Risks to operations. Market share. Profitability. Business leaders are surrounded by risks big and small. From Target to Wells Fargo to Facebook and Tesla, it’s not difficult to reference a situation that emerged and severely damaged a company’s reputation and bottom line. Your risk profile hinges on your susceptibility to events that may be internal and known – or external, unknown, and unexpected. With such a varied set of sources and impacts, resilience depends on numerous factors, including the nature of the industry and the maturity of your organization.
Beyond your ability to weather risk, the nature of your focus also can determine your ability to spot and pursue opportunity. Companies that are more focused on shoring up resources against present, tangible hurdles often inadvertently add risk to the normal costs of doing business. Specifically, they compromise the mindshare necessary to remain vigilant against uncertainty and poised to pursue potential.
Across a host of industries, we see this balance manifest in how companies build and act on their risk register. CPG organizations constantly monitor factors like quality and supply chain health to ensure their products live up to their brand and reputation. Financial institutions face liquidity risks, credit risks, and market volatility. Aerospace has safety controls to ensure take-offs equal landings.
The act of compiling and monitoring a risk register isn’t new. It’s a well-used method of categorizing and prioritizing focus. The general thought is that the risks you plan for can be mitigated, making your organization more resilient. Components of that work, like taking inventory and assigning responsibility for monitoring and maintaining the risk register are impactful. They are not, however, sufficient. A more deliberate process of uncovering blind spots is necessary to discover real opportunities. For example, consider that a set of known risks are contingent on future events. Proactive protection and cost avoidance activities can free up capital that then can be used to generate new sources of bottom line revenue.
It’s two sides of one coin. Let’s look at a few examples.
This is not Investopedia or an accounting tutorial. (I promise). The quick definition of contingent liability is a potential liability that may occur depending on the outcome of an uncertain future event. The probability of the contingency and the estimated amount of the liability are noted in the accounting records. If you have particularly toxic financing that you may be unable to fund due to market changes, liquidity issues, or an adverse legal situation (for example), you have a contingent liability. By holding cash to cover that liability, you reduce the capital you could otherwise use to reinvest, make capital improvements, or put toward inorganic growth. You are missing out on opportunities because of the risk you carry. By taking a proactive approach to inventorying, identifying, mitigating, addressing, or reinsuring the contingent liability, you free up capital and create the opportunity to pursue positive benefits to the organization. Yes, this is a simplified explanation of the complex process of insuring contingent liabilities or unwinding them, but it begs the proactive approach of inventorying and exploring other more forward-focused strategies to address.
Opportunistic Risk Mitigation
Let’s define opportunistic risk mitigation through an example. Passenger airlines have a massive number of constraints on their business model. Customer revenue in a competitive market must stay high through investments in things like technology and ancillary offerings. The cost of flying must be kept low through tightly controlled expenses. The cost of jet fuel puts that balance at risk. Jet fuel is a volatile commodity. Its fluctuating price can deeply erode an airline’s profitability. Southwest Airlines has focused on fuel hedging since the turn of the 21st century. That risk mitigation efforts brought them to the head of the U.S. passenger airlines class through the 2000s – an era marked by consolidation, bankruptcies, and wage disputes across the industry. The company avoided the fray thanks in part to its hedges (paired with other forward-thinking decisions like maintaining a single-bodied fleet and shunning the hub-and-spoke model). They kept their cost profile low, invested in their workforce, and have continued to pass the savings on to their customers, giving them that vital competitive advantage. Reinvesting capital saved through a forward-leaning risk mitigation strategy set Southwest apart and drove their profitability.
Risks exist. They are known, unknown, big, and small. That fact is not up for debate. What is more important to consider is how your organization can maintain strong resiliency and reputation as risks become more complex. By taking a hard look at your tangible, contingent, and sophisticated threats, you create the space to mitigate them, as well as to capture opportunities to redirect mind space and capital for profit-generating activities.
As we work with clients, we challenge them to consider how they are looking at and registering their risk. We assess internal and external hazards, along with the costs of protecting against their known and unknown impacts. Even companies that have a designated department of risk may be missing out on addressing factors that are impeding growth or that are producing opportunity trade-offs. We challenge them – and you – to take a different approach to consider risk. Start by creating space to wonder about what is ‘out there.’
It’s time to ask better questions about all the events and scenarios that should be part of your future-focused planning.