MANAGEMENT

Risky small business

Simon van Wyk from Aurecon
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Instead of seeing risk management as a ‘nice to have’, an increasing number of companies realise that not only their projects, but also their entire business philosophy, needs to be risk averse. In the light of this, businesses are adopting a risk-centric business philosophy, which entails proactive measures to harness opportunities through sound principles of risk management.

While many companies understand that risk management adds value, there’s often still a learning curve that needs to be overcome in order to get everyone on board with understanding the objectives and the true value add – especially the vital importance of including risk management during the design and execution phases of a project, says Simon van Wyk, an expert in risk management at Aurecon.

Opportunity tracked down Van Wyk, who’s team won the award for ‘Best Risk Consultancy’ at the 2014 annual Institute of Risk Management South Africa (IRMSA) Awards, to find out more about pioneering excellence in operational and project risk management – and to determine whether this philosophy has also been embraced by SMEs.

Why is it now even more important for smes to be aware of operational and project risk management?

Performance perfection embraces a multi-dimensional view on risk and or opportunity management. Operational performance looks beyond the application of risk management to projects, but rather at an umbrella view which looks to identify, assess, evaluate, treat and manage risks and where possible to realise opportunities. In essence, risk management allows companies to create awareness within the SMEs unique “context”. Understanding, truly understanding, the context (internal and external) is the key to an SME reaping the value add that risk management brings. It is better to know what your level of risk exposure is than to not know, even if it means doing nothing.

Do you think SMEs in South Africa fully understand that risk management brings value to a project or their business?

The reality is that each organisation (large or small) are on a journey that is unique (specific to its context) and thus operate at different levels of risk maturity. This disparity in application is a testament to how business is conducted. There is a delicate balance, which sits at the root of basic economic theory “What am I Willing to Pay versus What Level of Risk I am Willing to Accept”. Until one has truly embraced risk management, this answer cannot be determined.

What are the biggest challenges for SMEs when it comes to risk management?

The challenge is achieving a balance between investing in risk management and the reward. This is however specific to each SME. A process intensive SME vs. a people capital office based practice for example, attracts varying levels of risk management investment (such as money, training, resourcing and skill optimisation).

Can you tell us more about the different kinds of risks SMEs should be aware of?

SMEs should focus on:

  • Limiting operational downtime (loss of production means loss of income);
  • Active financial management (cash-flow is king);
  • Monitoring market trends and being responsive; and
  • Partnering with credible entities (if not, it can sink your SME).

Why should SMEs look at partnering with an experienced risk consultant in order to ensure that a project succeeds - and how could these companies add value to their business?

An experienced risk management consultancy will establish a clear context, define specific objectives and identify risks that may impact the success of such objectives, as well as appropriate analysis tools and techniques to inform sound decision making at each level in the SME. Risks will be managed and opportunities maximised.

Where do most SMEs go wrong when dealing with risk management without professional assistance?

SMEs should partner with an experienced risk consultant to minimise the probability of failure. General failures could include, but are not limited to over investment, the lack of skills, poor track record in terms of a local lessons learnt, and the acceptance of unnecessary liability.

SMEs are most exposed to the harmful effects of risks, due to limited resources and structural features. How can they guarantee survival and create sustainable value by managing risk?

Risk is defined as the level of uncertainty on an objective (ISO31000:2009). With this in mind, SMEs can never have ‘guaranteed success’ as the question alludes to, but rather managing the level of uncertainty within which they may operate. Sustainable value is generated by limiting ‘uncertainty’. You get that formula right and risk management equals gains, providing that it is executed correctly.

Is it true that businesses that adopt risk management strategies are more likely to survive and grow?

The answer to this question is most definitely true. The likelihood that risk management strategies can yield growth are well documented. By way of example, the mining industry is driven through risk management, some more successful than others. It should be noted though that risk management has a weakness - that weakness is people! The level of subjectivity cannot be eradicated which means that decisions are made based on information. A classic example of poor risk management is the case of the Dreamliner whereby supply chain management crippled the entire project resulting in delivery some eight years after project commencement. The saying goes, it is better to manage risk, then you can manage as opposed to managing blind (adapted from the acclaimed international Austrian-born American management consultant Peter Druker).

How can risk management provide opportunities for companies to provide services and advice?

Risk management provides a platform which, if undertaken robustly, provides a range of metrics, information, data and guidance towards making informed decisions. For every risk there is a reward (opportunity), the trick however is to minimise the effects of risks and maximise the benefits of opportunities so that SMEs can leverage financial and social gain. Imagine providing your customers with services and advice based on a comprehensive risk management undertaken… The impact on service delivery would be streamlined, proactive, trend-based and informed, which means the advice being provided is truly ‘informed’.

Can you tell us more about the financial implications for SMEs who have not embraced risk management strategies – or do not have effective strategies in place?

The financial implications range substantially from SME to SME specific to ‘context’. The reality is that each business has a different level of risk maturity which means the financial exposure varies. Those who have not embraced risk management practices (as opposed to strategies as strategies don’t yield results, but actions do) they expect higher investment to minimise risk exposure (consequence and magnitude of impact) as opposed to those SMEs which have adaptive mechanisms within their business model to remain flexible and responsive to change (be it negative or positive).

What would you say are the most important risk management processes that should be present for SMEs in particular?

  • Contextual analysis (market, trends, internal and external constraints);
  • Statutory and regulatory exposure;
  • Managing residual risk (risk exposure post treatment);
  • Monitoring and measurement (understanding what customers want as quick as possible – realise opportunities); and
  • Adaptive decision making.

Would you say that SMEs are more likely to claim an entrepreneurial risk-taking culture than large and very large businesses?

Yes, the reason being that SMEs are generally ‘embryonic’, in other words evolving from small to large. The journey requires, on average, a more aggressive approach to risk tolerance. The stakes are typically perceived as less significant because human capital is less, resources are less and reputation is considered less than that of large organisations. Risk culture takes time to build and implement and is a luxury that few SMEs have in demanding markets.

How has the current economic climate, and the ever-changing business envrionment contributed to the need for greater risk management among SMEs?

The liquidation and or cessation rate of SMEs is alarming in South Africa. Risk management has emerged as a key attribute to better business management. The key aspect of success being the level of detailed analysis commensurate with the SME context (internal or external) informs better decision making, which in effect means lowering the level of uncertainty under which decisions are being made. The probability of failure thus diminishes in live with the level of risk maturity.

Can you please tell us about the relationship between risk assessments and capital investments for SMEs?

Capital investment relies heavily on robust risk management. Specifically capital investment requires risk management to provide two main answers. One: Calculating the level of uncertainty (usually represented as a P80 or P90 value). The method used to model the level of uncertainty is known as Monte Carlo Analysis. Two: Calculate the contingency budget. These two calculations provide capital projects with significant context in terms of the level of certainty that the project will actually succeed, versus the level of investment required to apply interventions to circumvent risk consequence. Risk management makes use of several tools and techniques as per ISO31010:2009 to assess risk such as Schedule Risk Analysis, Qualitative and Quantitative Risk Assessment, Risk Profiling, Hazard Analysis and the list goes on (subject to project or SME type).

Do you think that South African SMEs have bought into the idea that risk management is no longer a ‘nice to have’ – and are our SMEs totally aware of the fact that their entire business philosophy needs to be risk averse?

I do not think that SMEs have given risk management enough thought. The main protagonists of risk management still reside with the large organisations. In SA, it is rare that an SME will invest in risk management, many of which claim ignorance of the law. By way of example, it is known that several organisations knowingly pollute the environment, yet the National Environmental Management Act (107 of 1998, as amended) imposes penalties of up to R 10 million and/or prison time, yet the illegal activities continue.

 

 

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