Risk Profile Development – Value and Benefits

During the past several months, we have briefly described the key components and process of risk profile development. In the last segment of our series, discover the value and benefits of innovative risk profile development and management.

Why go to the trouble of building and developing risk profiles? Beyond the qualitative benefits of peace of mind, learning opportunities for the organization and compliance with regulations, the quantitative benefits of strategic, financial, operational, and hazard risk profile development far outweigh the costs. The organization typically gains a 10-15 times Return on Investment (ROI) for these efforts, while gaining a reputation for being a leader in their field.

Additionally, the organization’s assets will be significantly more valuable in the long run under all standard areas of financial measurement including Profit Margin, Return on Equity (ROE), and Return on Assets (ROA). By removing predictable risk costs from innovative solutions as soon as possible, all stakeholders will gain tremendous economic value. Some examples of risk profile development value and benefits are described below.

Strategic:

“Should we invest in acquiring a business, or develop the capability ourselves”?

This question is continually on the minds of executives who are in a position of increasing an organization’s shareholder profits and value. A typical approach for this example may be to run two sets of “investment potential” numbers, one set for the acquisition and one set for the internal expansion. Then, the results of each option should be further “scored” using a risk profile development process. The final chosen solution is likely to offer shorter timeframes, better controls, or a variety of other important risk mitigation factors to enhance shareholder value.

Using this process, the organization will gain insight about the right path (aggressive or modest) to pursue any given strategy. At the end of the decision-making process during presentations to the executive committee and board of directors, managers will be much better prepared to describe the most complete expected outcomes with full consideration of known or expected risks. With this risk-tempered approach, the organization will feel comfortable describing the plans to shareholders and potential investors for the new initiatives.

Financial:

“How will our plant and sales operations in another country be affected by interest rate changes and regulations”?

This question weighs heavily on the minds of most financial executives responsible for making sure that the organization doesn’t suffer from government and other economic pressures out of their immediate control. Financial risk profile development and management supports the process of deciding what financial instruments to employ to manage these exposures to risk, particularly credit and market risks.

Similar to general risk management, financial risk management requires identifying the sources of risks, measuring them, and creating plans to address them. In the case of interest rate risks for operations in other parts of the world, risk profile development addresses when and how to hedge against rate increases or decreases using financial instruments to manage costly exposures to risk, thereby protecting and preserving shareholder value.

Operational:

“What are we going to do about our workers compensation, liability and health risk and insurance costs which are increasing at a rate beyond our immediate control”?

The operational risk profile development process involves measuring the risk of losses resulting from inadequate or failed internal processes and systems, human factors, and/or external events. As most organizations struggle with these questions every day, the process of operational risk management helps to address these costs by involving complex risk assessment, risk decision-making, and implementation of risk controls.

The main components in the foregoing example are the allocation of responsibility for the current and future care of the claimant, along with the appropriate costs of medical treatments and medications. Without a way to capture and measure the underlying drivers of these costs, and then apply acceptance, mitigation, and avoidance standards with benchmarks, most organizations will find it impossible to create efficient risk management programs. On the other hand, if standards are created and monitored with a risk profile development and management programs, the organization will gain significantly more profitability from their current business operations.

Leading organizations like Dreamworks, LinkedIn, and Google are creating “intrapreneurial” risk management cultures to maximize revenues and minimize costs within an operational risk profile development process to enhance profitability and shareholder value.

Hazard:

“Should we invest in expanding our operations in California, Florida or Michigan”?

With natural disasters such as earthquakes, mud slides, drought and hurricanes to consider, a risk profiling effort will help address the key costs associated with a long term investment for capital spending decisions. Proper analysis and planning will create a selection process to meet the objectives while mitigating unnecessary hazard risk costs.

For any area of your business, risk profiling helps create or enhance profitability and value for long term investors. All investors seek organizations which demonstrate strong risk profile development and management to create, enhance and preserve value. Put your organization in the best possible position to create a lasting business with sustainable long-term organic growth, economic profitability and competitive advantages by integrating innovative risk profiling into your management culture.

By Robert J. Blackburn, Managing Principal, Blackburn Group, Inc., contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..