Securing the Digital World

Three Ways Managing Risk Helps During Economic Downturns

Jul 22, 2020 | by Patrick Potter |
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The global health crisis has been hard on economies around the world. Organizations of all size, shape, scope and location have felt the effects. It was the catalyst for widespread remote work, activating business resiliency strategies and analyzing their third parties' ability to perform. In addition, many organizations have had to reimagine their business and delivery models. For example, restaurants have resorted to delivery or curbside pickup with few or no patrons sitting in their dining rooms. Other organizations are finding ways to tighten the belt and operate more efficiently to free up resources.

Even risk management has a part to play. Here are three ways that effective risk management helps during times of economic upheaval.

Building Business Resiliency

The term, "an ounce of prevention is worth a pound of cure," is especially applicable today because resilient organizations are better prepared to weather the storms that will follow. These storms, like the current health crisis, can result in decreased revenues and increased costs.

The best example of this is from the iconic movie, "Forest Gump." Forest's shrimp boat was the only one to survive a devastating storm, and afterwards, he reaped the benefit of having the only operational shrimp boat allowing him to corner the market on shrimp sales.

McKinsey research on the 2008 financial crisis found that a small group of companies in each sector outperformed their peers. Although their revenues fell on par with the industry average, they recovered more quickly. In fact, by 2009, the earnings of these resilient companies had risen 10 percent, while that of the non-resilient companies decreased almost 15 percent.

What characterized the resilient companies was preparation before the crisis—they typically had stronger balance sheets—and effective action during it—specifically, their ability to cut operating costs.

Managing Third Parties

Third parties are an essential extension of many businesses. They provide valuable products and services, but can be an expensive part of doing business. The organization that has practices and tools to govern third parties and manage their risk are in a much better position to optimize their supply chains and partner networks. They'll be able to pinpoint and pause nonessential spending and identify duplication in services. Or, they'll be able to better prioritize non-essential expenses that can be postponed until the organization has stabilized.

When all vendors are tracked in an integrated risk management tool, it simplifies the process of identifying whose contract terms can be renegotiated or finding alternative financing options for contracts and purchases underway. This enables the evaluation of current supply vendor relationships to keep those who are willing to partner and innovate even through difficult times.

Companies that manage their supply chain risk have a better idea of how to reprioritize how products are procured, distributed and stored. It also helps manage the supplies already in the system and reduces waste.

Optimize the Workforce

People are the most important, yet expensive, resource a company has. However, "optimizing" means so much more than cost savings. Take for example what has occurred during this health crisis. Almost en masse, employees were sent to work from home, many of whom had little to no experience doing so, nor did their employers in many cases. However, I have heard from more than a few customers that once people figured out how to work remotely and coordinate work with family responsibilities, they not only liked working remotely, but they were also more productive.

Now, companies are thinking twice before mandating all employees to return to the office. Instead, they may start to evaluate the costs and benefits of remote working versus in-office working arrangements. There are costs to both – remote work requires additional security controls and infrastructure, while returning to the office requires social distancing and cleanliness measures. There are pros and cons to each that must be considered, especially as spikes or second waves of the crisis become a reality.

One lesson we've all learned through this experience is that we can move faster than we imagined. Consider the speed with which businesses moved initially to manage the effects of the disruption on their organization., Within a matter of days or weeks, many enabled employees for remote work settings assessed new risks, adjusted business models and dealt with gaps and risks in the supply chain.

This period in history has forced innovation and risk management to the forefront; not necessarily as competing practices, but as complimentary functions that can make organizations more efficient and save vital resources in times of disruption.

After a business disruption, the path to stability can be a challenging one to navigate. Tomorrow’s success truly depends on the steps taken today. Check out our new resource, “Maintaining Resiliency After Disruption,” for guidance.