Intern Insights: Business Risk
June 25, 2012
Momentarily departing from my normal weekly blog, I'd like to discuss the risks that every business can encounter, regardless of size. On Thursday, I was forwarded a copy of Lloyd’s Risk Index for 2011, a forty page article detailing the most formidable risks that businesses face today. The Risk Index is further broken down by continent, prioritizing risks and categorizing them by level of preparedness. Priority and preparedness were measured on a scale of one to ten, with ten being the biggest priority or most prepared. As an aspiring business owner, CEO, multimillionaire, yachtsmen, etc… mitigating risk is a top priority and something that needs to be fully understood. Lloyd’s Index provides an economic and contextual basis as to why these risks occur and have or have not changed. Lloyd’s top five risks in 2011 were the loss of customers, talent and skill shortages, reputational risk, currency fluctuation, and changing legislation.
The risk of losing customers can be traced back to the most basic backbones of microeconomics, supply and demand. Producers will try to maximize profits by meeting the demands of consumers. When demand rises, so does producer output. When demand falls, producers have to scale back output but still post a profit. This is the dilemma that businesses are facing now. In the wake of a catastrophic economic implosion, where credit was scarce, businesses are now able to fund operations more easily. The impediment to businesses striking gold through production is that consumers are less willing and/or able to buy, for a variety of reasons. Lloyd’s asserts that this lack of demand stems from stationary or declining income levels, rising price indices, and job insecurity.
Second on Lloyd’s list of the top five risks businesses face is the shortage of skilled workers. Businesses responded that the shortage of talent was one of only two risks they were insufficiently prepared for, and rightfully so. How can you possibly prepare for a lack of skilled workers? The answer is to develop and maintain a strong and skilled infrastructure of workers. Retaining your current employees is much easier and safer than finding adequately skilled workers elsewhere. Lloyd’s also stated that firms, like themselves, were recruiting raw talent and training them to meet their needs.
At times, a business’ reputation can be the key to generating sales when it comes to referrals and word-of-mouth marketing. Hence, reputational risk was ranked third in Lloyd’s top five business risks. Lloyd’s cites a startling 2010 study, stating that 80% of the world’s one thousand largest companies lose nearly 20% of their value at least once in a five year period because of a major event that impacts their reputation. For Toyota, it was the automobile recalls and BP, the oil spill that threatened miles of coastline and thousands of marine mammals. Mitigating reputational risk can spark increased business value.
Lloyd’s fourth business risk regards business that import and export raw materials and/or finished goods, as wells as companies that dabble in foreign investment. Companies that import foreign raw materials and export finished goods are subject to the fluctuation of foreign exchanges rates. As foreign currencies depreciate against the dollar, firms are subject to paying higher prices for the materials necessary to produce a finished product. To mitigate this risk, companies need to make raw materials more readily available, whether through domestic suppliers or otherwise.
Lastly, Lloyd’s addresses the changes in legislation that have resulted from the financial collapse and the risks imposed on businesses. In 2010, the Financial Stability Oversight Council was created to watch over financial institutions that instigated the housing collapse through the securitization of sub-prime mortgages. In conjunction, businesses are now being held more accountable for their actions, and reporting standards are changing to ensure the accuracy of information made available to shareholders.
North America’s risk priorities tell a different tale, however. The risk most prioritized by North America was corporate liability, at a 6.7. Following corporate liability were reputational risk, cost and availability of credit, fraud and corruption, and cyber risk. Whatever risks your business may face, it is important to be prepared and mitigate these risks. There are my insights for the week!