Identifying Risk Across the Enterprise
By Alan Taracuk
In
the January 1, 2009 edition of CFO Magazine
, an article entitled Rethinking Risk referenced a recent
survey of 125 CFO’s. The survey
reports that 62% of the respondents blame the financial crisis on “risk
management’s inability to understand complex financial instruments”. It states that nearly 75% of the
executives rank risk management ahead of many key issues facing the finance
community, and that nearly half expect to implement broad changes to their risk
management policies and practices.
The article goes on to say the board, particularly external directors,
is asking increasingly pointed questions about the risks to the enterprise and
how they are being managed. Perhaps
these questions are the key impetus behind the CFOs’ planned increased focus on
risk management.
While we laud the increased focus
on risk management by the board and the financial management, we must also ask
if it is enough. Until recently,
most board level interest in risk has been focused on governance and compliance
issues. Too often, by the time
risks come cross the CFO’s desk, their ability to mitigate the situation is lost
or insignificant at best. As the
article points out, “It’s not enough to have risk management, you have to practice risk management.” If the practice of risk management is
important to the board and the office of the CFO, particularly in these
uncertain economic times where risks are coming from all directions, doesn’t it
make sense to adopt risk management practices across management - across the
enterprise?
In order to spread the concept and
implement risk management practices across the enterprise, the optimal approach
would be to conduct an enterprise risk assessment. The purpose of starting with an
enterprise assessment would be to address typical human behavior that (with a
lack of data to suggest otherwise) will come into play in our management
behavior. As humans, we tend to
focus on what we do well, not necessarily what we should be doing. An important characteristic for an
enterprise risk assessment, or any risk assessment for that matter, should be
speed. In the best of times, time
is of the essence. In this economic
environment, speed is even more crucial.
The second important characteristic of any risk assessment should be
accuracy. Is a particular situation
bad or really bad? A good
assessment should provide a measurement system and a set of benchmarks against
which the measurement can be compared.
The third critical characteristic is weighing. The biggest fire is not always the
hottest one. There needs to be a
method for combining the performance assessment with its weight to determine the
areas with the highest degree of risk and therefore, needing the most
attention.
In order to provide more tangible context for this article, let’s look at four areas of the enterprise and examine how risk management could be applied to reduce the risk to the overall enterprise. The four areas are Near Term Achievable Revenue, Order to Cash, Internal Initiatives, and Future Revenue.
Near Term Achievable Revenue
Every enterprise has a revenue
forecast for the next month, the next quarter, and the next year. The key question is how accurate is it;
or to put it another way, how achievable is it? Sales cycles are getting longer. Customer buying criteria is
changing. Customers’ budgets are
getting cut. In previous articles,
we discussed that Brand is a major factor influencing sales cycle time. We also discussed that in these economic
times and without tangible actions, the Brand can erode fast and
significantly. Product Managers,
Brand Managers, Sales Managers, and General Managers should be asking, “Is our
Brand at Risk?” “What are we doing
to maintain and strengthen our Brand?”
If the response from Marketing is, “…our Brand is fine; our customers
know us and trust us”, then maybe those sales numbers aren’t so accurate, and
the revenue plan is not so achievable.
If the organization has performed a Brand Risk Assessment and the
response from Marketing is something like “…our Brand Index was measured at 95%
in June of 2008 and was measured again in December of 2008, scoring 90%. We have taken steps…to regain those lost
points, but based upon historical data we believe that we have not slipped
enough to significantly degrade our sales cycle.” Maybe those sales numbers are
achievable.
As buyers are becoming more
demanding in their purchasing decisions’ (assuming that Near Term Revenue is
coming from existing offerings) has the perceived risk of your offerings
increased? Buyers still choose the
offering with the least risk. How
do customers and buyers rate your offering? What is the competition doing to make
their offers more attractive? An
Offering Assessment can provide valuable insight as to how customers and
potential buyers view the value and risk of your offering. Armed with accurate tangible results, it
may be possible to make fast, low cost changes to the offering in order to
improve its appeal and lower its risk.
This, in turn, provides more accurate, more reliable, and more achievable
Near Term Revenue forecasts.
Focusing on the performance of the Brand and assuring it will be at least 85% means that you are at parity with the best of the competitors. Driving the Brand Index higher represents a significant competitive advantage in shortening the sales cycle of the enterprise as well as the business partners. This competitive advantage may be the key element in pulling a sale forward and enabling achievement of the revenue plan.
Order to Cash
In this economy, many of your
suppliers, competitors, and customers are struggling to survive. While supply chain is the more common
vernacular, supply web is probably more appropriate. In many industries, the interactions are
complex and any disturbance can have an enormous ripple effect in all
directions.
What would be the impact on your
ability to deliver an order if one of your key suppliers goes bankrupt? How should one assess the viability of
their suppliers and the risk of their collapse? Customers can often become domineering
in these situations and demand a detailed response from all their suppliers
detailing the supplier’s financial health.
This approach may ruffle a few supplier feathers, but it will provide the
customer with an accurate picture of the situation and adequate handle on the
customer’s risk. This approach
unfortunately is often too cumbersome and time consuming to be repeated; in
today’s economy, yesterday’s picture may not even resemble today’s reality. The appropriate assessment process
should be quick, easy to complete, and repeated often.
Repetition is required as the
ripple effect causing harm can be coming from many directions, and the root
cause, not obvious. When a
competitor dies, the survivors are presented with an opportunity to claim the
deceased competitor’s market share.
Opportunities can be deceiving.
In many industries the supply bases are so intertwined and their margins
so thin that the collapse of your competitor may also signal the collapse of the
supplier. The failing supplier may
also be one of your suppliers and now what started as an opportunity has
resulted in a risk to you.
The risks are not just with your suppliers and competitors. How are your customers doing? We have already documented that customer demands are increasing, but do you understand why? What are the critical unmet needs of your customers? Providers that are responsive to customers’ needs in tough times are more highly favored in subsequent good times. Be careful though - being responsive does not mean being reckless. What is your customer’s financial status? Needs may not just be in service levels or pricing. Do you need to change shipment sizes or payment terms? Having a stack of invoices that can’t be paid does not necessarily help either party.
Internal
Initiatives
When times get tough, one of the
first things many companies do is cull their initiatives list. Some will be cut, some will be
classified as strategic and kept (sometimes with scope changes) and some will be
put on the shelf until times are more appropriate. The question is not whether this is the
appropriate course of action; the question should be how are these initiatives
evaluated, ranked and categorized.
Project sponsors are asked to
identify the most important projects under their purview. Project leaders are asked a range of
questions from, “can the project finish on time and on budget” to, “can the
project finish early on a lower budget?”
Quite often and through no fault of their own, the people answering the
questions do not have enough knowledge and experience to provide a robust
accurate answer. Valiant project
leaders will step up and “get the job done sooner and with less budget”, if
management keeps the project alive.
Unfortunately, the question that
often gets left out is, “When will the project achieve its ROI?” Most, if not all of these projects were
chartered as a step to improve the company and move its performance towards best
in class.
A robust initiative risk
assessment should assess project performance to date, including what has not
been complete that should have been (risk to downstream activities) and tasks
that have been completed pre-maturely (risk of required rework). The assessment should provide an
accurate projection of time required to complete the project, the expected
budget necessary, and the projected level and timing to realize the value. The assessment should be completed
quickly as time is usually of the essence.
The assessment should take into account the knowledge, experience, and
performance of the project team. It
should be more than a checklist of questions to ask one’s self. In order to provide an accurate gauge of
how good is good, how bad is bad, and what is this really going to take, the
assessment tool should be built on a database of similar project experiences and
be able to compare this project to best in class.
Figure 1 displays an example where, unless mitigation steps take place, “My Project” will never achieve Best in Class value. This level of achievement may not have been the objective for “My Project” but if it was, there is likely a risk to downstream performance objectives. If not, from this deliverable it is obvious what level of opportunity is still left on the table.
Future
Revenue
History has shown that the leaders
emerging from an economic downturn are those who attack the situation with new
and innovative products (either in their existing markets or new markets.) Innovation occurs when someone has the
inspiration to fulfill unfulfilled customer needs or unidentified customer need
with new technologies, existing technologies applied in a different way, and or
with a new business model.
In order to achieve innovation,
many companies focus on the technology side of the equation. In these tough times, increased scrutiny
is placed upon the financial side of the equation. While these are important aspects and prudent things to do, NorthPoint’s
research suggests a different focus.
As shown in Figure 2, average companies spend between 3-11% of their effort on their Buyer Needs Assessment, and between 24-37% of their effort on the Financial Assessment. Leading companies spend between 18-23% on their Buyer Needs Assessment, and only 9-11% on the Financial Assessment. The results are dramatically different. The leaders spend between 83-107% of their budget and achieve between 94-137% of their revenue plan. The average company spends between 111-138% of their budget to garner only 66-68% of their revenue plan.
The risks here are clear, if not enough attention is paid to truly understanding the unfulfilled and unidentified needs of your customers and buyers, then the probability of developing an innovative product and delivering on a revenue plan is not good. A good product assessment will include not only a review of the technical and financial aspects but also an increased scrutiny as to how intimate the team is with the customer.
Summary
Risk Management for the enterprise is becoming one of the most sought after skills that that is similar to IT skills of the past decade. Quality became a strategic advantage originally in production and now across the organization. Now risk management and risk management tools are the new skills required for successful management across the organization in order to achieve a resilient process headed for “Peak Performance”.
Click here
to read Part 6 in this on-going series.
Mr. Taracuk is a recent addition to the leadership team at
NorthPoint Software &
Services, a provider of
Contact him at ataracuk@comcast.net.
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