One point I discuss at a high-level in my flagship article comparing traditional and enterprise risk management is the difference in what each focuses on. In this article, I’m going to dive a little deeper into this difference with a real world example and how executives and practitioners can move from focusing strictly on loss prevention to increasing their organization’s chances of success.
As stated in the original article, traditional risk management focuses solely on loss prevention, usually in the form of hazards.
The example I use is a “wet floor” sign. The sign is put out to prevent an employee or customer getting hurt – this is basic risk management 101.
But as explained by Norman Marks in his latest book, Risk Management in Plain English, organizations in today’s world should focus on more than just avoiding harm or losses, but instead, need to focus on:
- Anticipating what might happen
- Assessing whether that would be OK
- Acting as needed
- All so you can increase the likelihood and extent of success”
Put another way, in a comment to my recent article on risk monitoring, Hans Læssøe explains that:
It [Enterprise risk management] IS NOT about managing risks, it IS about optimizing performance.
Although more organizations across-the-board report having an ERM process in place, less than 20% believe it is “…a proprietary strategic tool that provides a unique competitive advantage” according to the 2019 State of Risk Oversight Report from NC State.
How one organization transitioned from a strict loss prevention focus to a success-driven focus.
To illustrate this transition in thinking, let me discuss the journey of a client in the transit industry.
Before adopting a more success-driven mindset, this organization’s activities around risk focused solely on downside hazards such as accidents, insurance claims, and safety. In other words, the organization was taking a very traditional approach, which is the norm in its industry. But in order to succeed in today’s business environment, the executives knew they needed to think broader than this.
After learning more about ERM, the organization began to understand that it’s okay to take certain risks in certain areas.
For example, they are currently embarking on a major, transformational project that will drastically change their organization and the way transit is provided to their region. Management realizes they are taking risks around reputation, finance, and people resources in pursuit of this goal. Many long-term employees may not be happy with these changes, but after some deliberate thought around both risks and opportunities, leadership feels that the potential reward from the project is worth the risk.
This particular organization is still in their journey to fully transition from a loss prevention focus to a success-driven one, but they recognize that this process can and will take time.
As the famous Chinese proverb from philosopher Lao Tzu aptly says, “A journey of a thousand miles begins with a single step.”
How your organization can begin this journey…
Transitioning from a loss prevention focus to a success-driven focus isn’t something that is meant to happen overnight. There are issues around leadership, risk culture, and other organization-specific factors that will need to be addressed in order to have a successful transition.
Some companies find it easier than others, but if you attempt to move too fast, you will encounter more resistance throughout the organization and likely not have the executive-level risk champions that are crucial to making this change a reality.
Step #1: Focus on Disruptive Events
The first step in this journey can be to start focusing on things that could prevent goals or hinder performance. Once these disruptions are understood, the organization can then adopt one of four risk response strategies to ensure its goals are met.
It can be as simple as key dependencies for the organization to function, such as meeting customer expectations, shipping products, or paying employees.
Step #2: Consider Positive Risks
After there is a workable process for identifying, assessing, and acting on these “disruptive” risks, the organization can then move into considering positive risks. As I explain here, positive risks are those things that may seem good on the surface but can introduce new risks to the organization.
Think of the saying “…too much of a good thing.”
An example of this in action is a product rollout that goes better than expected. It’s estimated that the first month’s sales will be around 1500 units, but this goal is surpassed by day 10 and the month ends with 5,000 units sold.
Sounds like great news, right? But as I explain in the article, it can expose the company to other risks, such as:
- A contracted manufacturer cannot keep up with the demand, resulting in back orders and customer frustration.
- Strained resources due to needs for other products and services.
- Increased cost of doing business, thus reducing or eliminating profitability.
- Your organization’s website has so many visitors that it crashes the server, immediately halting sales.
By carefully preparing for these risks, you can turn them into opportunities should they occur, meaning you minimize the negative while maximizing the positive.
Step #3: Establish a Competitive Advantage
If you examine companies that have been around for more than a couple of generations, what you will find they all have in common is they have established some sort of competitive advantage in their particular market.
Take this example from one of my very first posts discussing the response to a hurricane that hit my hometown of Tallahassee, Florida back in 2016.
In this post, I explain how some companies were better prepared than others.
One particular example is Publix Supermarkets, a company who not just considers downside risk but also looks at how they can turn “catastrophic weather” into a competitive advantage. As anyone who has been to in the Southeast (but especially Florida) knows, Publix is “a staple amongst the community.”
Having generators to not just protect its stock but also open its doors while many were without power put Publix at a unique competitive advantage to other retailers, most notably against a much larger rival, Walmart. Anyone in the community could come to one of Publix’s 10 stores in our fair city to cool off, socialize with friends and neighbors in comfort, get fresh brewed coffee, use the bathroom, and of course, buy groceries and other staples that were not currently available at other retailers without generators.
By going beyond the protection of its stock to consider how it could support its community and customers, Publix earned the reputation as being a reliable partner in the midst of a natural disaster.
As Hans Læssøe explains in this article on where risk management needs to go,
…the way some companies succeed compared to the bulk of the industry is to change – change the rules, the products, the marketing, the business model – something/anything in order to establish a competitive advantage.”
By changing your organization’s mindset from one of loss prevention or minimizing risks to one of success or “intelligent risk taking” as Hans explains, you can better take advantage of opportunities and give your organization a competitive advantage.
Does your organization have a more success-driven focus or is it still stuck in a loss prevention mindset?
In what ways has it tried to transition from a strict downside focus to one that helps establish a competitive advantage?
I am interested to hear your thoughts on this distinct difference between traditional and enterprise risk management. Please feel free to leave a comment below or join the conversation on LinkedIn.
And if your organization is struggling to get out of the loss prevention mindset and could use an outside perspective to get unstuck, please don’t hesitate to contact me to discuss your specific situation today!