Harley Luplow: Try Risk Masters process

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Harley Luplow

February 19, 2012

By Harley Luplow, Local columnist ---- The Record Eagle Sun Feb 19, 2012, 07:14 AM EST

We function best at work when our heads are clear of all that needs to be done and we can focus on the task at hand. But do you ever pause for a moment and ask yourself the big picture questions of why are you doing what you are doing? And why you are doing it that way?

Many of today's business tasks are built upon systems and processes designed to provide efficiency and profit. These systems and processes are optimized around sets of circumstances and conditions to yield expected results. Achieving consistency and predictability for a desired result is prized in business.

However, in uncertain times when underlying conditions change dramatically, current systems and processes can yield unpredictable and undesired results.

In the face of uncertainty many businesses continue to stay the course, thinking what worked in the past will work again given time and funding — General Motors' strategy before the bailout.

Some businesses go into a holding pattern gathering more information before setting upon a new course, if it's not too late to do so.

I see savvy businesses recognizing uncertainty as a time to push forward with initiatives for growth and cost reduction, as well as financial restructuring and operational improvements.

The financial crisis and the auto industry collapse are prime examples of industry, regulatory and individual company systems and processes not keeping pace with a changed environment.

Following outdated processes in these industries without questioning their continued relevance proved to be a major mistake for many of these companies and our general economy.

With today's uncertainty it's critical that companies examine the utility of their core systems and processes, and invite uncertainty to participate in their next strategy session.

Accenture recently published a report of its finding on risk management practices by what it termed "Risk Masters," companies that use uncertainty to competitive advantage.

Uncertainty is risk and to manage it well these firms embrace it fully by understanding its impact on revenue and cost, and incorporating it into their decision-making by modeling risk scenarios and forecasting performance under various conditions.

The take-away from Accenture's Risk Masters is that it is better to be proactive than reactive with risk, and that it takes a deliberate inventiveness to do so.

Here are a few creative examples of ways to proactively managing uncertainty:

n Employee wages can be risk-leveraged to protect profitability and cash flow. For example, employees can choose to have their wages indexed to company profits. Wages are paid out at relative rates ranging between 75 percent and 150 percent of base pay depending upon company profits. MIT economist Martin Weitzman found that this "stakeholder pay" system engaged the entire organization focusing them on a common goal and did indeed improve profits.

n Perhaps, in a similar fashion the provision of certain state and municipal services can vary depending upon the level of tax revenue collected. A budget process could provide for basic services with no deep cuts when tax collection is below base levels, and in good times tax reserves can be accumulated rather than reducing tax rates or redirecting funds to lower priority uses.

n It is well known in the medical insurance industry, and common sense to most, that the cost of providing preventative health care is far outweighed by long-term medical costs associated with the results of risky personal dietary and exercise habits. Yet companies do not actively promote discounted health care premiums for their employees in exchange for measured increases in employee health.

Uncertain times can make it difficult to navigate your business into the future. Do not rely unreasonably on your tried-and-true business processes and miss opportunities to be a Risk Master. Challenge yourself to be creative and make volatility and unpredictability your friends, or at least manageable long-term acquaintances.

Harley Luplow is a local business consultant. Contact him at 709-9000 or www.luplow.com.