The Needed Revolution In Risk Management!

THE NEEDED REVOLUTION IN RISK MANAGEMENT!

by Mike Manes

Use risk management to control uncertainty in your clients’ businesses.

INTRODUCTION

Risk management (RM) is not only an important function in any business — I believe
that it’s the most important.

This article focuses on RM from the trenches, rather than the Ivy Towers of academia. I see RM as an art or craft that needs to permeate the entire organization — not a narrowly defined profession that’s isolated from customers, employees, directors, etc.

RM is about people — people who produce products/services, buy and use these products or services, make mistakes, file claims, and act as heroes or self-described victims. One of the greatest risks in business today is “techies” (MBAs, CPAs, CFOs, CIOs, self-described nerds, etc.) who discount the people aspect of organizations and believe that statistics, trends, data, and technology are more important.

RISK MANAGEMENT: BY THE NUMBERS

For 10 years I taught Risk and Insurance at LSU (Geaux, Tigers!) in Baton Rouge. Here’s a summary of the first lecture in each class:

Risk means uncertainty — the difference between good things and bad things happening in your life or business. Good things involve our dreams, goals, and assets (assets are dreams and goals that have been achieved). Bad is anything that destroys or damages an asset or interferes with the achievement of a dream or a goal. Management means control. Risk Management (RM) means control of uncertainty.

The purpose of RM is to maximize ‘good’ and minimize ‘bad’ (and mitigate the damage caused) in our life or business.

In general, the RM process involves four steps:

1. Organization — identifying and setting priorities for the dreams and goals of the business.
2. Accumulation — obtaining or creating the resources needed to pursue our goals.
3. Protection — protecting the process of pursuing these goals and the assets obtained.
4. Perpetuation — assuring that the business survives and prospers long term, using its assets based on the wishes of the principals.

To maximize good, the business needs planning: Applied strategic planning to create and operate the organization, and marketing planning to assure that the organization meets the wants and needs of the customer profitably.

Consider this quote:

“In this market-oriented view of the strategic-planning process, financial goals are seen as results and rewards, not as the fundamental purpose of the business. The purpose is customer satisfaction, and the reward is profit.” (Peter Drucker, The Role of Leadership in the Implementation of Marketing Strategy That Results in Customer Value [Louis A. Martinette and Melaura H. Stein])

The four steps to maximize “good” (strategic plan) are:

1. Identify what you want.
2. Determine what it will cost (in terms of time, dollars, and other resources).
3. Develop a plan to achieve the “want” inside of the budgeted cost.
4. Implement, monitor, and adjust the plan and process.

The five steps to profitably satisfy customers’ wants and needs (marketing plan) are:

1. Identify your customers.
2. Determine their wants and needs.
3. Develop products or services to meet these wants and needs.
4. Price these products to sell (discount or add value).
5. Build a profitable delivery system (streamlining or building relationships).

Once you’ve taken these steps, the organization will need to determine the best method to:

1. Prospect — find customers and prospects.
2. Communicate — speak with each prospect as a “niche of one.”
3. Sell — establish customer relationships.
4. Service — serve new customer needs and create repeat sales.
5. Compensate — assure that all stakeholders’ needs are met (a ‘win/win/win’ scenario).\
6. Manage — control the process, report results, anticipate changes, adapt, etc.

The four steps to minimize “bad” and mitigate damage include:

1. Identify assets — what do you have?
2. Set a price on these assets — what are they worth?
3. Determine your exposures — what bad can happen?
4. Manage your exposures/losses — how do you handle the chance of “bad?”

The next article in this series will focus on risk management of the “good” and “bad.”

Michael G. Manes can be reached at Square One Consulting, 625 Weeks Street, New Iberia, LA 70560, Cell 337-577-3885, e-mail [email protected], or Web site www.squareoneconsulting.com.