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The Dimensions of Risk Management - Risk Art 5

By Michael Vincent

28 December, 2006

Over the last several months risk has been examined in many guises.  Suggesting that the identification and control of risk is many faceted and in the eyes of the beholder.  The overriding characteristic of risks examined todate are they have been in the main physical.

This month we look at a project researched and completed by Ian Lowe, of Oxley Queensland,  Ian is a risk management consultant and  his area of interest is "risk management systems" in the context of commercial risk.

Because of the pressures of the modern market place, managers are being forced either by the shareholders or by government action to develop and implement business systems which identify and attempt to manage the various risks being faced by the organisation.   Today's business environment requires organisations to be "good corporate citizens", with stakeholders having specific rights under legislation.

In most instances commercial risk management can be seen as a kneejerk reaction to an organisational failure.  Managers accept the associated losses as being  "part of doing business".  However, lost market share and/or lost market confidence should not be addressed as being "part of doing business".   An organisation's image and reputation within the market is one of its most valuable assets and potentially its most fragile.   Market reputation is directly related to good will. Commercial risk has the potential  to adversely impact on goodwill and thus, long term viability.

Commercial risk can be defined as "relating to the evaluation and control of the exposure faced by an organisation endeavouring to maintain market share".   This form of risk is directly related to the maintenance of client confidence in a suppliers ability to deliver the required output in accordance with an agreed specification.

Unlike many other forms of risk, commercial risk does not relate to a well defined industry standard.  To a large extent this category of risk will change from organisation to organisation and market to market.   Commercial risk accordingly is a function of the interaction of many intangibles including, leadership, organisational culture, organisation structure and business management systems.

The most common method used to manage commercial risk is the establishment of a market reputation as a reliable and consistent supplier.

Assessing Commercial Risk.

Commercial risk may be assessed through a review of both the probability and consequences of a specific loss of earnings or market share.   However prior to reviewing the level of risk, the hazards which give rise to the risk must be identified.  A hazard can be classed  as any event which will lead to diminished client confidence in the suppliers ability to meet an agreed specification.

Some examples of commercial hazards are:

1. The use of unqualified people to perform critical tasks.

2. Unsuitable process review and validation.

3. Ineffective management of data and equipment.

4. Not using or maintaining appropriate materials or instruments.

5. Poor internal communication.

Thus in order to effectively manage the risk, the hazards must be identified and controlled.

The outcomes of lack of risk management are:

1. The client chooses an alternative supplier.

2.  Non payment of invoices and disputes.

3.  Rework of output that is not acceptable to the client.

4.  Loss of market profile, time and money.

5.  Insurance and legal claims.

Case Study:

A small company makes customised high pressure hose fittings wishes to assess the commercial risk associated with the simple task of taking a client's order.

The principal hazard here may be that the person taking the order is inexperienced or untrained.

One risk that flows from that event is that the order will be incomplete and/or incomplete.  If the hazard is correct then the probability of loss is extremely high.   Accordingly the consequence of the risk could be of a magnitude that affects the future viability of the company.

Managing Commercial Risk.

Once the level of commercial risk has been assessed it is then possible to devise management strategies to reduce the exposure; the most common strategies are:

1. The introduction of controls within the business processes.

2.  The introduction of specific activities and processes to manage                           corporate aspects of risk.

3.  Acceptance of the risk.

4.  Outsourcing of the relevant process or activity.

5.   Insurance.

In conclusion commercial risk is an issue which is recognised by management as one that should be controlled.   However, few organisations have analysed their processes and developed an integrated system of process controls and quality activities to effectively and efficiently control this exposure. 

Most of the quality systems which have been developed and implemented by organisations concentrate on achieving certification to an ISO 9000 series Standard.  They are not designed to achieve quality management by systematically managing the relevant commercial risk.

In order to adequately manage commercial risk, organisations must systematically analyse their business processes in terms of the hazards which can lead to commercial losses.   The risks associated with these hazards are assessed in order to identify process controls and quality activities which can adequately manage the identified risks.   Any agreed system of controls and activities must be documented to ensure uniformity and must reflect the executive management's attitude to risk and its control; this commitment provides clients with reassurance.  

About the Authors

Senior Lecturer, Department of Accounting and Finance

Faculty of Business and Economics

Monash University