Risks are unplanned events that can impact businesses in a significant and adverse way. Management must deal with risks every day, such as the threat of new competitors, changing customer preferences, political upheaval and economic slowdowns. Tangible risks can be easily quantified, meaning the benefits and costs can be expressed in dollar terms. Intangible risks are difficult to define in concrete and dollar terms and require a greater degree of subjectivity and intuition.
Tangible risks include project and product management risks such as schedule slippages, personnel unavailability and budget shortfalls. If not managed properly, they can lead to business risks such as lost customer sales. Ernst & Young ranked credit risk as one of the top business risks for 2010. It is linked to overall macroeconomic conditions and has a measurable impact on the financial statements. Companies can manage this risk through flexible cash management and cost control measures.
Rising raw material and energy costs represent a tangible risk for most companies because they directly impact profitability. A related risk is pricing pressure -- the inability of companies to increase prices because of competition from low-cost overseas suppliers and aggressive discounting by competitors.
Globalization means global supply chains, linked using software systems and telecommunications networks. Very few rules govern these complex architectures, yet businesses and governments depend on them. System failures or cyberattacks could cause serious disruptions throughout the supply chain, which could hurt production and sales for several companies simultaneously.
Ernst & Young's list of top business risks for 2010 ranked regulations, including environmental regulations such as carbon-trading schemes, and related compliance costs as one of the top risks. This is an intangible risk, because regulatory actions by governments worldwide cannot be reasonably predicted or quantified. Companies should use industry associations and lobby elected officials to anticipate and possibly shape regulatory changes rather than wait for them to happen.
Economic and political volatility also are intangible risks, both in emerging and developed markets. Rising protectionism sentiments, especially during downturns, represent a serious risk for global businesses.
Emerging technologies and the ability to constantly innovate are other intangible risks. Companies must not only keep pace with the competition in terms of leading-edge products, they also must integrate new technologies -- such as social media and enterprise resource planning -- in their business processes to avoid being rendered obsolete by their competitors.
Risk management involves identifying potential risks and implementing measures to minimize their impact. Risks should be prioritized according to their probability of occurrence and impact severity. Risk mitigation strategies should be constantly monitored and adjusted because business conditions and risks change over time.
Considerations: Costs vs. Benefits
Risks usually involve a cost-benefit trade-off. The analysis usually is simpler for quantifiable tangible risks than intangible risks. Best estimates and managerial judgment often play key roles in risk assessment and management.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.