Virtually everything a business leader has to do today comes down to managing, mastering and exploiting risk in the service of improved performance. It takes shape in the decisions a company makes about its strategic direction, capital structure, scope of operations, governance, people strategy and operating processes.
In the 21st century, how nimbly a company identifies, quantifies and understands the interplay among its risks will determine its success. We believe there are seven imperatives for the successful management of risk that apply to virtually all businesses:
1. Understand the full magnitude of the forces affecting the business world. An array of complex forces affects prospects for business in the future. Successful companies prepare by making assumptions about the impact of those challenges on their business and acting on the assumptions. That could mean moving business operations to other parts of the world sooner than anticipated, or developing a new approach to bring down the cost of domestic operations.
2. Recognise that managing risk is ultimately what business is about today. Every decision an executive makes must assess the risks involved and ways to address them. Is the company in a commoditised industry? Has technology changed the business's operating model? Are large segments of the workforce qualified to perform work as the business model changes?
3. Put people into the risk equation. People are central to every kind of risk decision, from the cost structure of labour and the competitiveness of that structure, to the emerging skill sets required, to management's ability to engage the workforce to maximise accountability for results. All companies deal with both people and risk, but only recently have they started to connect people and risk to drive better business outcomes.
4. Understand the power of employee engagement. Engagement is an increasingly important concept in companies today. Enlightened ones know there is a direct relationship between the energy and commitment of employees and business results. Evaluating current and desired levels of engagement can make a dramatic difference to key business outcomes.
5. Hold leaders accountable for engaging people. Towers Perrin global research shows that employees, irrespective of geography, have significant doubts about their leaders' competence in taking the company forward, and many do not believe they keep their employees' best interests in mind. These doubts have a significant impact on how likely people are to stay with the company and their willingness to provide discretionary, ongoing effort. The ability of leaders to turn these negative sentiments around can lead directly to a powerful competitive advantage for their organisation.
6. View risk holistically. Enterprise risk management is a well-known concept that relies on a complex array of modeling, mitigation and risk transfer tools and approaches. But ERM is also about understanding the vast, complex connections across risks throughout the enterprise, measuring them against each other and determining which offset each other, and understanding which must be carefully managed and which could be exploited for competitive advantage.
7. Make every individual in the organisation a risk manager. Towers Perrin research shows that employees value autonomy over their sphere of influence and input into decisions that affect their work and that of their unit. It's a short step from there to helping each individual understand the business risks inherent in his or her job and ways to master those risks. While the risks range in severity, a collective focus on understanding and managing risk can help bring every employee more closely into the business, and pay huge dividends in performance.
Bearing these seven imperatives in mind can turn business risks into tangible rewards and competitive advantage.