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Corporate risk: Has efficiency trumped resilience?

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9th Jul 2012
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PwC is promoting a new approach to risk management that prioritises resilience over short-term measures of efficiency.

The Big Four firm’s philosophy is based around maintaining adequate buffers and adaptive capacity to support resilience. A new study from the firm entitled Prospering in an era of uncertainty warns that both of these essential qualities have been eroded by the drive for profitability during boom times, as well as post-bust survival tactics.

Big technology companies such as Microsoft and Apple tend to build up large cash reserves that prompt calls for them to return the money to investors. But the study notes that Apple’s $100bn cash war chest allows the company to make game-changing investments in fast-moving markets that help to ensure its survival.

Like an athletes who push fitness to the point where they damage their immune systems and suffer regular infections, many organisations pursued efficiency to the point where it could undermine resilience, the study noted. The internet has increased global interdependency and the rise of social media has amplified the impact of corporate shocks.

Top resilience tips

Collaborative relationships  Collaboration can be a source of adaptive capacity by calming turbulence an creating new opportunities.

Communicate stories and scenarios Conversation is a key adaptive mechanism; strategic conversations should focus on stories that combine numbers and narratives - pay attention to outcomes as well as measurement.

Tone from the top Boards need to set a clear example of ethical behaviour.

Examine strategic trade-offs Most strategies contain a number of potential dilemmas where judgement needs to be exercised. Leaders need to work through and debate these trade-offs with their teams to build adaptive capacity.

“Highly leveraged balance sheets and the ruthless exploitation of supply chains may increase short term profits but this kind of behaviour reduces buffers to a point where they cannot withstand a shock,” explained PwC business continuity leader Martin Caddick.

Boards need to understand the trade-off between resilience and efficiency, he continued: “In the boom years where most growth constraints were absent, some balance sheets became so over-leveraged that resilience buffers were completely absent, but the cost was deferred until a subsequent shock destroyed all shareholder value.”

The PwC paper, produced following a series of workshops for Blue Chip companies with the University of Oxford, argues that organisations need to seek evidence to learn more from their new misses. To do so, they need new performance measures reach across supply chain boundaries and organisational divisions.

Some of the material suffers from academic abstraction and management jargon, but some practical pointers are presented from the workshops with business leaders (see box, right). The study argues that resilence has a value - typically seen in the intuitive retreat to “safe” shares during difficult times. That can be measured and managed, but PwC has not yet devised a formula for quantifying the value, or determining who should foot the bill for the necessary corporate buffers.

Further research will be published on this subject as the project continues. To keep up with these developments, visit PwC’s risk and governance home page.

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By David_Lewis
13th Jul 2012 13:51

Risk management & SMEs

It is interesting to see this article on Accounting Web which I (rightly or wrongly) perceive as being aimed at accountants in the owner managed business market.

I believe that for most small businesses structured risk management either doesn't appear on the radar at all or if it does feature is seen as technobabble that is used by bigger companies.

Interestingly Ernst & Young published a paper "Turning, risk into reward"  where it suggests that businesses with more mature risk management perform better.   However the paper centred around  global businesses.

I believe that risk management has a place for larger SMEs that want to grow to the next level - espoecially as thinking carefully about risk also highlights opportunities.   Whilst the article is interesting,  I would like to see more work being done in this area in relation to smaller businesses.

David Lewis

Camrose Consulting

 

 

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