Five big risks facing business

  • Date:01 Oct 2013
  • Type:Company Director Magazine
Alf Esteban says all Australian boards should be talking about how to mitigate these five big risks and turn them into opportunities.

Australian businesses face an unprecedented confluence of five major risks that could threaten future performance and even viability. These have the potential to affect them in the short to medium term and should be part of any board discussions on risk management.

The background information was created using the “bow tie” analysis technique, whereby causes and effects of a risk event are analysed to determine key causes and consequences so that controls, along with key risk indicators (KRIs) and key performance indicators, can be developed and assigned.

We believe organisations should be seriously considering appropriate preventive, detective and remedial controls to mitigate these risks. However, nimble organisations should also be looking to exploit these risks for their benefit.

Regulatory change can be positive or negative, new technology throws up major growth opportunities and skills shortages provide opportunities to use technology to boost skills or  sell services to others.

The five major risks are:

1. Interventionist governments
Governments at all levels and of all political persuasions have embraced interventionist action. The number of Acts passed by the federal parliament has surged from just 17 in 1901 to 206 in 2012. But government often acts without considering the broader economic and social consequences of its actions.

To mitigate this risk, businesses need to look at lobbying government, as well as changing business processes, strategies and target markets. They also need KRIs to detect changes in government regulations. KRIs that can be used to detect changing government regulations that may affect business outcomes include:

  • Tracking politicians’ statements in parliament and to the media to gain an indication of their thinking regarding new regulations.
  • Tracking the progress of legislation through the various legislative processes, enhancing your ability to prepare ahead of time.
  • Tracking changes to obligations linked to risks and controls to ensure controls are amended (if required) in time.This is especially significant regarding workplace health and safety regulations and rules, which are changed often.

2. Reduced access to credit
The global financial crisis highlighted that credit can suddenly become scarce. Many companies lost access to short-term funds after the commercial paper market dried up. Commercial paper issuers turned instead to prearranged back-up lines at banks to refinance their paper as it came due. Banks were obligated to fund such loans. As a result, funds became less available for new lending. Non-financial business demand for liquidity also increased during the crisis to meet high precautionary demands for cash. Many businesses drew funds from existing credit lines simply because they feared continued disturbances in the credit markets.

Businesses need to consider pre-existing lines to mitigate the risk of another credit crisis.

3. Effect of new technology
New technology is causing a fundamental shift in the entire business landscape. The internet, for example, has changed communications and commerce globally. But smaller technological innovations are also affecting – positively and negatively – businesses and market sectors. Street map publishers, for example, have had to dramatically change their business models due to the rise in the use of GPS devices. In turn, smartphones are affecting GPS device manufacturers.

Resilient organisations identify opportunities from the advent of new technologies and quickly adapt their business models. But it is not always the inventor of the technology who can best exploit it or fully understand the long-term implications. Carl Benz, the inventor of the first automobile, conceded there would be probably no more than 1,000,000 automobiles in the world as that was the total number of chauffeurs at that time!

4. Skilled labour shortages
Automation of business practices has increased, but human capital is still an essential resource for organisations of all sizes. Skilled labour is becoming a “Catch 22” for many organisations. Training unskilled or lower-skilled staff requires time and cash. But without training and the experience to shift labour from unskilled to skilled, organisations face a diminishing pool of skilled labour. Also, the associated costs of hiring and retaining these skills increase.

This risk can be negative or positive. It will be negative for those who struggle to hire and retain skilled labour and positive for those who take advantage of the skills shortage to increase their own productivity and take the opportunity to sell their services to others.

5. Supply chain disruption
No organisation exists in isolation to its suppliers and customers, which creates supply chain risk. The risk was highlighted recently when Fonterra was forced to recall eight tonnes of whey product due to potential botulism contamination, possibly caused by a contracted cleaner not doing its job properly. Supply chain disruptions are varied and often outside the immediate organisations’ controls, so detective and remediation controls are likely to be more beneficial. Other organisations see supply chain risk as so great that they expand their operations to incorporate downstream and upstream elements of the chain – an approach taken by many of the large global conglomerates. For Australian companies that are often increasingly dependent on Asian suppliers, the potential risk of supply chain disruption needs to be taken into account.