they previously enabled by supporting your products or services.
Fluctuations in currency can become a minefield when setting a price for foreign customers and investors. The amount you agreed on cannot be set in stone because the exchange rate might change overnight.
Think about some scenarios
If you buy goods or services from EU countries and Brexit causes tariffs to go up, the cost of acquiring these will go up. The likelihood of this happening (high) is different from the impact (depends on the percentage costs those goods or services represent).
If your business is IT services and you supply some software, then it’s likely that the impact will be low.
If you’re an automotive manufacturer, lots of your raw materials will come from the EU and they represent a big percentage of your total product costs. This issue is high risk because of the likelihood of it happening and the potential scale of impact it could have on the business is also high.
As an aside, much as we’re all tired of the topic, it’s important for all businesses to assess the potential impact of Brexit, including issues such as tariffs. This way certain steps can be implemented to reduce risk and be prepared for the worst-case scenario.
Instead of just randomly listing various risks to your business, you need to organise and prioritise them. At the top of the pile will be high impact and high likelihood, of which there will usually be few. At the bottom of the table will be the low impact and low likelihood, of which there’ll be many.
Once there’s a clear categorisation of risk, from highest to lowest risk, you can focus on the most pressing ones. It’s an important step to pull together and collaborate in order to agree upon the best solution to reduce the likelihood and impact.
For example, if your most pressing risk is that you rely on a large flow of raw materials that are both scarce and subject to delay, the impact on production will be immense. To mitigate the likelihood of this happening, stock can be created, orders can be made earlier and alternative suppliers could be identified. The likelihood of having a break in supply is therefore reduced. To find out more about how to mitigate risks from your suppliers, click here.
When the risk mitigation plans are in place, you will feel different. You will have a sense of greater control and management oversight. Your decision making will improve. But, until you actually do it, the risks are there and growing. It might seem like a lot of work and you will need to review it monthly or annually according to the risk. You will need to continually assess whether the risk is still there and check the viability of the mitigation plans. You might need to change the plans. But it will be worth it!
To conclude, being proactive to reduce risk in your business is key to the success of your business. In the commotion of daily life, many risks are easy to ignore and if left unattended, they can be detrimental. By taking these 5 simple steps and instilling accountability, you can reduce overheads and increase the bottom line.