5 Reasons for SME to Invest in Risk Management
“Entrepreneurs are not risk-takers. They are calculated risk-takers”
Leonard C. Green, Investor & Professor of Entrepreneurship
Proportionately, risk management matters more to small and medium-sized enterprises (SMEs.) Even a small hit to the bottom line can have a big impact, which is why around half of small businesses will fail within the first five years.
For mid-sized firms, nearly half of European leaders questioned by The Economist admitted they hadn’t identified an optimal size or sustainable rate of growth that wouldn’t compromise existing progress. So, it’s easy to see how effective strategic and operational risk management could make the difference between business success and business failure for an SME.
Risk management is all-encompassing, not the responsibility of a particular team or department – even if the organization has appointed a dedicated risk manager. For risk management to be effective, it’s vital that it’s woven into the cultural fabric of the organization.
Therefore, risk management isn’t merely about investing money in insurance policies or health and safety contractors. It means investing in developing an enterprise-wide mindset to identifying, assessing and mitigating risks. However, for an SME, the payoffs can be substantial.
1. Effective Enterprise Risk Management Informs Strategic Decisions
According to HBR, strategic risks accounted for 86% of significant losses in market value over the period 2005 to 2015. Conversely, auditors spent only 6% of their time focusing on strategic risks compared to operational, legal, and financial risk.
For example, launching a new product or service line without considering the risks to your existing core offering could have a negative impact across the entire business. Loyal customers may become alienated by a shift of branding message. You may need to divert precious resources away from the core business to support the new offering.
If you don’t foresee these risks and the new offering isn’t a success, the whole business will suffer as a result. While a larger company could sustain moderate losses, even a short dip in revenue could be catastrophic for an SME.
2. Risk management Saves Money
Material savings don’t come from insurance claims or reducing fines for non-compliance. Proactive risk management reduces the likelihood of unexpected occurrences or accidents because you’ve had a chance to consider them upfront.
For example, the costs of unexpected server downtime can range from $700 to $11k per minute. SMEs are among the most frequently targeted businesses for cyber attacks, according to anti-virus firm Malwarebytes. Furthermore, around a quarter of those attacked don’t have the resiliency to recover and continue doing business afterward. Therefore, quantifying the value of risks for your business, and having a backup plan, should be a critical priority.
3. Risk Management Protects Company Resources
An effective risk management plan will enable business owners to quantify both the severity and the likelihood of any given occurrence. By understanding risks, organizations can prioritize which risks deserve the most time and resources. This reduces the incidence of money being needlessly spent, either on the incidents themselves or on planning for issues that are of negligible impact.
4. Comprehensive Risk Assessments Are Intrinsically Linked to Employee Engagement
Employees who are engaged with the principles and priority of managing workplace risks are more likely to believe that the organization prioritizes their individual health and safety. This ties in with Herzberg’s Two Factor theory, which describes how employees gain job satisfaction from motivational factors such as responsibility and achievement.
Having employees proactively involved with risk management produces a positive snowball effect. Employees will take accountability for managing risks, and further reduce the chances of an incident occurring.
5. Risk Management Improves Brand Image
Far from demonstrating weaknesses, a proactive approach to planning for risks is great for branding. It demonstrates to clients and suppliers that the company is accountable for its actions and is taking a sustainable approach to doing business.
Bad news travels fast, but how your business has planned for and reacted to an incident can protect your brand reputation even during difficult times. A case in point is how companies, such as US-based Home Depot, have even managed to turn around the potential brand damage of a high-profile data breach with a clear communication strategy involving the CEO.
Risk management isn’t about eliminating risk, or a mere compliance topic. It’s an integral part of managing the success of your business. For an SME focused on growth and reaching new customers, it’s easy to let risk management become an afterthought. However, only those companies taking steps to measure and manage their risks will flourish in the long-term.