This article originally appeared in the July 2015 issue of Smart Business Philadelphia.
For many owners the value of their business is the largest asset on their personal balance sheet. As such, it is critically important to manage risk factors that could reduce opportunities and diminish value.
"Evaluating and addressing risk through an effective enterprise risk management process is fundamental to achieving a company’s goals", says Stephen Christian, a Director at Kreischer Miller.
A growth strategy without addressing attendant risks may result in unexpected consequences which limit the chance of success.
Smart Business spoke with Christian regarding the importance of an enterprise risk management system for growing, privately held companies.
What is enterprise risk management?
Enterprise risk management (ERM) is most often defined as methods and processes used by organizations to manage risks related to the achievement of objectives. Risks come in many forms—geopolitical, financial, customer, supply chain, regulatory, litigation, rising costs and so on. Properly managing these risks will help to achieve desired goals.
What does risk management have to do with growth?
All companies that pursue growth take on risk—increasing headcount, adding equipment, entering into new markets, investing in new technology, dealing with new suppliers – all have attendant risks that should be anticipated, planned for and managed. If you omit risk factors from strategic planning, you will be more vulnerable to interruptions and road blocks to growth.
Isn’t this a public company issue?
Absolutely not. Public companies are often larger and more geographically dispersed, thus dependent on systems and processes to drive success. They generally have significant resources invested in evaluating and planning for risk factors that may impede success. Private companies, although perhaps not as large or sophisticated, operate in a fast-paced, complex and, more often than not, global marketplace.
We live in a new era of growing and diverse threats and obstacles to our businesses. All companies must protect their strategy and growth desires by effectively managing risk.
Who should be responsible?
Assuming you do not have a risk management department headed by a chief risk officer, most often this initiative is led by the COO or CFO.
Such a person is often in the best position to look across the organization and focus on the big picture.
This person in turn communicates with the CEO and/or board of directors. The leader of the initiative will have strategic interactions with key people throughout the organization to discuss potential risk factors and their possible impact on desired strategies.
How do you implement an effective ERM system?
First you need to understand the importance of such a system in achieving your goals and be committed to setting a tone at the top. Then assign leadership responsibility to the right person and clearly set forth the expectations for the initiative. The group or person charged with developing the ERM system will identify risks that could impact the business, assess their likelihood and magnitude and determine appropriate responses.
This process often involves scenario planning—what happens if costs go up, access to inventory from another country is interrupted or employment markets tighten. An often overlooked aspect of a successful ERM system is the need to periodically update your findings. We live in a constantly changing world and these changes often impact the risk factors that can affect a successful business.
Companies need to be resilient and anticipate obstacles to growth and success. Don’t wait until it is too late to plan and make adjustments. The earlier you anticipate potential problems, the more alternatives you will have to navigate changes necessary to ensure you accomplish your goals. So as you plan your future growth strategies, you will be well served to make ERM an integral part of the plan. ●
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