There are risks inherent in every business in every industry. Some of them are economy wide, affecting all companies in your industry. However, other risks are uniquely created by decisions companies make. The former are what we call Structural Risks while the latter are Variable Risks. And how you understand, analyze and manage each risk type can have a major impact on the success of your business.
What is Structural Risk?
Structural risks are those that equate to the cost of doing business. How and when they occur is out of your control. That’s the bad news. The good news is that they affect your entire industry and possibly businesses in all industries. The health of the economy is a Structural risk. A strong economy drives consumer confidence, employment, buying power and sales for companies in your industry while a weak economy can create layoffs, margin pressure and even business closings. Everyone is affected by the economy. The labor market is another example. The availability of talent to fill positions at your company is the same challenge faced by your competitors.
Structural risks are capable of being discerned by any competitor in your industry and many of them can be managed in the same way across any enterprise. When creating a risk profile for a company, we assess Structural risks first, looking at all four quadrants of our Risk Wheel to assess how best a company can allocate resources to minimize the impact these risks could have.
But if that were all there was to it, everyone could manage risk the same way. They don’t. And one reason is because companies make decisions regularly that create risks that are unique from their competitors.
What is Variable Risk?
Variable risks are those that your company creates and are, for the most part, unique to your operation. Businesses create Variable risks all the time. For example, companies that choose to open facilities along the Gulf Coast in the United States create risks that are not faced by a company located inland or along the Pacific coast. While these locations may be ideal in many ways, they are also potentially in the path of hurricanes that could damage or destroy the site. If competitors don’t have locations there, then the variable risks created are unique to the companies that do. It creates costs to prepare for hurricanes and lessen their impact. Other companies won’t have to include those costs in their budgets. In another example, a company may choose to purchase a building because the cost is low; but the tradeoff is that the facility is located in a high-crime neighborhood, creating risks of theft, potential harm to employees/visitors and damage to brand reputation.
Because Variable risks are based on unique choices a company makes, they should be evaluated prior to making decisions. We use our data-driven Applied Risk Science methodology to forecast what impact a decision can have on your risk profile and the cost to effectively enact mitigate these risks. In this way, companies can have a holistic and more meaningful view of how their decisions affect risk management enterprise-wide. If a company is considering opening a facility in a higher-than-average crime area, risks to employees could increase. A prudent company will take steps to protect their investment in people by using some of the facility rent savings to install video monitoring systems, enhanced parking lot lighting and digital entrance systems.
However, the holistic view of risk will also include analysis of the impact a facility location will have on recruiting efforts, since some candidates may choose not to work at your location because of the crime rate. If the hiring process takes longer than planned, the facility may either be delayed in opening or will open with fewer employees than required. That, in turn, creates risks if employees become stressed due to covering for positions not filled. Using a holistic approach is the best way assess the Variable risks associated with business decisions and manage the risks across the company. Importantly, the costs associated with delayed construction or inadequate labor supply are uninsurable.
When making your next major business decision, it is critical that you consider both Structural and Variable risks so that you can budget risk management accordingly into your plans. A good place to start is with a risk assessment that can look at the impact the risk could have, the cost associated with risk mitigation, and what level of risk your company is willing to accept based on the benefit the decision will have to your company.