Assuming for a moment that the average risk manager is constitutionally incapable of allowing a risk to go unmanaged, the real danger in our profession is the former, that of a risk manager turning into a corporate pest. Once people start rolling their eyes at the mention of involving risk management on a deal, the risk manager has lost his or her effectiveness.
This negative perception stems from a failure to properly define risk management. In finance, risk is almost always accompanied by its corollary, "reward." In the investment world, proposing a riskless investment with high rewards is tantamount to selling a perpetual motion machine or a pill that turns water into gasoline. Any effort to strip all risk out of a business deal runs the danger of sounding like an attempt to make the deal unprofitable.
It is no wonder that attempting to roll out an enterprise risk management (ERM) program can become problematic. If the promise is to reduce risk in business transactions, senior management is likely going to be dubious about the program. If the proposal includes elements of risk transfer, then financially-minded types within the company will quickly do the math: Transfer of risk means an erosion of profit.
The predisposition to risk transfer has colored the world of risk management to the point that risk has taken on a negative connotation. It is like toxic waste that we want to transfer to someone else's property before the container ruptures. And of course, no one is going to take our toxic waste voluntarily--at least not without a price.
Ironically, it is the negative perception of risk that provides an opportunity for risk managers to turn it into a revenue opportunity for their companies. If risk, or the opportunity cost associated with risk management, avoidance or transfer, can be identified and quantified, it can be assigned a value. If a business deal has an identified risk associated with it, it can be assigned a monetary value and used to drive the price of the deal up or down. A tool that can be used to alter the cost or revenue on a deal is valuable indeed.
For example, consider a sale where the company is considering offering extended payment terms to a customer for the purchase of machinery. Good risk management would dictate that the customer carry insurance on the product, agree to indemnify the seller and otherwise promise to be responsible for the machinery until it is paid in full.
Typically, battles over these terms and conditions have a prohibitive impact on the deal and taking a hard line on these items is expensive, and may even risk killing the deal. But, an identified high-risk situation may afford the risk manager an opportunity to shine in the eyes of the same operations executives so reticent to confront the exposures for fear of squashing their profits.
Pricing and charging for risk is a very common practice in the marketplace. Not only have insurance companies been doing it for years, but everyone from credit card companies to cell phone providers considers it standard operating procedure. Identifying, quantifying and charging for risk is a well-established business practice. When it is made into an established risk management practice, then risk management transforms itself from a barrier builder to a revenue enhancer.
BEAUMONT VANCE manages risk for Sun Microsystems Inc.
February 1, 2005
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