The added value of the risk manager in preventing enterprise risk resulting from internal and external agents
Who is the risk manager?
The risk manager is an essential and vitally important element in any business; the main task of the professional figure is to limit the company’s exposure by analyzing and anticipating potential risks arising from the external environment.
Its function is carried out in several aspects that include:
- the assessment of risks in a contextualized manner to the definition of a specific order of priorities in the economic, managerial and legal environments
- the preference of business policy to be supported, to optimize business performance following the order of financial capabilities in the short, medium and long term
- the definition of preventive measures to protect from external risk exposure
- the choice of any insurance coverage necessary to cover deficiencies not directly attributable to the company itself
- the coordination of the team to entrench, support and strengthen the risk culture and work toward the achievement of greater security.
What does the risk manager do?
While the theory appears to be a conglomerate of actions necessary to resolve the risk of financial and other exposures of the company, it is in practice that the absolute importance of having a good and qualified risk manager within one’s business becomes apparent, even more so when dealing with large companies that are used to operating in different and differentiated markets.
The first approach comes from analyzing data from the company’s history, so as to assess trends and create reserves to be used in special cases when the external environment becomes a protagonist and beyond the company’s control.
In line with the analysis of historians, a regulatory compliance is defined that includes various aspects and allows the markets to be monitored so as to intervene where possible with the stipulation of convenient contracts.
Some examples may be: evaluation of transportation companies, relationship with insurance brokers, management of credit institutions, compliance with current regulations.
The impact of environmental risk
One of the aspects that in recent years has characterized element of confrontation is the environmental risk that becomes a strength and added value for some realities that choose to keep the valuation paramento high and reinvent themselves following the canons of the current reference market.
The basis of business assessment becomes useful for several aspects that imply a broader interest aimed at improving the whole business: the identification of production flaws, mapping of the activity, qualitative and quantitative measurement of risks, financial and organizational performance, and the development of innovative techniques.
The direct consequence of improving the elements described above offers the company to make-where necessary-improvements that, while primarily aimed at lower environmental impact, as a collateral consequence create dynamics capable of improving production and organizational performance.
Risk can arise from internal dynamics or from external elements that cannot be controlled, however, in some and specific cases it can be mitigated.
Internal risk
The most serious internal risk that can occur is the failure of the company as a result of financial strategies and investments that are wrong or not thought through at all.
Indebtedness is often the main cause resulting from a lack of or incorrect production planning, as well as from a malfunction of the production apparatus, a failure to communicate orders or a not at all thought-out procurement of raw materials.
In short, internal risk can often be traced back to incorrect planning or failure to plan the various work activities between the arrival of the order and the fulfillment of the order.
External risk
The elements that contribute to external risk are incalculable and unpredictable.
However, through the sensible use of resources and the creation of reserves, it is possible to achieve some sort of protection where predicted and catastrophic events occur, as was the case with the recent COVID-19 pandemic.
Companies that have chosen to reinvent themselves have taken advantage of internal dynamism and managed to stay afloat or in some cases explode their business by tapping into a new target niche.
Internal analysis and continuous monitoring of the parameters of control and risk are essential elements in responding in zero time to market needs, even when these become unpredictable and global in scope.
What are the main types of business risk?
To best understand business risk in the modern environment, it is necessary to break down business risk into its different categories.
Each of which is responsible for the “slice of the pie” that make up the risk as a whole, and if monitored well, enables functional control and monitoring to be activated for the growth and inclusion of new activities and production lines.
Financial risk
Arises when leverage is used in the correct manner and is amplified when the company chooses to use debt lines as financing.
The element that stands out most in this type of management is the constant need to deal with interest and rising rates.
Rising rates are an external risk factor that, if internal risk is well weighted, becomes controllable and avoidable.
The direct consequence of financial risk exposes the company to several other risks that affect the business environment.
Liquidity risk
That is, everything that is related to the short term and decreases the economic power of the individual entity by causing the company to run out of financial resources, which, in the absence of reserve, leads the company to a moment of crisis.
Credit risk
Poor pulse or improper management of payment timing from customers becomes a boomerang that leads the company to periods when it has no revenue due to a rambling policy of resource management.
External risk is the customer’s difficulty, which can be weighed by choosing deferred or alternative methods or solutions for payments.
Market risk
Fluctuating markets as a direct result of changes in conditions including price, rate, commodity, and foreign exchange can create crisis situations to be resolved
by choosing to bargain with their suppliers and entering into contracts when the market rotates in their favor.
Compliance risks
Attention to the regulations in place in the area in which one operates becomes a risk in the modern environment as there is a risk of disrupting production activities due to flaws in the system or lack of attention to the regulations in place.
Criminal and civil consequences in addition to image damage become complex obstacles to overcome as they imply bad faith in the company’s vision.
Strategic risks
Strategic risk is generally related to an overly revolutionary view of the market that has little to do with and avoids taking into consideration the real situation.
If the economic variables are external factors, the need to create reserves becomes the only methodology for preserving the stable foundation of the business.
Analysis of the external environment is indispensable and allows one to assess how and where to move, such as observing the movements of a competitor and choosing to focus on technological innovations or other foundations that may represent added value.
Operational risks
Business operations is a wide-ranging factor that intercepts various topics and actively collaborates in the proper functioning of the company.
State-of-the-art machinery, operated judiciously, in full operation, up to safety standards and properly maintained become essential.
At the same time, properly educated operators offer their added value when they are able to itncertain an obstacle or malfunction and, instead of stopping the process choose to intervene and solve it by bypassing the obstacle.
This is ensured by scheduled maintenance and business management that takes human value into account.
Reputational risks
The need to always look your best is an essential factor in being chosen by your target customers.
Several studies show that the digital storefront is an essential element and represents the “0 moment” in which an individual begins to become interested and build an opinion about the company and the possibility that it can guarantee the resolution of one’s problem.
The next step is to transport the individual into reality by making sure that what is present in the digital world matches the real way, so as to provide continuity of thought.
Pure risks
Risks that struggle to be budgeted for by a company are called pure risks and are subjugated to natural disasters, accidents that can generally cause damage to third parties, and theft.
Modern business environment risk: the ranking
The continuous evolution of society, events of different kinds that characterize everyday life, and the political, economic and managerial influences that increasingly intercept and shape business needs have shaped and changed-sometimes distorted-the ranking of environmental risk.
In the modern era it is necessary, unlike a few years ago, to take into account and add parameters that were unimaginable, or increase the importance of other factors that might once have been considered second-rate.
The indication allows you to consider your business and take cues to analyze and make improvements.
A survey by Allianz defines an interesting and skillful ranking for analysis.
Among the top spots are:
- Cyber risks
- Business interruption
- Energy crisis
Next come factors that remain stable over time and represent known external risks: - Changes in the macroeconomic scenario
- Climate change – hence the increased importance of the environment
- Changes in the legislative and regulatory scenario
- Natural disasters
- Fire, explosions
- Changes in markets
Then concluding the top 10 with a factor that is likely to move up the rankings in the coming period: - Political risks understood as: war, terrorism, riots
Strategy to mitigate risk management
The trend of risks is in itself – the term itself says it – not very predictable, the ability of the risk manager is demonstrated through the creation of potential solutions capable of keeping intact the achievement of the set goal, alternating the procedure depending on the risk – or obstacle – that is encountered.
In order to achieve a result, it is necessary to proceed through planning and control strategies, combined with the enhancement of human capital capable of accentuating the added value present in the company, all of which must be combined with the assessment of risks of an environmental nature internal and external to the company’s reality.
The strategy to best manage enterprise risk is developed around 4 essential and fundamental steps:
First, it is essential to identify the risk in its being and check how much it may affect the business objective.
Second, it is useful to analyze the risk by hypothesizing and calculating-where possible-the consequences.
Next, it is necessary to respond to the risk by putting in place a custom-built strategy that overcomes the obstacle and enables the risk to be mitigated.
Finally, it is necessary to monitor the outcome and keep the risk under control so as to intercept any new opportunities proposed by the market and not yet developed.
Prevention: a sui generis solution
The risk manager chooses to group his vision of action in a phrase that although it seems obvious, in application stirs up all the difficulties and perplexities of implementation: prevention is the best insurance against internal and external risks to the company.
If with regard to internal risks first of all the rule of safety applies-which is developed around both financial management and the safety of workers, with regard to external risks it is necessary to observe the market and all that goes with it.
The modern business environment is focused on two elements: digitization and climate change.
Regarding digitization, it is advisable to create a virtual reality that reflects as much as possible what the company experiences on a day-to-day basis, so as to avoid creating false expectations and increase corporate reputation.
With regard to climate change, the improvements to be made pour over the use of technological machinery or at least the least polluting as possible or on analyzing the process so as to make improvements, a practical example is to revise the maintenance plan that allows on the one hand to solve the safety issue and on the other hand to keep the production cycle “clean.”
