De-risking the Downturn

De-risking the Downturn

13:46 23 May in Business

What role does risk management have to play in a recession? After all it was a failure of risk management that created this situation in the first place, wasn’t it? Well partly – there were a lot of bad decisions made on the back of good risk analysis and there were undoubtedly lots of “good” decisions made on the back of poor risk analysis, but that’s another story………..

 “We are where we are” as the saying goes. And where we are, for most companies, is a place of brutal cost-cutting in order to survive. So why would we spend time and money on improving our risk management processes at such a time?

Effective risk management can help us survive the downturn and provide a springboard to take advantage of the recovery, when it comes. And the ROI can be extremely compelling.

The key things that we need to do as businesses in these difficult times are:

  • Reduce costs: Many cost cutting exercises are done without effective analysis. The most sophisticated processes are done with spreadsheets and guesswork to produce a GIGO situation. By using a proven cost risk analysis process such as Quality Based Costing (QBC), you can accurately assess the cost risks to your business processes and projects. This will allow you to maximise efficiencies by ensuring that all key risks are managed and opportunities are taken. You will also be able to predict accurately the potential % confidence of meeting your budget targets and see the route to increasing that confidence level by managing quantified assumptions.
  • Retain clients: In a down-turn the last thing we want is to lose a key client. The easiest way of doing that is to not deliver on your promises. So for example, when you are delivering a strategically important project for a client, you must do everything that you can to deliver the key objectives on time, or at least manage expectations appropriately. Using timescale risk analysis you can virtually guarantee delivery on time (or even early!) by systematically working through the QBC assumptions and progressively increasing your confidence in meeting the milestones.

And when the green shoots do appear in your business sector, the most important thing is to:

  • Win new business: Risk is a touchy subject in sales situations. But good sales professionals know that risk can be a massive competitive differentiator if handled well. This will be the subject of a future De-RISK Bulletin but in summary the approach is to:
    • Assess your cost risk so that you can propose the most competitive price
    • Assess the timescale risks so that you convince the client that you will deliver
    • Shadow the competition by showing that their risks are not inherent in your offering

The last of these is almost impossible to do with traditional risk management processes, due to the fact that you would have to be overtly negative about the competition. Shadowing risk is easy to do using ABCD as you can simply talk positively about the key assumptions and (where appropriate) why you are so confident about the assumptions that the competition will undoubtedly see as risks. If the competition do not identify the risks that you are shadowing with your confident assumptions, the client will be alerted and be wondering why the risk has not been highlighted, so you win both ways!

So the bottom line is that there has never been a better time to invest in risk management than in the middle of a recession. In recent De-RISK engagements, the business cases have indicated massive ROI’s (eg: a £15k QBC assessment leading to the identification and management of £1m of previously unidentified risk and opportunity). Doing risk management effectively really can be a no-brainer, not despite the recession, but because of it !

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