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Corporate risk: when upside is a downer

Ian Ingram
Feb 11, 2014 9:01:00 AM

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Proxma image; Ian Ingram

Any accountant will tell you that more businesses go bust in the recovery from a downturn than in the recession itself. A big reason for this is poor risk management – because managers think they can stop worrying. They can’t.

For most larger businesses, of course, the risks are slightly different. With more ballast in the balance sheet and greater volumes of sales, the danger of overtrading and running out of cash before the business has rebuilt its muscle after the lean years is much less significant.

But the risks are, if anything, harder to manage in bigger companies. There’s evidence of this in two recent reports from Deloitte. The first, a survey of chief procurement officers (CPOs), revealed that 50% think procurement-related risk has increased in the past 12 months – a period when the green shoots of recovery were already in evidence. One problem is that already lean supply chains can get stretched as trading increases – so you need to manage the risk of a small business in that chain running out of cash.

Actually, this quote from the report is more revealing on the risks of the upturn: “While 88% of CPOs stated they either delivered or exceeded their savings plan last year, a large number commented that sustaining this level of value delivery was the primary cause of sleepless nights.” They know that growth equates to higher volumes, more constrained supply – as those smaller companies handle that overtrading risk – and therefore higher prices. Sleepless indeed…

Another problem, reckons Deloitte, is that in many businesses, departments are having to take ownership of their related risks. This increased accountability is probably a good thing. If risk management is ghettoised in the finance function, for example, it can easily be mismanaged or overlooked.

Which brings us to that second Deloitte report. This addressed the problem for CFOs of financial planning and analysis – which, again, is more challenging as markets pick up. The big win, said the firm, is “risk-adjusted forecasting”.

And it warns: “there can be a perceived complexity associated with multivariable stress-testing analysis, which some executives view as intimidating, as well as worries that corporate IT systems may not support the process.”

If you’re “some executive” coming to terms with a sophisticated risk register, “multivariable stress-testing” and all the attendant reporting and mitigation requirements, that’s bad enough. If you’re a procurement manager, dealing with supply chains that have extended and become incredibly complex after two decades of globalisation, outsourcing, specialisation and intensification? That’s a really tall order.

Hey – if a well-oiled machine like supermarket giant Tesco in the UK can fall victim to a scandal involving horsemeat in the meat supply chain, you know these procurement risks are a tough call…

Worse, as growth emerges and confidence returns, CFOs are keen to get more risk back on the balance sheet. They want new markets, new products, new efficiencies – all the good stuff that will keep them attractive to investors. That means innovating, expanding and refining supply chains. And all the while, the board expects those headline cost savings numbers achieved during the downturn to keep moving in the right direction…

The Deloitte report also highlights CPO fears on data quality and analytical capabilities; and procurement team skills. So is there any good news?

Yes. Although there are downside risks to an upturn, there are also upside risks. If procurement can make a strong case for investment (remember, the UK FTSE 100 alone is sitting on £166bn in cash; for all US corporates it’s nearly $1.5 trillion) as part of the push for growth, it can address some of those systems and skills issues.

Actually, 58% of the CPOs Deloitte spoke to plan investment in analytics capabilities this year.
Nag the CFO – be one of them!

And if you’ve taken steps to become a genuinely strategic procurement function – by acting as a conduit for innovation out of the supply chain and into your own businesses, for example – then a period of growth can be a massive opportunity.

Indeed, it’s not a stretch to say procurement should be a driver for growth. But if you’re one of the CPOs losing sleep over beating a recession-era cost savings programme, it’s unlikely you’ll have the appetite to manage for that upside.

Ian Ingram

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