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Sunday, May 1, 2011

The Return of a Stable Economy Could Pose New Business Risks


The markets are up. Companies are hiring again. And while it’s good news that earnings and profitability are up, for many companies there are still headwinds and concerns in the marketplace. One of those concerns may be the increased risks that your company has become exposed to as a result of weathering the down times. Over the past few years many companies cut back on their internal risk assessment and management functions in order to save money. They also cut finance and compliance staff, whether through layoffs or reorganizations.

The result of those cuts is too often newly formed blind spots or holes for many companies in their ability to fully understand their own operations and what might interfere with the firm’s ability to accomplish its key business objectives. So now as we start to come out of tough times, it should be an opportunity to take a hard look at where your company is going and what its key initiatives and strategies are, and what it should be doing to assess, monitor and mitigate key business risks.

For example, if a company enters new geographies, or changes its product mix, it should stop and ask ‘What are the 3 to 5 things that could get in the way of us accomplishing our goals? How will it impact our technology? Do we have the right people? Do we have a true understanding of our customers’ needs?’ Most of the attention has been on buttoning down financial risks in the wake of scandals like Enron, WorldCom and Lehmann Brothers. Rules from Sarbanes-Oxley to Franks-Dodd have closed many loopholes. But the more common operational risks often go unexamined, particularly at small and mid-sized companies. That’s a mistake that can be easily avoided.

While many companies talk about assessing risk across the enterprise, that assessment is often done in silos with, for example, different views of risk between the executive management team and the operations team. In fact, there might be several different risk assessments at a company, none of which are either connected or functioning well together.

It’s a problem that an enterprise audit can repair by identifying and managing risks. There are some basics steps the audit should follow:

  • Understand the company’s risk tolerance or profile. A bank or insurance company may be more conservative, for example, than a VC-backed tech firm.
  • Assemble the key management team and board of directors for tough conversations about where the company is headed and how it is going to get there. What are the company’s strategies, objectives and initiatives, and what are the processes that it is employing to accomplish its goals?
  • Reach an understanding of what obstacles exist to achieving the company’s goals. This information can be obtained through interviews, surveys, or a facilitated session with a consultant.
  • Plot the risks on a map to gauge the likelihood of those risks occurring.
  • Develop detail action plans that address the root cause of the risk and how it will be mitigated.
  • And finally, have a plan for continual follow up for risk assessment and management.
  • The end result should be better educated executives and improved embedded risk awareness across the company to minimize surprises in the future.

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