1) Risk plays an inherent role in companies and effective risk management is important, especially given increased globalization and lean supply chains. 2) Companies should analyze their risk profiles by considering the probability and potential cost of events to determine how to mitigate high probability/high cost risks or communicate low probability/high cost risks to investors. 3) Identifying all potential risks, no matter how unlikely, and understanding their consequences is important, as unlikely but high impact events can significantly affect companies, as examples like the BP oil spill show.

1. Risk Optimisation
Risk plays an inherent role in the development of any Identifying Opportunities
leading business. This is particularly true in the current Many businesses misclassify risks and overly focus on
economic climate, where the most successful those which are either relatively low impact (such as
companies are often those which effectively manage employment issues), or high impact, well documented
risk. and likely to affect the entire market (e.g. the
Eurozone crisis). At 4C, we look at risk across two key
As the economy becomes increasingly globalised, dimensions:
companies are finding themselves exposed to more
risks. Tighter margins and lean, extended supply · Cost: calculating how much a given event
chains have further magnified the potential effects of could end up costing a business
unforeseen events and significantly impacted · Probability: how likely is it that the event will
company risk profiles. Leading businesses have reacted occur (see Figure 1)
to these amplified threats by carefully analysing their
risk profiles and applying new quantitative High probability/ high cost events need to be
approaches to examining evolving hazards. mitigated, through hedging, or building a model
designed to insulate the business. Often the more
In times of austerity it is not possible to put in place interesting opportunities are found in the areas
contingency plans for every potential scenario. All relating to either high or low cost, low probability
businesses take risks and consequently expose their events. These scenarios were referred to as “Black
investors (and other stakeholders) to potential losses. Swan” events, in Nassim Nicholas Taleb’s “The Black
Recent examples include suppliers providing burgers Swan: The Impact of the Highly Improbable”. In many
which contained horsemeat and Boeing’s Dreamliner cases the most economical way of dealing with low
fleet being grounded due to tech malfunctions. Best probability/ high cost events is to simply communicate
practice is to understand each individual risk and the threat to investors and explicitly take the risk.
either explicitly take the risk, or devise an approach
aimed at mitigating it. Different industries and companies choose to manage
Release cash Reduce cost Manage risk Improve ROI
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2. risk in distinct ways. Investors are often better able to
absorb a particular risk than the company itself, as
part of their diversification. The airline industry, for
example, is made up of companies which frequently
self-insure their own fleets. This means the investors
shoulder the potential cost of a major incident, rather
than purchasing expensive insurance that may not
provide full compensation. British Airways is one of
the companies which has adopted this approach.
Businesses should think hard before investing in
solutions such as the hedging of commodity costs and
instead consider clearly communicating risk strategy
to investors. By explicitly linking performance to
commodity pricing, investors can build a clear
understanding of the overall risk vs. benefit analysis
(this is an approach used by some food companies).
provides examples of some of the various types of
risks that companies face. Many risks are interlinked
and often one event will act as a trigger for a
multitude of scenarios. A case in point is the collapse
of financial services firm Lehman Brothers in 2008,
which set in motion a chain of events that continues
to affect companies today.
When looking to determine the probability of any
given event taking place, we have found that a
statistical approach, backed by the right data, is
usually more accurate than expert predictions. Nate
Silver, author of ‘The Signal and the Noise’, accurately
predicted the outcome of the 2012 USA election in all
50 states. Whilst most experts were swayed by
Figure 1
comment and perspective on events, Silver’s statistical
approach allowed him to foresee Barack Obama’s
On the other side of the spectrum, some companies comfortable victory.
are unwittingly exposing themselves to major risks.
The financial crisis demonstrated the relatively small Generally speaking data relating to past events can, at
amount of structural insurance which financial the very least, provide an estimate of the probability
institutions had in place. Many companies were of an event occurring. Once the overall approach to
effectively self-insuring but not realising what they managing and tracking risk is laid out, a monitoring
were exposed to. The industry as whole process can be put in place to understand changes in
underestimated the risks involved in their business. the probability of particular events occurring. On the
For example, there was a belief that the risk of default other hand, when trying to predict the likelihood of
on mortgages in the USA should be determined on a an event for which there is very little data, or, in the
case by case basis. In reality the probability of a words of Donald Rumsfeld a “known unknown”, it is
default on each mortgage was highly correlated to best to apply common sense coupled with statistical
the others. analysis.
Identifying Risks
Risks can be identified, however, most companies fail
to look beyond ‘standard’ risks. Forward looking
companies are able to:
· Identify all of the potential threats which the
business is vulnerable to and their
consequences
· Estimate the probability of each scenario
Determining the various threats facing a business
provides a platform upon which an effective risk
management programme can be built. Figure 2

3. Building a Sustainable Model
Figure 2
Rather than purchasing insurance, adapting a business
model to mitigate threats is often the most effective
Some Examples of Risks way of managing risks. In 2012, dry weather
conditions in the UK severely affected crops, forcing
Walkers to cease crisp production for a number of
Strategic Risks Expense Risks weeks. For a company which prides itself on using
only UK potatoes, the possibility of a more severe
New competitor Loss of key supplier drought in the future represents a huge risk. Walkers
responded by investing heavily in innovative solutions
Market shrinks Increased costs aimed at reducing dependence on water from
Economic recession Rising commodity traditional sources.
New regulations prices
New regulations Projects include devising a way to harvest the water
given off by potatoes during the cooking process and
External Risks Financial Risks the iCrop, a device which monitors soil moisture and
uses weather forecasting data to set the amount of
Natural disasters Devalued assets water needed to irrigate fields. These initiatives will
not only make factories less dependent on volatile
Reputational Changing interest weather conditions, but also provide an advantage
damage rates over competitors.
Terrorism Supply chain
breakdown Juggling Growth and Risk Management
Leading companies are taking a new approach to
managing threats and thinking about risk as part of
Prioritising and Contingency the budgeting process. This best practice includes:
When deciphering potential risks, businesses must not
only focus on the most likely disruptions but also · Having a process that identifies and captures
those which could have the most dramatic impact. The all risks, including low probability but high
necessity of this approach is illustrated by the 2010 cost scenarios
Deepwater Horizon oil spill. In this case the National · Thinking about risk in a structured,
Commission on the BP Deepwater Horizon Oil Spill probabilistic way
and Offshore Drilling found that; “The companies · Consciously deciding which risks to take and
involved in the Gulf of Mexico oil spill made decisions which to mitigate, whilst communicating to
to cut costs and save time that contributed to the investors the risks that they are exposed to
disaster”. Had these cost saving initiatives been
successful they would have delivered only a fraction of By adopting this strategy, businesses are able to
the damage caused. leverage their risk management capabilities in order
to increase efficiency and drive growth.
When Comet went into administration late last year,
their suppliers found themselves in a weak position.
Many vendors were unable to recoup what they were 4C Associates has the insight, technology and
owed as they were low on the list of secured creditors. experience to drive rapid profit improvement.
The probability of Comet going out of business was We offer specialist consulting, technology and
high, and consequently so was the possibility that managed services to transform your costs. We
suppliers would make a loss. The combination of high apply industry and functional expertise to deliver
risk and limited potential benefits should have proved exceptional benefits.
a red flag to many vendors.
Our team works with leading organisations across a
Companies also make costly mistakes when over range of cost categories including Direct Materials,
compensating for risks. At 4C, we have seen many Services, Marketing, IT, HR, Logistics, Supply
cases of clients over insuring. Although these Chain, Property and FM. We apply deep practical
situations typically receive less media attention, they knowledge, combined with process and change
can significantly inhibit company growth. Working skills, to deliver reduced costs and increased profits.
with a client, 4C was able to ensure significant savings
by using a less expensive solution to carry out the To discuss how we can transform your costs please
client’s deliveries. Adopting the new approach meant contact us at:
relinquishing a percentage of the insurance paid out
for lost deliveries. A thorough study demonstrated Tel: 0207 605 1600
that the cost benefit vs. loss analysis, justified the risk Web: www.4cassociates.com
of lowering the insurance percentage. Email: Petra.urhofer@4cassociates.com
Release cash Reduce cost Manage risk Improve ROI
T: +44 (0)20 7605 1600 E: info@4cassociates.com W: www.4cassociates.com

4. Release cash Reduce cost Manage risk Improve ROI
T: +44 (0)20 7605 1600 E: info@4cassociates.com W: www.4cassociates.com