The third of a ten part guide series on how to tackle the often complex challenges companies face when they are growing

By Mike Horne*

If you are looking for growth and wealth creation for your business, then you most likely want to be bigger than you already are.

In the same way that a child grows up and learns to walk, progress is slow and involves steady learning.

Is growth risky?

Of course, and if these risks are feared, ignored or dealt with inappropriately, you’ll never reach your potential.

If recognised, understood and managed properly, risks are part of growth. Don’t underestimate how hard it is to get risk under control.

While risk is an inherent part of any successful business’s growth strategy, it must be prioritised, and managed expertly and consistently across an entire business.

Learn how to identify the good opportunities and avoid being sidetracked by non-essential go-nowhere ideas. This will ensure your scarce resources aren’t putting out fires when they should be focused on high value risk mitigation activities. These get harder and more complex as a business grows and becomes more diverse in what they do and how they do it.

For some, the greatest risk of all is fear of failure.

Dreaming, believing and living a goal saw Sir Peter Blake winning the America’s Cup; and Sir Angus Tait surviving the receivership of his first company A.M. Tait Ltd and building Tait Electronics back from the brink to grow even stronger.

Like these great New Zealanders, you need to move outside your comfort zone to grow.

Remember your first time on a tricycle?

Chances are you fell off, didn’t get hurt and scrambled back on – more determined than ever – to get both legs pedalling in tandem and the handle bars headed in the right direction.

Just like toddlers, growing businesses tend to be uncoordinated, with the left hand out of sync with the right.

They tend to become decentralized with divisions becoming separate silos of information and data, across national or international borders.

The challenge for any growing business is to perceive risk as a “whole of business” phenomena, taking a birds’ eye view and a co-coordinated approach to everything that could damage any aspect of the organisation.

This could be financial, operational, brand or market driven.

Businesses need to develop a risk intelligence capability to identify, evaluate and prioritise potential risks and appropriate responses.

Responsibility for risk lies fairly and squarely with the CEO and the Board.

Ideally a steering committee including people from key functions and from different levels within the business will report to the Board through the CEO, who must then take responsibility for driving a risk management culture throughout the entire business.

Identifying risks also goes hand in glove with your strategic planning process (see Guide 1 in the Deloitte Reality of Growth Series) which will have recognised inherent risks in your strategy. But that’s not enough.

Your first two wheeler now that’s scary!

Don’t worry, the family is there to steady the bike, lay down the ground rules, deliver a running commentary on how to keep your balance, and how not to fall off or career out of control. Yet all the while you can’t wait to feel the wind in your hair as you overcome the risks of mastering this new challenge – it’s all part of growing up.

Like a child learning to master a two wheeler, businesses need guidance in risk management.

One of the most critical tasks is the setting up of a working group to lay down the framework for identifying, managing and mitigating risks in key areas.

So you’ve identified the risks (see Figure 1, Phase II). Now you need to evaluate to determine if they are:

• Almost certain – expected to happen

• Likely – will probably occur

• Possible – could happen

• Rare – just might happen

• Very rare – highly unlikely

And if they are:

• Catastrophic – Would bring down the business

• Major – would seriously hurt the entire business and take significant time to recover

• Moderate – could hurt part of the business but recovery has manageable timeframe

• Minor – potential to impact business but easily manageable

• Insignificant – has small impact that is taken in stride

Having identified and evaluated potential risks, you can now prioritise them and, depending on your risk tolerance levels, start to put in place risk mitigation strategies (see Figures 2 and 3).

Your first motorbike a Harley or Moped?

Children grow up and achieve in different ways. Some have a crashthrough style while others shine in more subtle ways.

Businesses have very different attitudes to risk.

If you’re in the car racing business your risk tolerance level is probably higher than if you have a fast food franchise.

New Zealander John Britten was a great example of measuring risk and finding success in his internationally acclaimed motorcycle design businessan innovator and winner in one of the riskiest sports in the world.

Genuinely understanding where your business sits on the Risk Richter Scale means analysing a broad range of factors including:

• how others involved in the business feel
• where you want to be in relation to your competitors
• will someone still be prepared to put up the money
• will the benefits outweigh the risk
• your ability to manage the risk, and
• where you’ve got it right, and where you’ve gone wrong in the past

Set precise guidelines, communicate priorities and clearly state what is, and what is not, acceptable. A good example is:

Monetary limits – such as financial loss limits, maximum investment and transaction and authority limits.

Perhaps another way to say this is: How much money can you afford to lose, how do you make the maximum return and what limits do you place on transactions? For example:

• transactions and activities – clearly define which are encouraged, prohibited or not acceptable

• boundaries or banish – install boundaries or ban certain behaviour and activities

• priorities and trade-offs – set clear priorities and trade-offs so that everyone understands the importance of conflicting objectives

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Nice car but are you sure?

You’re growing up fast and you want to spread your wings. You yearn for new things, new places. And you want your first car so badly.

But are you ready for it? Can you afford it? Could it be repossessed?

More importantly, are you sure you’ve looked at all the eventualities?

Whether it’s the risk of buying your first car or tackling another major milestone in a business, there are three key ways to keep risk under control:

• reduce the likelihood of risk happening

• reduce the impact of risk, or

• transfer risk

In fact, transferring can sometimes achieve all three. If you transfer risk with things like contracts, insurance arrangements, strategic alliances or financial derivatives, you are also reducing the likelihood of something happening, as well as its impact.

Take an insurance policy. It will reduce the impact if your motor vehicle is stolen because you can easily replace it.

Similarly, the combined resources of a joint venture and shared ownership of a project are also likely to reduce risk.

And don’t be risk-shy. Other options that could be in the best interests of managing risk include:

• Acceptance – this tends to happen when you inherit other activities and the risks are part and parcel of the deal

• Exploitation – high risk, high reward strategies work well for some business sectors

• Pricing – charging a premium in a volatile environment

• Avoidance – when in doubt, don’t.

Keep your eyes on the road and your hands on the wheel

You’ve made it. You’re all grown up and you’re thriving.

The challenge now is to keep risk under control as you continue to build on your successes, or you could lose it all.

Risk doesn’t control you. You must control risk or else you’re in real strife.

While there are hundreds of potential risks, control of them falls into three broad categories.

• Preventive – stopping it before the risk occurs

• Detective – uncovering the issue once it has occurred

• Corrective – going into damage control

However, embedding a risk control culture within a business is a complex task in itself, demanding the same dedication as any major change management initiative.

External stakeholder and whole of business buy-in is essential if there is to be a cultural shift to risk management being perceived as everyone’s business – not just the domain of the chosen few.

It is an evolutionary process, not a one-off activity. You need to be constantly on the alert and prepared to change your strategy to take into account changes as they occur in the external and internal environments.

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Mike Horne is a partner at Deloitte NZ. You can contact him here »

This Guide is part three of a series. It is used here with permission.

Part one is about Strategic Planning and is here »
Part two is about Alliances and is here »
Part three is about Managing Risk and is here »
Part four is about Raising capital in New Zealand and is here »
Part five is about Marketing and is here »
Part six is about Outsourcing and is here »