Business leaders need no reminders that we operate in an ever-changing business environment. Political, social, economic, environmental and technological developments can often be a shock to the business system, proving that everything is interlinked.
On a global scale, the unpredictability of the environment and climate change is already affecting physical assets and supply chains. Governments are leading efforts to reduce greenhouse emissions implementing more complex forms of sustainability legislation. Shifts in economic growth and wealth will likely strain public services and facilities including natural systems – all of which make up a mere snapshot of some of the challenges firms will need to respond to in the coming years.
And on the technological side of things, high street bank TSB has recently faced backlash from its customers and politicians over its recent IT crash as it merged systems with its Spanish owner Sabadell. Data breaches have also forced high profile public apologies from leaders at Facebook and Equifax.
History has shown us numerous examples of disruption caused by changes in the business world. From the Industrial Revolution to the global financial crash of 2007 / 08, these scenarios have all turned the world on its head and affected a variety of people from the very wealthy to poorest in society. It’s something of an understatement to say that we live in risky times.
Businesses need to be prepared to expect the unexpected by being open to the possibilities of new developments and new inventions, but also new ways of thinking about combating risk.
Risks can be used to fuel innovation – a risk can be an opportunity, focussing, businesses to adapt and instigate change themselves. By taking a risk centric approach, business leaders can devise a strategy for success. Through integrating risk management into their core operations, firms are more likely to achieve their goals and objectives, even when they encounter obstacles.
In the accounting and finance profession specifically, understanding and managing risk is a key to successfully diverting a company from failure to success.
Accountants are the backbone of business. It’s becoming increasingly recognised that the profession is vital to drive down costs, identify drivers of value and profitability, seek and secure new finance, and strengthen balance sheets – and there’s a growing need for accountants to be aware of enterprise risk management (ERM). This is an organisation’s risk competency; an ability to identify, assess and prepare for any risks that may interfere with a company's goals and objectives. ERM is crucial for growth and development, and it needs to be tied to a business’s strategic aims.
Our report, Innovation and ERM: Partners in Managing the Waves of Disruption, was published recently with US-based professional body IMA, and states that a clear ERM strategy does three main things:
- Anticipates and interprets disruption: With a clear risk strategy that includes short, medium and long term scenarios, companies can more easily predict and respond to waves of disruption.
- Rethinks strategy: With a true understanding of risk and how it can impact strategy, companies can develop and alter key assets to combat changes in the external environment.
- Innovates business models: When responding to risk, it’s important for businesses to not only innovate, but also consider business model innovations.
ERM not only enables a company to innovate, but it can also protect it from the downside of innovation. Innovating without knowing the associated risks is a main reason for failure in business. However being proactive in planning against unforeseen challenges paves the way to succeed in times of uncertainty.
Our report highlighted the ERM strategy of LEGO Group, one of the world’s largest toy manufacturers and a company that’s recently had to consider its options for innovation.
LEGO has hd great success across America and Western Europe markets. But in their endeavours to improve and grow the company, they considered an option of what they could do next: should the company shift from manufacturing in a few sites in Europe and North America, and build a factory in a low-cost location in Asia?
This move would impact heavily on the business and require a detailed look at the current business model to ascertain whether it was robust enough for the challenges lying ahead.
LEGO executives employed scenario planning as a key tool to weigh potential outcomes which forced them to look keenly at LEGO Group's strategy, choice of primary customers, core capabilities, and organisational structure.
While scenario planning can't forecast the future, the process enables managers to consider the impact of decisions both in the short term and long term. It can also reveal newer scenarios that can arise, therefore giving early warning indicators of further factors to consider.
This knowledge will ultimately enable finance professionals to identify their firm’s competitive edge, thus giving them a head start on their competition. Finance professionals, in short, should always maintain their focus on their companies’ competitive advantages when plotting out the risks to their enterprises.
As headlines, customer and shareholder reactions show, there are dire consequences for companies that fail to innovate and mitigate risk. However the only way to get the greatest results from innovation is to manage the risk proactively, navigating disruption by tying it to business strategy.