Risk Management: Participants’ interactions

The Risk Management Agency works with businesses to ensure that risk management is embedded in business plans and strategies. The agency also works with other community agencies to help them manage risk while providing underwriting services where needed.

What is risk management?

Risk Management is the process through which a business or other entity identifies, assesses, and controls or mitigates risks or threats that might disrupt its operations. For a business, risks may emanate from making business decisions with wrong or incomplete data, errors in operations, and changes to the operating environment, occasioned by regulation or economic issues, among other factors. Regardless of the source, a business should be able to anticipate and adequately plan to eliminate occurrences where possible, or otherwise blunt their impact if they do occur.

How does risk management work in the community?

Every business in the community develops a business plan which is regularly updated as new developments and information come to light. Even then, the community understands that even the best plans may fail if they do not make sufficient allowance for unforeseen events, as well as the personal limitations of business owners to carry out business plans even with the best information and support.

In this respect, therefore, risks emanate either from incorrect implementation of business plans and operational failures, or environmental issues that a business or marketing plan may not have incorporated.

For these reasons, risk management is not an isolated process, but part and parcel of business planning and developing marketing strategies. Businesses identify and assess risks when developing and implementing business and marketing plans, but also in real-time as data produced by their operations is received.

The community intends to ensure that as many businesses as possible succeed. This is dependent on sound business plans, but also an adequate anticipation of things that might not go according to plan, and make a plan fall short of the intended outcomes.

In modern practice, a business will adopt a risk management strategy and conform to standards, such as ISO 31000, as a way of showing it is operating within best practices in risk management, and in doing so, enhance its creditworthiness and reputation. For some businesses, therefore, risk management is a necessity, while for others, it is a luxury they can decide to do without, the consequences notwithstanding.

In the community, however, risk management is an essential part of business planning. For a business plan to be implemented, it needs various agencies to provide it with space, equipment, and data analytics, at a fee. The agencies need to be sure that the business has adopted the necessary risk management standards before this, meaning that every business in the community must have a risk management strategy in place before they commence their operations, and update it constantly as new information comes to the fore.

Risk management standards such as ISO 31000 and others are formulated in a way that can be applied across a wide section of businesses, with each business then tailoring the standards to meet their unique circumstances. The community will have two tiers of this adaptation. First, its standards’ framework will be in line with accepted local and international risk management standards. Secondly, it will ensure that the standards reflect the community’s unique operating environment and that individual businesses are facilitated sufficiently to then have their standards reflect the nature, size, financial situation, and other characteristics of their business.

Automated risk management

Automated risk management processes significantly lower the incidence and severity of risks by eliminating human error, as well as the inefficiencies and inconsistencies that are fire in analog/ manual processes. A major reason for this is the amount of data that an automated system can process and AI-powered algorithms, as well as the analytical tools that it employs. It is therefore able to form more complete assessments of risks, and therefore enable risk management consultants and businesses to devise better responses.

The ability to access and analyze up-to-date information also means that the automated system can identify risks that had previously not been considered, and provide real-time analytics that can be used to counter them.

Automation of the risk management process enables a business to standardize its whole posture to risk. This makes it easier to implement and comply with risk management standards and also helps consultants to be able to serve more clients, instead of being dedicated on a full-time basis to one business.

Point-in-time assessments of risks are the only way out when risk management is a manual process. When a business can conduct risk management on a rolling basis, with present information, it greatly mitigates the risk of being blindsided by emerging threats and therefore strengthens not only the risk management process but also its overall ability to successfully implement its business plan.

Operational presidencies and consultants in risk management

Business Development operational presidencies implement the policies and strategies of the three agencies in the Business Development Bureau. There are 48 operational presidencies, serving the Business Planning, Marketing, and Risk Management Agencies. Each of the 24 districts is served by two presidencies, each with four presidents (representing married men (A), married women (B), single women (C), and single men (D).

The three agencies in the Business Development Bureau are instrumental in helping participants achieve their business goals. The journey of setting up a business, producing goods and services, and marketing them is full of risks that can easily derail the business and motivate an investor. Most businesses in the community succeed not just because they have solid business and marketing plans, but because they are supported sufficiently to anticipate and control risks. The Risk Management Agency performs this role, helping businesses to establish the risks that surround every aspect of their enterprise, and dealing with them accordingly.

The nature of business planning, marketing, and risk management, and the need by businesses and agencies to get it right necessitates the presence of operational presidencies. The higher number (other bureaus in the Property and Process Department have a maximum of 24 presidencies, while the Business Development Bureau has 48) of operational presidencies is in part designed to ensure participants have ample support as they need it.

While the processes that the three agencies facilitate are largely automated, it is also where plans and theories face reality, sometimes with unforeseen results. Operational presidencies are constantly monitoring and reviewing not only how participants interact with data that the automated system provides and analyses, but also, how they implement plans and manage their business. They intend to make sure that the automated system is optimized to help participants

A big part of business success is due to the quality mentorship that an entrepreneur receives from successful business owners. In the community, mentorship cannot be effectively offered by paid contractors, besides the consultancy and training services they offer a business. Operational presidents, who are themselves successful business owners, can offer these services, or due to time constraints, facilitate mentorship of upcoming businesses from successful owners who are all too eager to help.

Even so, contractors are an important element in helping businesses undertake effective risk management strategies. When participants need their help to set up a comprehensive risk management plan, the operational president who serves them, as well as mentors, can refer them to consultants who can fine-tune whatever analysis the automated system has come up with, while adapting plans to a business’s and the community’s economic realities.

Illustrations

Every business in the community needs to be fully invested in the risk management process as a crucial pillar in that business achieving its business plan and marketing strategy goals. Businesses are helped by contractors, operational presidencies, and fellow businesses, which may volunteer as mentors. In these illustrations, we discuss a business participating in risk management, and how other players can help in this.

Illustration 1:

Ron has been setting up a business in the community. initially being contracted by a food processor who was a limited partner, he has formally joined the community and now intends to start a business as a milk processor, while still offering consultancy services to the limited partner who first contracted him.

The business planning phase is over, and Ron has already had a test run to see the viability of his business. He has also used the plan and the experience of the pilot to figure out a marketing plan, helped by the Marketing Agency and a contractor. Within these processes, however, Ron has had to perform in-depth risk management to ensure his business does not suffer from unforeseen events, or fail to reap the benefits of opportunities around him.

Ron intends to produce a wide range of dairy products. However, his priority will be treated milk, yogurt, whipped cream, and butter. He might add other products to the line in the future as the business grows, but he needs to grow first and learn the market well.

Ron carries his own assessment, helped by the automated system. He then contracts a risk management expert who helps him to further refine his plan, including identifying risks, developing strategies to counter them, and contingency plans in the event things do not go according to plan.

Risk identification and assessment

Ron does not have cows, so he has to obtain milk either from farmers, or from other businesses that buy milk from farmers, transport it to storage in the industrial zones, and sell it to milk processors like Ron. Ron needs to look into both options, and either decide to go with one, or balance them. Traders who sell milk from farmers will sell it at a premium to cover their costs and make a profit. However, they will ensure a steadier supply, and will therefore minimize the threat of disrupting his activities.

Getting milk directly from farmers will be a logistical headache, with dairy cattle dispersed in the pastures and hinterlands. He will however get the milk at a discount, giving him enough room to breathe. To ensure a steady supply, he needs to contract several farmers, which may lead to additional legal hurdles, and also overcommit him even when he does not need the milk, probably due to a glut.

With a supplier who collects milk from farmers, it will be difficult for Ron to assure quality through traceability since the supplier will just collect milk, put it in a tanker, and take it to storage. The risk of purchasing an inferior product will be high.

Once Ron has the milk, he proceeds to process it into different products. He then takes it to market, where he has decided to use market penetration as a strategy. He will price his products low, with the hope of getting into the market fast. This strategy is risky because it might make people think that the products are inferior. In addition, it could complicate his margins, especially if he has to obtain the raw material from several sources, some of which are unpredictable in pricing.

Risk management, control, and mitigation

Ron needs to deal with the supply issue before he can go into production. After identifying a suitable supplier, Ron and the supplier define how the supplier will ensure the quality of the raw material, and the penalties that will arise due to poor handling before delivery to Ron, as well as the delivery of poor-quality milk. The penalties seek to indemnify Ron, as long as he had no part in the process.

Ron also scouts and identifies 4 farmers who have large hers of dairy cattle. He agrees with them to regularly buy a set amount of milk, designed to bridge any gaps in supply but also to help him price his products more competitively. He likewise agrees with them on the quality of the milk and indemnifies himself. He will however be covered only to the extent of the milk leaving the farm – after which Ron and his transporter will assume responsibility for any issues.

The milk business is volatile, as the weather patterns change, cattle may have ample to eat, relying less on supplements that are used in the dry season, and consequently making milk cost less. Ron needs to ensure that during the dry season, when milk is more expensive, he does not have excess raw material in storage, since he will struggle to dispose of it when the supply improves. He still needs to have enough storage to ride the wave of more supply for as long as possible. To achieve this, Ron periodically rents a storage facility in the industrial zone.

Ron deals with negative perceptions about his pricing strategy by contracting experts in the milk business, health, and showbiz as influencers. They talk about how his milk is rich in calcium and other nutrients and show the high standards that he operates by in processing. Ron also performs regular free tours to school children, their parents, and teachers to train them on milk production and processing in an attempt to win them over and show that it is possible to have a high-quality product that is reasonably priced.

Contingency plans

While Ron has seemingly sealed all supply loopholes, there is still the chance of a disruption of supply. He needs a contingency plan to ensure that, if his supplier is suddenly unable to supply milk, or the farmers are befallen by an unfortunate event that prevents them from honoring their contracts, production continues undisrupted. He cultivates relationships with other suppliers, and agrees with them to be a plan B, in the event of such events. He also talks with his peers so that they can step in to help if he has no raw material at any given point.

The machinery he uses is leased from the Business Operations Agency, while the agency performs regular maintenance, Ron also contracts a technician to run regular checks so that in between the checks by the agency, there are no disruptions. Any insurable risks that may result in losses are assessed and insured separately, by the Life Planning Agency, which provides business insurance services.

Illustration 2

Nelson is a risk management expert, whose main role is to help businesses scrutinize their business and marketing plans, as well as analyze the environment to develop proper risk management approaches. He is an expert in the Risk Management Agency’s automated system, which participants go to for analysis of the risks they face, and how they can mitigate them.

Clients come to Nelson either before or after they have been through the automated system, mostly as part of their business planning journey. Recently, he was contracted by Rose, a participant who intends to run a gaming business in the storehouse.

Rose first engaged the automated system, which identifies the risks that the business faces based on its business plan, current operations, and other information either collected from other systems or supplied by Rose.

The system then produces a detailed report, which identifies various risks, and how Rose can mitigate them to ensure she succeeded. With this report, Nelson starts analyzing Rose’s business and the risks that she faces.

The report has listed a host of risks. New businesses similar to Rose’s are in the process of being set up. They will compete for the same market. The system has suggested that this risk can be mitigated by aggressive marketing, relationship building, and a proper pricing strategy. Nelson recommends that additionally, Rose must adopt a robust system through which she can identify any faulty equipment, and have it addressed in time. This is a serious challenge because gaming equipment is used extensively, sometimes roughly, and can put off clients, causing Rose to lose business.

Another risk identified by the automated system relates to Rose’s experience in running such a business. While she is an enthusiast and has been contracted by a limited partner who had a similar business in the past, she has never run a business without the collaboration of other limited partners. The system recommends business management courses that relate to her business. Nelson further recommends some mentors who can help Rose learn the ropes in the initial stages of her business. She will also collaborate with them, for a few hours every week so that she can get hands-on experience.

After analyzing these and other risks, Nelson helps Rose draw up a comprehensive risk management strategy, which forms part of her business plan. He helps Rose implement the plan while teaching her how to identify, assess, and come up with strategies to control or eliminate risks. While the automated system carries out the bulk of these roles, Nelson periodically reviews the business to ensure risk management controls are in place.

Nelson issues a report every time he performs a review. Rose can use this report to get additional business support where necessary and to show herself as a model of proper business management. The Risk Management Agency also has courses on the subject. Nelson can, based on his assessment on how well Rose is dealing with the risks she faces, recommend some of these courses. The courses will help her not only to respond better to threats affecting her business, but will also mean that Rose is rated highly as someone with the expertise to deal with risk, putting her at an advantage in dealing with agencies that provide business support.