Leadership. Innovation. Change management. Strategy.
These are just a sample of the hot topics on the minds of owners and executives. And why shouldn’t they be? They’re exciting, and focusing on them is intellectually stimulating and provides an opportunity to think about the big picture. Unfortunately, when stacked up against these other topics, risk assessment often falls to the wayside. However, identifying risks and mitigating them are the cornerstones of sound strategy. The good news is that risk assessment does not have to start as a long, laborious process. Following are three simple questions you can ask to help you uncover risks and identify eye opening strategic opportunities.
1. Where do you get your money?
Asking this question will help you focus on risks resulting from customer, industry, geographic, or product concentrations. Once identified, management can consider potential responses to those risks. For example, offering concessions to a key customer in exchange for a long-term commitment could actually increase business value and allow you to channel sales efforts into the development of new relationships that reduce long-term customer concentration. If you have industry, geographic, or product concentrations, the development and successful execution of buy-side M&A strategies could reduce overall concentration and open up new markets for your products. Alternatively, these types of concentrations could lead you to conclude that the best way to maximize value is to pursue an exit via sale to a strategic buyer who is willing to pay a premium to gain access to particular products or markets (the path one of my previous companies successfully pursued).
2. Where do you spend your money?
Answering this can help you identify key employees and key suppliers, as well as geographic or commodity price risks. After identifying these risks, step back and consider alternatives to mitigate them. For example, if you do not have noncompete agreements with key salespeople, you may run the risk of
losing both key employees and key customers. Offering compensation and benefit changes in exchange for an agreement not to compete might reduce risk as well as better align the employees’ interests with the company’s. If you have a significant dependence on a key supplier, entering into longterm arrangements with the supplier or entering into arrangements with new suppliers (even at slightly higher short-term costs), might reduce risk and lead to increases in long-term value. If you have geographic or commodity price risks, the implementation of effective hedging strategies can help you get a leg up on competition (this was one of the strategies that helped Southwest thrive when the rest of the airline industry was in turmoil).
3. Where do you keep your money?
Asking this will ordinarily lead to a whole series of related questions. Is it all in one institution? Is that institution adequately capitalized and insured? Which employees have access to balances before they reach the institution? Which employees have access to funds once at the institution? All of these related questions will help uncover potential gaps in internal controls and insurance coverage that in almost all cases are easily remediated.
Finally, it is important to ensure that risk assessment is not a one-time exercise because the world of commerce is dynamic and new risks are constantly emerging. Investing the time necessary to answer these questions in a thoughtful, structured manner can not only mitigate risks, but help you build long-term, sustainable value.