Navigating the Risk Awareness Cycle

by in Business Finance Blog

Companies of all sizes are searching for direction as they seek growth during these tumultuous economic times. Some companies are looking for better ways to deploy capital while others are simply fighting for survival. It is during times such as these that many do not take the time to seek perspective on the risks that they face. However, the strongest companies realize that having a solid understanding of their unique risks is vital to their continued success. These companies also realize that the risks they face are ever-changing – both internally and externally.

The first step to developing a better understanding of risk is to conduct an Enterprise Risk Assessment based on the company’s strategic objectives. This risk assessment will serve as the baseline for measuring risk responses going forward and also as the foundation for a broader Enterprise Risk Management (“ERM”) program. As a company implements their ERM program, it is critical that a culture of risk awareness rather than risk aversion is promoted. A “risk aware” culture embraces risk as the flip side to the reward they seek.

However, simply identifying, measuring and mitigating risks is only part of achieving “risk awareness”. An effective way to gain this perspective is to examine how the business is evolving in relation to its overall strategic direction through the Risk Awareness Cycle (see figure below). At any given time, a product, service or an entire company is in one of four stages of evolution – Order, Complexity, Chaos or Simplicity. Within each of these stages, risks take different forms. In addition, to continue as a viable enterprise, movement from one stage to the other is essential. Without movement, an enterprise will lose forward momentum and ultimately fail.

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