Web of Risk

Risk and risk management have evolved considerably over the course of the past decade. A barrage of extraordinary events — from Y2K, 9-11 and the H1N1 pandemic to Hurricanes Katrina, Ike and the financial meltdown — has compelled organizations to reconsider how they deal with risk and pushed them to identify quicker and more effective ways to manage it.

But just as one exposure is identified, others appear on the list: terrorist threats, the environmental impact of business operations, IT-related attacks, etc. etc. On top of all of this, companies still have to account for more “traditional” risks such as fires and natural disasters.

These major events — along with daily business challenges posed by realities such as complex supply chains, globalization and the recession — have raised concern among many organizations about preserving the integrity of their overall operations.

Understanding risk and adapting appropriately is critical, especially as the world becomes increasingly interconnected and interdependent.

SUPPLY CHAIN RISK

In an effort to trim costs, suppliers are outsourcing to companies thousands of miles away — including areas that have limited regard for sound risk management practices. Adding to the complexity, many of those suppliers are in turn outsourcing to companies with even lower production costs. In such emerging markets, the concept of risk management is still in its infancy; the knowledge of actual risk is not well known. In a day and age of thin inventories, any breakdown in this chain can spell disaster for business continuity.

To add to the risk manager’s challenge, many organizations outsourcing a key business process have a procurement function that typically focuses more on cost and quality than on risk. The performance of procurement departments is often measured on such cost criteria.

So it has become critical not only to evaluate new suppliers, but also to revisit existing ones to ensure their continued viability. It is vital to maintain strong relationships with every supplier and gain a thorough understanding of the processes and exposures at all of these suppliers’ facilities. Leading organizations do a “deep-dive” to understand the viability of their supply chain partners, but it’s not an easy task. Surveys show most risk managers struggle with managing supply chain risk.

Companies look beyond cost when it comes to site selection for a new facility, constructing a plant, signing a deal or deciding whether to work with a particular supplier. Many companies, for example, may consider the stability of the government in the country in which they want to operate. Furthermore, they might investigate the intensity of competition for vital resources like energy and water, which are sure to become major concerns in the coming years as global resources become strained.

Fortunately, there is a trend towards an increased global acceptance of risk management practices among companies in emerging countries that want to participate on the world stage. As companies from emerging markets increasingly compete in global markets, they must develop the same level of resiliency as their competitors from developed markets.

WEB OF RISK

Reputational Risk

Companies today face threats to their reputations, threats over which they have little control. An organization’s reputation is increasingly affected by the actions of its suppliers and others associated with it. When it comes to reputation, focusing on understanding one’s own risks and loss prevention is paramount: insurance alone will not make a company whole when it comes to protecting their corporate image.

Sustainability

Organizations are striving to meet their own sustainability goals and building green has become popular. Among the driving forces behind a company’s decision to build to more sustainable standards are increased regulations, environmental concerns, the enhancement of corporate image and return on investment.

As a result, many companies must now consider the unintended consequences of such pressures, actions and responsibility. In construction, for example, green building introduces an increasing amount of carbon during the construction phase, even though a larger percentage of carbon emissions occurs during a building’s normal, day-to-day operation. Still, it makes sense that it is better for the environment to protect a facility from fire and other major hazards than it is to completely rebuild one that suffers a major loss.

Loss Prevention

According to FM Global’s own published research, without effective fire protection systems, fire increases the carbon emissions of a standard office building by 1% to 2% (30-40 kg of CO2/m2) over its lifecycle. In areas exposed to natural hazards, such as wind hazards in the East and Gulf Coast areas of the United States, risk from wind damage also increases carbon emissions by 1% to 2% over the lifecycle of a typical industrial building. Clearly, preventing a building from destruction can play a significant role in sustainability. Loss prevention measures such as automatic sprinklers mitigate fire loss; limit carbon emissions from any fire; and decrease or eliminate carbon emissions that might be released during reconstruction, since there will not be any need to rebuild. Protecting a facility, by reducing its vulnerability to fire and natural disaster risks does more than just safeguard the environment: it protects the jobs of employees and suppliers, a critical benefit in today’s economy.

UPSIDE TO RISK

Times change, sometimes all too quickly. A short five to 10 years ago, most companies focused primarily on business risk, such as that associated with launching a new product. Companies at that time didn’t accept any risk that didn’t offer an immediate return. Instead, they transferred most of their risk through insurance because they perceived risk as having only a downside. But, today’s organizations recognize there is actually an upside to risk. In fact, strong risk management can be viewed as a competitive advantage.

It is an exciting time to work in the risk management field. The challenges and opportunities have perhaps never been greater. In the face of disaster, companies with appropriate recovery and contingency plans can take advantage of competitors that do not have them in place.

More organizations now realize that companies with stronger risk management practices — and therefore greater resiliency — can reap significant benefits. Not only can these companies take advantage of competitors’ missteps, but this kind of resiliency can also allow the board and senior management to focus on their primary task, which is determining how to grow their top/bottom line strategically. Whether an organization chooses to embrace or transfer its risk, a focus on business continuity planning will serve it well in the coming years.

It is sure to be a decade fraught with hazards not yet imagined. And yet, despite increasing exposures related to distant suppliers, financial pressures, political situations and other significant threats, resilient organizations will persevere.

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It has become critical not only to evaluate new suppliers, but also to revisit existing ones to ensure their continued viability.