Every entrepreneur has to develop a tolerance for a certain amount of risk. However, this does not mean they have to be vulnerable. By taking steps to assess and mitigate operational risks, business owners can have greater assurance that they will be prepared for the surprises that can arise in an uncertain and constantly shifting economy.
Have you ever performed an operational risk stress test for your organization? Are you aware of any business continuity threats that could interrupt or derail your company activities? Do you calculate how much these risks could cost your business if they were ever manifested? Failing to run these tests can result in you essentially running your organization blind.
To prevent disastrous surprises, conduct assessments that determine how sensitive your company would be to risks. Create a few hypothetical scenarios to which your business could be vulnerable. Price Waterhouse Coopers makes a great point about operational risk management, explaining that this element should not be viewed as a standalone component. Rather, it permeates every other type of risk (credit, IT, legal, liquidity, etc.). By understanding that operational risk is linked to everything a business does, entrepreneurs can put this in context and “embed” risk management processes into daily operations to bolster all the functions within an organization, PwC says.
Risk inventory
Begin by creating an inventory of all risks and the current controls in place to mitigate them. Consider each facet of your operations – marketing, sales processes, client relations, business location, strategic partnerships – and how those factors impact your business. What steps have you already taken to manage these issues? How do you monitor their effectiveness? What do you stand to lose if one of those components underperforms or fails?
As you undertake this assessment, it is wise to be pessimistic. Do not think about ideal scenarios, but rather those where everything that possibly could go wrong does. In an event such as that, how would the controls you created perform? If the answer is “not well,” it is time to think about what needs to be done to insulate your organization.
Once you have identified and measured the various operational risks in your organization, you can start to weigh those threats against the potential rewards. In doing so, you can determine which must be eliminated and which can simply be managed. This gives you insight on what steps you will have to take to protect your organization from surprises.
