Risk intelligence vital for business survival

Aug 04, 2009

RISK. This is one of the most feared situations. However, it does not need a seer or sage to recognise it. Risk is as predictable and devastating as a hurricane and a corporate scandal.

By Alex Twesigye

RISK. This is one of the most feared situations. However, it does not need a seer or sage to recognise it. Risk is as predictable and devastating as a hurricane and a corporate scandal.

But you need skills to detect the opposite side of the risk coin, represents opportunity, competitive advantage and growth.

Traditional approaches to risk management emphasise mitigation, focusing on the readily apparent risks facing a firm in the areas of security, privacy, credit, regulatory, technology or fraud. These threats are important and must be addressed.

But enlightened risk managers do not worry just about the bad things that could happen, such as the theft of sensitive customer data. They also consider the good things that might occur like introducing a hit product on the market.

It’s vital to evaluate potential crises and consider risks that are linked to success to capitalise on opportunities. These are the ‘two faces’ of risk; “rewarded risk” and “unrewarded risk”. Unrewarded risk represents what poker players call “table stakes”. Many examples of unrewarded risk appear in business. For instance, a firm in Uganda must comply with payroll tax, withholding laws and pay bills. Yet firms that do all of these tasks timely and competently don’t see their share price surge as a result.

These kinds of activities simply meet expectations of shareholders, regulators, suppliers, analysts and other stakeholders.

The attendant risks cannot be ignored, but the primary incentive for addressing them is value protection, not value creation.

Conversely, rewarded risks represent the strategic bets that you place during your poker game. In business, rewarded risks are those bets you make as you develop new products, enter new markets or acquire new firms. Taking rewarded risk spurs value creation. Fixing just one side of the coin won’t help. Focus on value creation to the exclusion of value protection and you will quickly find yourself on the slippery slope of non-compliance, litigation, reputational risk and other nastiness. Similarly, address only unrewarded risk and your firm may survive, but never thrive.

When considering these two faces of risk, one can coin a business maxim: Organisations that are effective and efficient in managing risks prosper.” That is, firms make money by taking intelligent risks and lose it by failing to manage risk intelligently.

If risk is not on your radar screen, it’s time to upgrade your detection equipment. without” imperative. A convergence of factors has converted risk management programmes from a “nice to have” option to a “can’t live without” imperative.

Risk has also become personal as the out-of-pocket settlements have hit-hard directors and executives across the globe in recent shareholder lawsuits.
The writer works with Deloitte Uganda atwesigye@deloitte.co.ug

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