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How To Manage Risk Effectively

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risk analysis

by former CTO of Eriscsson and President of Blackberry, Sandeep Chennakeshu

Risk is not a tap but a potential break or leak in our system. If left unchecked, it can result in weak or no flow of water through the main pipe.

Risk is categorized as a combination of market factors (like macro-economic events such as recessions) and company-specific problems. A major goal for you as a business leader is to demonstrate to investors that your company is well-run and has low risk. When your company excels in operations and its financial results are predictable, it is more likely to be assessed as less risky. The best you can do is mitigate risks as far as possible, planning and adapting when situations arise.

The approach I take to assessing the risks that could affect my castle’s foundation — its cash flow and business model — is as follows:

  • Categorize the risks my company or business faces.
  • In each category, ask questions regularly to assess the risk.
  • Address identified risks immediately with corrective actions.
  • Follow up on the corrective actions every month until the risks are resolved.

The following are examples of categories and questions I use to assess risk. You can modify or expand on these for your own business.

Customer Revenue Risks

  • Does the company have a concentration of a few customers who generate a high percentage (say above 30 percent) of the revenue?
  • Are these major customers geographically dispersed or in one region (to assess how susceptible is the company to regional risks)?
  • How resistant are the sales orders from these customers to macroeconomics or other factors?
  • Do these customers have alternative sources of supply via competitors, and is your company’s share dropping or rising when compared to these competitors?
  • Does the company have a healthy sales pipeline to replace revenue from customers whose revenue is at risk?
  • Does the company get paid for its products in one currency or several? If the latter, does it hedge for currency-fluctuation risk?
  • Are the company’s products still valued by customers? How sticky are these products to the customer?

Supply Chain Risks

  • How resilient is the company’s supply chain to disruption from its suppliers? In other words, does the company have geographic diversity of supply and alternative sources and alternative materials in its supply chain, to mitigate shortages, natural disasters, or regional or supplier-centric disruptions?
  • Does the company buy all its products in one currency, and, if so, does it hedge for currency fluctuation risk?

Execution Risks

  • How forward-looking is the company’s roadmap? Could it be surprised by a competitor or disruptive trend?
  • How reliable is the company’s execution on new product introductions (NPIs)?
  • How reliable are the company’s sales-demand forecasts?
  • How reliable is the company’s fulfillment of forecasted demand?
  • Does the company carry a lot of inventory for extended sales periods?

Capability Risks

  • Does the company have all the skills and experiences needed to manage its business model? If not, how will the company rapidly address this?
  • Is the company able to hire the best of the best for its business needs? If not, why not?
  • What is the company’s talent attrition for employees and executives, whether they leave voluntarily or are poached?

Legal Risks

  • What are the pending litigations and claims made by other companies or third parties against the company?
  • Does the company have good ethics and business practices, or does it often fall foul of the law?

Other risks, such as disruptions caused by natural disasters or changes in government regulation, also need to be considered and addressed. Unexpected events like the COVID-19 pandemic, which stunted businesses and disrupted our way of life when it spread across the world, need to be managed in unique ways. It is important to have processes in place to constantly assess risk so your company can shift and adjust its operating model when something like the pandemic happens. In response to COVID-19, many companies equipped and allowed people to work from home to avoid productivity loss.

Managing risk is a science and an art — and it also helps you keep your detective skills sharp. It is best to review the company’s risk-management plan every month to ensure all plans are in place to manage risk, with key executives responsible for each risk category.

*Excerpted from “Your Company Is Your Castle: Proven Methods for Building a Resilient Business” by Sandeep Chennakeshu

 

sandeep chennakeshu

As former CTO of Eriscsson and President of Blackberry, Sandeep Chennakeshu has spent thirty-four years in three industries whose products have transformed all our lives. Along the way he transformed businesses to grow profitably in a sustained manner using the principles outlined in his book “Your Company Is Your Castle.”