Economic evolution

A global risk management survey conducted by Aon Risk Services in October and November 2008 showed that the worldwide economic downturn is still leaving business owners very concerned.

Many of the risks that keep business owners up at night are connected, and they all involve complex relationships with worldwide economies, governments and major industries.

“Companies need to be aware of the changing landscape and need to be able to adapt to that in order to survive,” says Chris Smith, senior vice president, Aon Risk Services Inc.

How organizations approach this new holistic view of risk management is critical to ensure not just present-day survival but also future competitiveness during a growth period.

Smart Business spoke with Smith about how to maximize opportunities in an economic recovery.

What can business owners learn from the survey?

Boiling it down into the top 10 risks, the No. 1 risk that was identified was the economic slowdown, which started at the end of 2006, when it was ranked No. 7 on that year’s survey. Now it is No. 1. The change in these top 10 risks is fairly dramatic for just a two-year period. In fact, three of the top 10 risks identified this year didn’t even make the list two years ago.

Business interruption is pretty close to the top of the list. Also, regulatory and legislative changes jumped much higher on the list. Those have always been concerns but now are far greater concerns because of the economic downturn and financial crisis. Everyone is anticipating even more regulations to deal with and adapt to.

How can organizations use this information to adapt to survive?

The key is preparedness. You can’t prepare for a risk until you have identified it. This data can help companies identify risks that they haven’t thought of. Another key is looking at risks more holistically, on an enterprisewide basis. Traditionally, companies have associated risks with things like product liability, workers’ compensation or, more generally, third-party liability. Those days are long gone. While those are still significant risk factors, so many other risks can blindside you if you are not prepared for them.

The economic slowdown is a prime example, and so is business interruption, which has been impacted by the slowdown. If your major supplier goes out of business and you are not prepared to make changes quickly to keep your supply chain moving, then you could be in serious trouble.

Swine flu is a recent example of how that can happen. There was a lot of fear that the border to Mexico would be closed. There are so many U.S. companies that depend on the flow of raw material and finished goods across the border. What would you do if that happened? How would you address it?

How is looking at risks on an enterprisewide basis preferable?

A lot of these risks are interconnected. Economic slowdowns, regulatory changes, business interruption — all of those things are directly tied together. While any one of those things could hit your business hard, they are all, to a degree, cause and effect of each other. You need to look at the overall picture and determine how that might affect you.

Increasing competition was a big risk factor this year that had not been identified previously. That can also be tied to the economic slowdown. Businesses are a lot hungrier. Everybody is trying to do more with less, and you have increased competition for the same buyers, but those buyers have less buying power. That drives down cost, prices and profit.

After identifying their risk factors, what action can business owners take?

The next step is putting a plan in place and following through. Those plans need to be constantly scrutinized and updated. Also, implementation has to be reviewed and updated. The business landscape is changing dramatically and very rapidly. Data helps you keep current on what risks your counterparts and competitors are facing and how prepared they are to deal with them. It also allows you to identify strategies to maintain your business’s viability.

What are some strategies business owners could use to convert economic challenges into opportunities?

One tactic is identifying the risks associated with, for example, business interruption exposures. There has been a huge trend in the last couple of years toward outsourcing and offshoring — hiring other companies to do functions that used to be done internally. For example, moving operations to India to take advantage of lower operating costs. Analyze the potential impact: Will that improve your bottom line or expose you to additional risk?

How does the new regulatory environment impact offshoring? Will it ultimately lead to lower cost structure, or will there ultimately be regulation changes here or in the host country, like India or China, that may impact the potential profitability of that move?

How can a company get the necessary information to make that decision?

Your risk management partner should be able to assist you with identifying these risks as well as assisting you in planning for and managing potential impacts of these risks to your business.