But I didn’t see it coming!

All too often this is the catch cry after a major incident…..a show stopping incident…..a business crippling incident…

But after the dust has settled and the emotion has been removed from the discussion, the real question is “WHY didn’t you see it coming?”  Show stopping incidents in business – the ones that have the ability to cripple or kill a business, can be predicted.

These risk events will normally fall into either being a Credit, Market or Operational risk event. A common Credit risk event for small business is a major bad debt, which more often than not will have some measures in place to protect the business, (ie. debtor insurance, product claw backs, bonds). Market risk is driven by your market, with mitigation often driven from your business strategy through methods such as diversification or hedging.

But….how well have you shored up the internal foundations of your business? – the key processes and systems of how you do business. How well practised are your team at combating operational catastrophes in your business?

Broadly I define operational risks as the internal failure of the people, processes or systems in a business. These could extend from the crashing of a key piece of IT, or an error in quoting for a large sales transaction, all the way through to the inability to sell a product due to the lapse of a key license or certification.

History shows that these events are often only considered after the horse has bolted and the damage done.

If you think that this is not something that could impact you, then consider the following;

1. A profession service firm missed the renewal of a critical membership, which meant that it was no longer able to submit transactions to its key suppliers. The issue was sorted out, but in the 7 days this took it lost a number of clients. Estimated revenue lost was $130K.
2. A manufacturing firm where the maintenance program for a high volume production machine was allowed to slide, with required maintenance not completed on time or by the required service staff. A subsequent breakdown was disallowed under the manufacturer’s warranty – causing both delays for its repair as well as having the cost for the repair rest with the business. The replacement part came from Germany, the specialist repair engineer from interstate and 12 days of loss of production – total cost $380K.
3. A wholesaler did not run the “normal” induction program for some new employees because “they were busy”. Unfortunately this meant that the new employees were not aware of the warehouse processes used by the company, resulting in a serious injury to one of the employees when they got too close to some loose stock. Direct medical costs were approx $90K, with legal action still pending for a 6 digit claim for pain & suffering and permanent injury.
4. A retailer who had trained their staff, suffered financial loss when one of their sales staff released stock to an unauthorized party. In simple terms, they did not follow the defined business process and did not check the identity of the person collecting the goods. As this was high end componentry, the loss was $140K.
5. A financial services business processed an email transfer request from one of their clients. The staff member skipped the phone contact requirement, which would have detected that the request was in fact fraudulent. The bank wrote off $780K with overseas authorities still pursuing the fraudsters.
6. A call centre operation had a cataclysmic failure of its phone system, meaning that all calls were simply going into a void – for 5 hours. 5 hours of wages for 86 staff, 5 hours of client inquiries not being serviced, hundreds of caller complaints and several penalty claims back from their corporate clients. The business considered themselves lucky to only be out of pocket $83K after insurance.

Could any of these situations be happening in your business? 

In each of these cases, the processes, systems or people within the business – failed in some way. In a few of the cases, a simple process was not followed whereas in others, a defined process did not exist or it simply did not cope. These failures in critical foundation points meant that the business suffered. In addition, in all but one case – at least 1 staff member was held accountable and lost their job.

Each of these situations could have been predicted and whilst they may not have been able to be avoided, the business could have taken action to mitigate the risk – and thus diminish the impact on the business and its staff. By doing this, the business builds resilience.

The way to shore up these basic foundations of a business can be many and varied, from the simple “insure it”, through to detailed back-ups or fall back systems. Sometimes the most effective way to mitigate risk can be a simple well thought out process change.

The critical point here is to identify upfront what the key operational risks are in your business – consider their cost and frequency, and then calmly, make a conscious and considered decision on how to mitigate – rather than leaving everything to chance.

With a strong foundation in place, business owners then have the ability to focus on the growth and success, knowing that the ground will not collapse beneath them.