Nobody can ever guarantee success. We can however increase our chance of success by reducing risk, and the impact of such risk in the event of it all going wrong.
Government statistics tell a story, regardless of your geographic whereabouts. The stats show that between 80% - 90% of businesses fail within five years. Even more shocking, 96% close down, in any 10 year period. That’s just 4% that make it. So if you wanted to improve your chance of being in that top 4%, surely you’d study what they do, then just copy it right?
Most would say that success comes down to money, but even an abundance of money in a business doesn’t guarantee it reaching that 4%. On average 75% of Venture Capital backed companies don’t reach that 4% either, and these all have an abundance of money at their fingertips. The key to improving the chance of success is risk, & how it’s managed.
When a business offers you an opportunity, they’ll always tell you about the upside - how much money you could make, what benefits you’ll receive by being a part of it, but most will never speak of the possible downsides, or risks the business faces, or even what risk you might face, by being a part of it. Not all risk can be quantified in financial terms either, what about the breakdown of a relationship for example.
Every business has downsides, or elements of risk & possible events that can happen. When these happen it can completely derail the business & turn it from a glowing success to a train wreck within just a few weeks.
Look at all the great entrepreneurs and their business story over the years. They all have incredible stories of failure, or near failure, experiencing the effects of when something goes wrong, but then they rise again from that failure, learning from the experience, becoming stronger, but most importantly no longer looking at the upside of every opportunity anymore. Although they maintain a long term vision for the business, they also focus on possible downsides and the risks in the business, putting in place measures to protect themselves should the worst happen. A quote that has stuck with me over the last few years, Richard Branson famously quoted one of his tips for success, as ‘Always protect against the downside’. That means keeping the big goal in mind, but always having a fall back position. If Richard Branson does it, don’t you think it’s a good idea we all practice it?
Consider the game of roulette. When you visit a casino, you don’t place all your chips on a single number in every bet. The chance of success in such a move would be almost zero. You could balance the risk, and choose to place them entirely on either red or black, giving you a 50% chance of success. Ultimately a more successful approach would be to further spread that risk of failure, & only place a portion of your chips. That way, you’ve created a fall back position. If you lose the bet, you’re still in the game with plenty to play with.
A good business leader will always be able to tell you what might go wrong. It’s important that every business takes the steps to identify what might go wrong. Nobody expects a business to identify every possible risk. Such insight can only come based on the wider experience of the team within the business. As the business grows, the team grow experience every day - most of the day to day fire fighting builds experience within the business. This is the beginning of the risk analysis & mitigation process. Every business has problems, new businesses often face problems every day, fast growth businesses face those same problems, except they’re 100x bigger.
The best businesses will identify those problems, but they’ll also, much more importantly put in place the necessary steps to minimize impact on the business, should the worst happen.
What is Risk Mitigation
Risk mitigation is a process to identify, manage, & reduce the impact of risks to a business, or personnel. Another term for the risk mitigation process is risk management.
The first step in the risk mitigation process, is to perform a risk analysis on the business & its operations. Looking at every area of the business, day to day operations; back office & support operations such as the systems, IT & financing; strategic risks such as economic & competitor related risks; and of course, also looking at your wider business environment such as your supply chain - including your upline and downline, resourcing & local economy.
After identifying the risks, they should be measured and prioritized according to impact on the business. Some risks will carry much greater mitigation costs, the costs associated with reducing the impact of that risk, and so the business may not have the resources to effectively manage every risk fully. The process of measuring the risk can easily be performed by using a risk matrix. A risk matrix has a vertical axis demonstrating the impact of the risk, and the horizontal axis demonstrating the likelihood of the risk. Using the risk matrix, it’s also easier to identify the highest priority risks to focus on first.
After prioritizing the risk, you must now determine the best way to manage that risk. There are four main ways to manage the risk, which ideally you’ll allocate one option to each risk identified.
Risk Acceptance. Considered a strategy for managing risk, this would not reduce the impact on the business should the event materialize. This would generally be an option for those risks with minimal impact, or impact that can be managed easily should it occur. This wouldn’t be a strategy used for managing business critical risks.
Risk Avoidance. This is the complete opposite to risk acceptance. It can be the most expensive strategy. An example of risk avoidance could be abandoning any activity that may trigger the identified risk from materializing. Another example could be a construction site being closed down in bad weather which would completely avoid an identified risk.
Risk Limitation. A limitation strategy is often the most used strategy. It combines an element of risk avoidance with an element of risk acceptance. An example of risk limitation could be where a business identifies a potential problem with a supplier, so their risk limitation strategy would be to use two suppliers, or have a backup supplier in place, should this identified problem arise.
Risk Transfer. The final strategy for managing risk, is to transfer the risk. This is generally where you transfer the risk to a third party. Common examples of this, can be when you buy an insurance policy. By purchasing the insurance policy, you’re transferring the risk to the insurance provider, at least to a point which should be bearable to the business should the event occur. Another example of risk transfer, is when a building occupier uses a specialist Facilities Management business to oversee and manage a building, using specialist people to deliver and manage services. By doing this, the business is transferring the risk of issues such as regulatory compliance over to the specialist, who deal with such issues every day.
Regardless of the strategy chosen, there should be a documented system in place which is tested, & the whole team trained to deal with such an event if it does occur. By putting a process in place it gives you the opportunity to test the scenarios, then perfect your response, looking for areas of weakness and potential break down in the process. An example of this testing process, is when a building performs a fire alarm evacuation. This not only ensures the right people are trained to deal with a real life scenario should it happen, but it also tests the process giving senior management the knowledge it needs to make any improvement, perhaps identifying a faster exit route for part of the building, or identifying a bottleneck in the process.
We can look at two areas of risk mitigation which could be found in any business.
Cloud Storage - How do you currently store files in your business? The majority of businesses still use a paper based filing system, using filing cabinets & storing documents in archive boxes. What would happen to your business if all of those documents disappeared overnight? How would you know what orders you had outstanding? How would you know which clients owed you money, and how much?
Some businesses use a combination of paper based filing, and a computer based system, either using individual PC’s, or a networked system with a centralized server for storage. Again, imagine if your building & its contents disappeared overnight. AXA Insurance state that 80% of businesses experiencing a major incident such as fire, either don’t reopen for business, or go bankrupt within 18 months.
With the latest technology innovations over the last few years, we’ve seen a transition, especially for newer businesses, to use cloud hosting & storage services. In simple terms, this basically means storing all files electronically at a remote location. Using Cloud storage means you can access documents from any computer, and at any geographic location. Most importantly it means the documents are still available should your business premises face any kind of disruption.
I’ve experienced this myself. About 7 years ago, just at the time when cloud storage was in its infancy, I was working doing consultancy work for a number of companies both in the UK, and overseas. All of my work was stored on my laptop, which I generally carried around with me every day. I’d identified the potential risk of losing access to my laptop, but couldn’t really come up with a good alternative to reduce the impact that was cost effective, but also practical for the way I worked. My choice of risk mitigation, although looking back at it now was a pretty poor choice, was to back up everything I did on the laptop, by using a USB memory stick, then storing the memory stick separately to the laptop every day. This was a very basic risk management strategy, but it also meant that if my laptop was stolen, or stopped working for whatever reason, I could still access the documents I needed.
A few months after adopting this strategy, my laptop crashed with no explanation. I lost the laptop and everything it contained for 9 weeks while it was repaired by the manufacturer. If I hadn’t used the USB memory stick to back up my work, i’d have easily been out of business, potentially with litigation claims against me from my clients at the time. I’ve since adopted a full cloud hosting and storage facility for every business or project I’m involved in. By adopting this strategy, again it's a risk limitation strategy but far better than my original choice of using the USB memory stick.
'Always protect against the downside'
Sir Richard Branson, Founder of Virgin Group.
Fire Protection. Most people think that a fire alarm system is there to protect the building from fire. That is only a bi-product of the system. The main purpose of any fire protection system is to reduce risk to the business. Business critical areas should always have the highest level of fire protection system. For example a basic fire protection strategy will be having a handheld fire extinguisher in the building. The highest level of risk protection would be to have an automatic extinguishing system such as a sprinkler system, or fire suppression system, combined with a fire alarm system that automatically dials the local fire authority. Going further in depth to this example, let’s consider an airport facility. With such a high impact that a fire would have on the airport, both in terms of damage to the building, vehicles and aircraft, there is also an impact on the airport from downtime, and of course the risk of fire to any occupants of the building or aircraft. For this reason, airports don’t rely on external fire authorities to protect them from the effect of fire, they have dedicated fire fighting teams on site 24 hours a day. Again, this is an example of how one organisation measures the risk, along with the impact it might have, then putting in place a set of measures and procedures to protect it.
Being a good entrepreneur or business leader isn’t about travelling toward the goal at full speed. I read a quote recently that stated, ‘Being an entrepreneur is like jumping out of a plane, then building the parachute on the way down’. I’d agree with that in part, but actually, I think being a good entrepreneur or business leader, is about making sure you have the pieces of the parachute before you jump. Without a rip cord, you’re destined for failure regardless of how quickly you build the parachute, but if you’re only focused on the jump, you’ll inevitably forget the most important piece of the parachute. That’s exactly what risk mitigation is. Looking at what could go wrong, then putting in place a set of measures & actions that you can take quickly, consequently reducing the impact on you, your team, your clients, and the business, should that risk materialize.
Looking at the entire business life-cycle, existing operations, but also within every future plan or opportunity for the business. Using the risk management process with every opportunity can be a measured approach to operating or growing a business. Perhaps choosing a less riskier option with a higher guarantee of success but lower returns can be a better choice than choosing a higher risk opportunity with higher returns, but much less chance of ever realizing those returns.
Take ten minutes out of your day to identify three risks that could impact your business, then follow the process through. You don’t have to become a risk management guru, but ten minutes today, could save you weeks of torment later on.
Wishing you a great week ahead
We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.
If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen. It’s a full time job. - The time investment alone is enough to put anyone off. So imagine for just a minute, that you didn’t need to do all of this work. What if this could be done over the next 3 - 5 years (by someone else). Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.
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