How To Help Your Company Focus on the New World of Risk

Most corporate risk managers today are finding they've got a higher profile than ever before. The reason is painfully obvious: Risk itself has a more prominent place on the corporate agenda. In a world where customer loyalty is plummeting, new forms of competition are multiplying, deregulation and globalization are making the environment more complicated and unpredictable than ever, and outside forces from political upheaval and terrorist threats to technological change are repeatedly disrupting "business as usual"--in such a world, risk is no longer the province of a few specialists. Instead, it's near the top of the list of high-priority issues for virtually every manager.

But these new realities don't make your job as a risk manager any easier. They may help you capture your boss's attention. But they don't tell you how to launch a focused, productive conversation about risk that can help your company prepare for the (almost) unforeseeable threats you face today, tomorrow, and the day after that. In this article, we'll offer three tips about how to start that conversation, using the new-found salience of risk as a springboard for changing how your company thinks about and deals with uncertainty.

Tip #1: The world has handed you a broader mandate--use it!

Not so long ago, in corporate circles, "risk" was seen as being chiefly about compliance issues: What must we do to keep the SEC off our backs? To get approval from the FTC for our planned merger? To make sure we'll be covered by insurance in the event of some kind of disaster? To meet the tough new rules mandated by Sarbanes-Oxley? But risk isn't just about compliance any more. Today, it's about the new world of strategic risks that threaten your company's business plan--and that have already brought down a host of once-great companies in almost every industry sector.

In our new book The Upside, we explain the seven major kinds of strategic risk that every business needs to know about and prepare for: project risk (when your next big initiative fails); customer risk (when customers abandon you); transition risk (when unexpected changes in technology or business design undermine your company); unique competitor risk (when a Wal-Mart rides roughshod over your industry); brand risk (when your brand becomes irrelevant or unappealing); industry risk (when your industry becomes a no-profit zone); and stagnation risk (when growth grinds to a halt). These seven threats cover the gamut of risks that can destroy most companies' business designs--and they represent the kinds of risks that every corporate risk manager needs to have on his or her radar screen.

Tackling this new, broader risk mandate begins with taking a close look at your business's current risk story. Consider each of the seven varieties of strategic risk, and examine how each one applies to your company. Remember, strategic risk isn't a matter of black-and-white. Each type of risk exists on a spectrum, from the most extreme to the least extreme--just as the risk of an earthquake may range from a devastating quake measured at 8.0 on the Richter scale (which can destroy entire communities and cause hundreds of deaths, as happened in San Francisco in 1906) to a mild shock with a Richter measurement of 5.0 or less (which might merely shatter windows and crack walls in buildings near the epicenter of the quake).

For example, industry risk may take an extreme form, in which case an entire industry may be transformed into a no-profit zone, as occurred in the airline industry during the past twenty years. Or it may be milder, as when an industry suffers eroding profit margins due to increased R&D costs (as in pharmaceutical development) or rising capital costs (as in semiconductors). You can think about the risks you face all along this spectrum, with the severity of the risks requiring different levels of response and preparation.

Start the conversation inside your company by educating your boss and your colleagues about the new world of strategic risk. Discuss the seven types of risk and look at an example or two for each one. Chances are good that you'll see heads nodding around the table within a few minutes of launching the discussion. (In their guts, most managers understand how their businesses are threatened by strategic risk, even if they may never have used the precise term before.) After half an hour, you'll be well on your way to redefining risk in the new, broader terms that today's challenging business environment demands--the essential first step in getting your company ready to master the risks it faces and even transform them into opportunities.