Risk Managers To The Rescue?
How risk managers can help navigate through a recession.
As a result of the ongoing global pandemic, recession is now starting to become visible in many countries across the globe. It’s possible that it may appear like a short-term economic dip, but indicators are there that it may turn out to be a longer-term downturn, taking several years to reach a recovery.
The need to respond
Effective risk management involves forecasting and preparing for future events in order to ensure the organization is prepared for adversity. In the context of a recession, an organization will look to offset economic risks by saving costs and finding substitutes on both ends of the value chain.
During these times, it’s critical for an organization to consider the macro risks resulting from a recession and frequently map them to challenges and opportunities arising for the company in order to maintain agility within an emerging situation.
Risk managers are uniquely placed to take a lead in this type of exercise, given their experience in preparing the organization for future development and responses to ”what-if” scenarios.
A responsive process
Risk managers are also equipped with the tools to help guide senior management through the process. However, being agile and responsive during a crisis is key. The commonly applied risk management process is not. We suggest to enhance it to the following more responsive approach:
- Define objectives
Start with defining realistic targets for during and after the recession. This may mean adjusting existing company objectives to accommodate the new economic circumstances. It may also mean shifting from growth-based targets to targets focused on sustaining existing business. You’ll also need to define metrics to measure progress.
- Identify risks and opportunities
Evaluate the company and value chain for areas that may pose a risk. In doing so, you can also consider related risks. For example, if one of your suppliers goes out of business, what would be the downstream impact on supply interruption of a related process? Here are some of the elements you may want to consider: suppliers, customers, units, processes, assets, financials and liabilities, technology, projects, etc.Evaluate the same areas for opportunities. For example, would switching to a bigger supplier bring more security for your supply chain, or other opportunities such as negotiating bulk discounts as a new customer?
- Assess macro impact
Assess macro risks and opportunities that may affect the company objectives and define metrics. Consider aspects like financial market, supply chain risks related to lockdowns in certain countries, consumer spending forecast, etc.
- Adjust operational objectives
Adjust operational objectives. Each team and function should have individual and group operational objectives that are aligned to the organization’s targets defined in the beginning.
- Define and execute actions
Identify measures and activities that under the given circumstances have the highest positive impact on the targets. These activities should be the ones that mitigate the risks with the biggest impact or likelihood, and the ones that help realize opportunities that are aligned to achieving your targets.
Communicate the changes to the workforce, and where relevant, to suppliers or customers.
Monitor improvement and measure changes. You will need to use the metrics defined at the beginning to assess progress against targets and adjust actions.
- Monitor, evaluate and adjust
Frequently monitor the market conditions and adjust planning. This is not an annual or one-off assessment. When market conditions change, you may need to re-examine your goals and metrics accordingly.
Effective risk management during a recession means doing more than simply reducing expenses and maximizing savings. Such an approach will fall back on you when the economy recovers. Instead, look for opportunities to invest as a way of protecting your bottom line.
Along with considering immediate threats, keep the long-term perspective of the business in mind. All recessions eventually pass and history has shown that companies that were prepared for economic hardship thrived the most.