Goodwin Procter

Confronting the Lesser-Known Risk

March 14, 2014
To remain successful, a company must spend time and energy addressing less-obvious challenges.

The modern business faces many challenges. A strong company spends the bulk of its resources on solving the most pressing challenges – those imposed by the market.

How can we improve sales? Cut costs? Improve the quality of our product? But to remain successful, a company must also spend time and energy addressing the less-obvious challenges.

If unwatched, these non-market risks can grow, until they eventually erupt with devastating results.

Non-Market Risks

Supply Chain Risk: Most manufacturers buy at least some of their products’ inputs, rather than make them all in-house. This common practice can put the safety and quality of the end product in the hands of the suppliers. For example, some Chinese food companies facing serious market pressure famously learned, to their sorrow, that the cheap milk they had bought, packaged, and resold was diluted and laced with melamine – a toxic chemical.

Transportation Risk: Whether materials are sourced from outside the company or within, they must be transported to the point of assembly. The global transportation system is robust, but it is not invulnerable; nearly any transport pathway can be disrupted by a strike, severe weather or a natural disaster.

Regulatory Risk: Every business operates under some combination of state and local regulations.  Regulations may dictate facility siting and design, mandate worker safety precautions, limit what products may be sold or have any of a host of other impacts. Negative changes in these regulations can deal a serious blow to a company’s bottom line.

External Threats: Like other members of society, businesses face the threat of attack by bad actors. Increasing globalization means not only more opportunities for business, but more exposure to bad actors the world over, from ordinary criminals to hackers to terrorists. For example, a major retailer recently admitted that millions of customer credit card numbers had been stolen -- apparently by Eastern European hackers using software obtained from a Russian teenager.

Social Media: With the success of social media networks such as Facebook and Twitter, even the lowliest employee may have access to a planet-sized megaphone. If an angry consumer’s tirade goes viral or a disgruntled worker reveals trade secrets, a business’s plans can be disrupted and its reputation damaged. As former National Security Agency contractor Edward Snowden demonstrated, those with access to your data can share it with the world.

Political Risk: Although our government should strive to be impartial, in governance, as in business, who benefits all too often comes down to who you know. A company may find itself facing unexpected competitive pressure if a rival can use friends in high places to procure a government contract or ease the path to a building permit or business license.

How to Address Non-Market Risks: A Holistic Approach

Non-market risks come in all different sizes and shapes, but all share one important factor: they are fundamentally unpredictable.

No level of planning can prevent a blizzard, and no amount of lobbying can guarantee favorable regulatory change.

But that does not mean there is nothing to be done.

Companies can and should take steps to: Identify the most likely and most costly risks in each category; identify and implement changes to reduce those risks’ potential likelihood and cost; and plan how to best deal with each risk if it occurs. Enlisting the assistance of an outside crisis-management professional may assist a company in all of these steps and provide a ready resource should any of the risks materialize.

The Holistic Approach in Practice: Examples

Supply Chain Risk: Ensure that supply contracts state any important quality standards clearly, implement routine testing to ensure compliance with those standards and consider obtaining insurance or requiring the supplier to do so.

Transportation Risk: Explore alternative sources and transport routes for important materials. It may also be worth warehousing a few days’ worth of stock near the point of assembly.

Regulatory Risk: Stay abreast of proposed regulations that could affect the company and occasionally remind local law-makers of the jobs and other benefits the company brings to the community.

External Threats: Review electronic and physical plant security protocols on a regular basis -- new technology or new threats may mean a change is in order. Routinely check the integrity of physical safeguards: Are doors being propped open? Lights left off or burned out? Cameras functional?

Social Media: A positive relationship and outlook is like a vaccine against social media attacks.  For example, make a point of respectfully and actively listening to complaints, rather than ignoring them or responding in a hostile or defensive manner.

Political Risk: The ease and reach of new media can benefit the company on this point.  Sweetheart deals that amount to unfair competition will often be newsworthy and the resulting public scrutiny may take the wind out of a rival’s sails.

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