Identifying Risk Across the Enterprise – Part 7
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 Enterprise Risk Management software and services. He has assisted clients in all phases of New Product Development including creating an environment and the processes which foster the creation of ideas for new innovative products, reducing the cycle time and cost required to design, develop and launch those ideas into the market.
Contact him at ataracuk@comcast.net.
