Risk Management: Lessons for Middle Market Businesses
When you are a middle market company, it might seem like risk management is less of a concern, but even smaller businesses can learn from the mistakes of big boys like Goldman Sachs and Toyota. Emerging companies needs to embed risk management practices into the core of their business so that as they grow, there is a foundation to build on. Here are a few basic steps that middle market companies can take to more effectively manage their risks:
1. Proper Continuity Planning
A common practice for large businesses, but sometimes overlooked in smaller arenas, continuity planning helps identify potential risks, both internal and external, and then looks for solutions. Businesses must pinpoint the hard and soft assets necessary to protect the company from risks and allow for swift recovery while still maintaining a competitive edge. For example, crisis management schematics and off-site backup storage are tools for continuity planning.
2. Creating a Crisis Plan
A crisis plan gives direction should a problem occur. The goal is to target the decision-making process and ensure that decision makers have the resources they need to act quickly in a crisis situation. Once the plan is complete, test it thoroughly and often. Without proper testing, a crisis plan can lose validity as the business changes.
3. Focus on Supply Chain Issues
A business is only as strong as its supply chain. In an attempt to create a more cost-effective process, many companies allow the supply chain to narrow. If a key supplier fails unexpectedly, this can put the entire business at risk.
4. Understanding Risk Appetite Levels
Risk appetite is the level of risk the business is willing to accept before taking action. A business must assign risk appetite levels for each project and understand some short-term failures may lead to long-term success in the right situation.
5. Benchmark the Quality of the Risk Management Strategy
Benchmarks tell a business how well their risk management effort is working. It measures progress in areas like:
- Risk identification
- Risk Assessment
- Risk Tolerance and Evaluation
These all require regular scaling to ensure they remain effective. Benchmarking looks at risk models and evaluates the infrastructure.
6. The Use of Captive Insurance
Captives are effective tools for covering certain lines of business – such as worker’s compensation – that have predictable claim rates. This allows the middle market company more leeway in other ventures and helps them maintain risk in other areas.
7. Understand Cyber Risks
In today’s high-tech environment, cyber risk is even more prevalent in businesses of all sizes. Enterprises must produce cyber risk polices and define online behavior rules to improve virtual security, especially when dealing with personal mobile devices and social media sites.
8. Establish Return-to-Work Standards
Return-to-work programs can lower workers compensation costs by establishing protocols for employees coming back after injury. Return-to-work programs allow these individuals to participate in modified work assignments that get them back on the job safely to reduce disability payouts.
9. Provide Ongoing Risk Education
Companies of any size can benefit from ongoing risk management education. This can include sending key staff to continuing education classes and seminars or helping them network through conferences and professional organizations. Ongoing education exposes them to the latest trends in risk management.
Middle market businesses that establish risk management practices are already ahead of the curve. As the business grows, they will have the core necessary to identify and handle crises as they happen and set up protocols to avoid them.