High performance requires a keen understanding of not only a company’s appetite for risk but also its capacity to manage that risk effectively. Companies that walk the fine line between the two can better protect themselves and pursue new marketplace opportunities.
Traumatized by the global economic meltdown, many companies have chosen to hunker down and play defense. Though understandable, that approach won’t light any fires under corporate performance or fuel a recovery.
On the other hand, some companies appear primed to go on offense with major spending sprees. Hundreds of them are sitting on piles of cash these days, having saved billions in the last year or so by cutting jobs and capital spending. But can they spend that money prudently, bearing in mind the painful risk management lessons of the recent past?
A new measure of effectiveness
Application of this expanded concept of “risk-bearing capacity” is something new to the field of risk and performance management for non-financial companies. It is a measure of a company’s resiliency and agility – an estimate of its ability to take on new opportunities, as well as the scope and type of economic shocks it can bear without a serious decline in its operational effectiveness.
Using a risk-bearing capacity analysis, companies can balance their appetite for risk taking against their ability to manage those risks. Neither too cautious nor too reckless, they can adjust either their capacity or their appetite to make more prudent – and ultimately successful – investment decisions.
The failure to effectively manage risk – by companies, governments and households – is at the heart of the current economic crisis. But doubling down on bad bets and taking bigger chances in a desperate bid for much-needed growth is not the solution for business. Nor is the answer to become so cautious as to leave opportunity on the table. This new approach to risk can help companies find the path that is right for them, helping them bring risk appetite and risk capacity into balance.
Beyond conventional ideas
The capacity to effectively understand and bear risk to support profitable growth involves much more than just sound financial management and the building of capital reserves – as important as those are. It is also more than defensive posturing – sounding the alarm and then circling the wagons.
Risk-bearing capacity is multidimensional, comprising at least five components: financial strength, management capacity, competitive dynamics, operational flexibility and risk management systems. Effective risk-bearing capacity analysis can help companies establish stronger links between strategy and operational planning, which enables them to optimize capital allocation, identify additional resources to seize opportunities, craft much more relevant and powerful performance metrics, and achieve better focus on performance reporting.
Risk-bearing capacity also expands the traditional idea of risk management beyond financial resources, focusing a company on a broader picture of operations, management processes, systems, culture and leadership that can increase resiliency in the face of setbacks, and improve agility to pursue new opportunities. That is, it helps a company deal with both the downside and the upside of risk – to play defense as well as offense.
Bill Spinard, Craig Faris, and Steve Culp also contributed to this article.
This article originally appeared in Outlook, an Accenture publication. Copyright 2010 Accenture. All rights reserved. Condensed and reprinted by permission.