Mention the word “risk” to executives and the immediate reaction is probably one of worry. Indeed, for many people, the word “risk” has a negative connotation and they prefer hearing it as little as possible.
But seasoned professionals know risk does not have to be negative. Of course, risk should not be taken lightly, as consequences of risk can prevent a company from reaching its objectives. However, professionals who have dealt with risk throughout their careers know risk also creates opportunities for improvement to make a company more efficient, or provide a competitive edge.
The best way to show the relationship between risk and opportunity is through examples. In this post, we will give five examples that illustrate how best-in-class organizations can use risk as an opportunity to improve business performance.
Supply chain risk creates opportunities to cut costs of materials
The Risk: There is the potential presence of toxic ingredients in materials purchased from suppliers. These ingredients can be harmful to the environment, and to the health and safety of workers and consumers. This produces compliance risks regarding chemical regulations and reputational risks.
The Opportunity: After inquiring with suppliers about purchased materials (either through questionnaires or on-site audits), a company may determine about 30% of its suppliers are providing materials that could pose a risk. The company decides to no longer purchase materials from these suppliers, and instead purchases only from the remaining 70%. As a result, the company consolidates to a few suppliers and purchases more materials from each supplier. This presents opportunities for cost savings through bulk purchases or better pricing because of increased volumes.
Risk of losing consumers creates opportunities to increase profits
The Risk: A company faces the risk of losing market share because consumers are increasingly demanding products made of mostly recycled materials and are fully recyclable.
The Opportunity: To mitigate the risk and preserve or increase market share, the company changes the product design and sources different materials. This allows the product to be more marketable to a growing base of consumers demanding green products. But before embarking on this change, the company does a market study and creates a business case showing that consumers would be willing to pay a 15% premium that would cover additional costs and include additional profit, thus improving the profit margin of the product line. Addressing the risk can provide an opportunity to not only preserve or increase market share, but to increase profits by charging a premium that sustainability-conscious consumers are willing to pay.
Compliance risk at facilities creates opportunities to save audit time and costs
The Risk: A company has multiple facilities in a country. Each of these facilities has compliance obligations, thus creating risk of non-compliance at each individual facility.
The Opportunity: To mitigate risk of non-compliance, each facility conducts assessments, but this means assessments can be performed through disparate and duplicate processes across facilities. By implementing an automated and centralized audit management software, business processes can improve and organizations can better monitor their regulatory compliance status. In addition, a single enterprise-wide solution for audit management allows the standardization of regulatory compliance assessment across the entire organization, which increases the productivity of auditors, thus reducing audit time and costs.
Risk of knowledge loss creates opportunities for knowledge retention
The Risk: With a segment of baby boomers retiring or about to retire, there is a risk that a large amount of industry and company knowledge could be lost by the organization. This could result in loss of productivity and increase the risk of adverse events due to loss of knowledge.
The Opportunity: Knowledge is a company’s most valuable asset and must be preserved. To avoid losing knowledge, an organization decides to use an integrated enterprise platform for EHS as a repository of knowledge that can be critical in the future. Such knowledge includes industry best practices, work processes, impacts of regulations on the organization, lessons learned, etc. By having a mechanism to capture and retain knowledge, a company protects its productivity and operational efficiency from losses of employees due to turnovers, market downturns, budget cuts, or retirements.
Reputational risk from social media creates opportunities to foresee issues
The Risk: Social media increases reputational risk because the velocity (or speed) at which issues impact reputation is greater than before.
The Opportunity: Chuck Saia, CRO at Deloitte, stresses that social media can also present an opportunity. For example, a company can understand how competitors deal with issues as they play out in social media, and see in real time how stakeholders react to such issues. In turn, an organization can use that understanding to get in front of potential emerging risk issues. Thus, a company can gain insight and prevent the type of reputational risk from social media affecting industry peers. In addition, because news spreads very quickly on social media, it can be used to engage with stakeholders in a timely way and show commitment to transparency.
In conclusion, best-in-class organizations do more than risk management. They also analyze risk to determine if there are opportunities the organization can leverage for potential gain.