Ignoring risk management can be risky business

Managing risk was long seen as the forbidding province of the insurance industry, a distasteful afterthought at best for many operating executives.

But attentive corporate managers today have been scrambling to get their arms around the concept of strategic risk and to integrate it into their thinking about how to run their enterprises.

The reason is simple: While business always has been risky, a new set of factors now makes it riskier than ever. Rapid technology changes can leave laggards in the dust. Low-cost global competition from India or China can undercut Western companies slow to react. Venture-funded start-ups aim at unseating market incumbents. And one-of-a-kind business juggernauts, like Dell Inc. or Wal-Mart Stores Inc., can enter new markets and wipe out rivals overnight.

In this volatile business climate, managing strategic risk intelligently could become the hallmark of growing companies and successful leaders in the coming years, suggests Adrian Slywotzky, a Boston managing director of Mercer Management Consulting and coauthor of the 2003 book "How to Grow When Markets Don't."

Slywotzky issued a blunt warning in Risk Matters, a client publication circulated in Great Britain this month by Mercer's parent company, Marsh & McLennan Cos. Inc. "Failure to anticipate and manage this broader spectrum of risks can expose a company to dramatic decreases in shareholder value and severe swings in stock prices," he wrote. "The high level of volatility that has long been a feature of high-technology industries is spreading to most, if not all, industries."

For instance, even before the technology bubble burst in 2000, fully 10 percent of Fortune 1000 companies lost more than a quarter of their value in a 30-day period during the late 1990s. The losses, which occurred in different months and years, were most often related to new categories of risk. Today, Slywotzky said, the percentage of companies vulnerable to such fast erosion of market value is even higher, and the size of their potential losses even greater.

Slywotzky advises executives to define the risks to their companies, identify the tools for managing their risks, and seek to measure the risks against the value of the entire enterprise. "The countermeasures are not financial instruments," he said in an interview. "You have to devise a new set of solutions or answers."

That can involve a two-pronged approach: downside strategies to insure or hedge against more controllable risks, such as currency changes or environmental damage, and upside strategies to give companies an edge in approaching the risk/reward calculation.

In the latter category, Slywotzky recommends creating proprietary information, "double-betting" on emerging technology, and even collaborating with competitors on certain back-office functions.

He cited Capital One Services Inc. as a leader in developing proprietary data. The company runs tens of thousands of pilot programs each year to offer credit cards and other financial products to narrowly defined market niches, such as college seniors. "Their information is so good that, when they launch a program, they have a pretty good idea what their response rate will be," Slywotzky said.

The double-betting strategy was classically employed by Microsoft Corp. in the 1980s when it ran two separate development projects, for Windows and OS/2, a computer operating system it was working on with IBM Corp. "That's a form of strategic insurance," Slywotzky observed. And a number of airlines, suffering from declining profit margins, have experimented with code-sharing and combined maintenance to leave them with the financial resources to compete on routes and cost.

Strategic risk also has been emerging as an important topic in business courses at colleges and universities. And, like management consultants, some educators are rethinking the very concept of risk.

"We try to open up the students' eyes to the forces that can really impact their businesses," said Ted Clark, executive lecturer in entrepreneurship at Northeastern University. "We teach them how to manage risk. I don't consider entrepreneurs to be risk takers. I look at them as risk managers. Jumping out of an airplane without a parachute is taking a risk. Jumping out with a parachute is managing risk."

Robert Weisman can be reached at weisman@globe.com.