Tackling today's risk management challenges.

The following article was prepared by Ajilon Finance Solutions in conjunction with an internal expert consultant in the area of risk management.

The economic recession has forced companies to focus on survival by reducing cost and often, headcount. Organizations are trying to make the most of available assets and resources. With companies in survival mode, in many cases, effective risk management has taken a back seat and controls are being weakened, ironically at a time where risk exposures are probably the highest.

From a practical standpoint, the nature of the risk management challenges organizations face today are vastly different from even a year ago. During these turbulent times, regardless of the industry, companies have to contend with certain risk exposures. This is a good time for your Board and management to consider the effects of these risks on your organization.

Ensure effective governance.

Companies, especially in banking and financial services, have been criticized for their management compensation practices. Many organizations have struggled with rising business losses that have led to eroding stakeholder and public confidence in top management while, at the same time, continuing to overpay top management with lavish salaries and bonuses.

Therefore, a key challenge is to consider a compensation structure that is reasonable to attract and retain talent and, at the same time, combines long-term performance evaluation measures with annual financial performance. The most effective companies use a number of qualitative, longer term performance measures including Balanced Scorecards and Economic Value Added (EVA) in combination with annual financial performance measures.

The roles of the board and its committees, especially the audit committee, are expected to come under greater scrutiny and will need to be strengthened to provide more proactive oversight to company operations. Companies need to consider implementing an effective risk management function that gives management a clear view of all key individual risk factors and their collective impact on the organization's operations. Consider whether your performance metrics are driven by the right Key Performance Indicators (KPI) to give the Board and management greater insight into the company's situation.

Manage financing and liquidity risk.

As sources of credit have dried up, companies are scrambling to find funding to keep operations flowing. Most companies have implemented measures to tighten cash flow management and liquidity. Some of the measures being used include reducing Days Sales Outstanding (DSOs) through aggressive follow ups and collection of AR, while simultaneously slowing down the payment cycle by negotiating longer credit periods. Companies are also attempting to increase the accuracy and timeliness of their cash flow forecasting and this has become top priority for finance executives. Liquidation of inventory at discounted rates is another way of freeing up cash flows. With most companies in a defensive mode attempting to optimize cash preservation, capital expenditure projects have been delayed or, at times, abandoned. Here, the Board will need to step in if they believe that diluting critical investments in capabilities may lead to reduced competitiveness when the market recovers. Boards and management also need to better understand the balance sheet, especially cost and sources of financing, and how leverage impacts profitability.

Streamline operations.

Companies are looking at all avenues to squeeze costs and reduce waste through process improvements and leaner operating cycles. Moving to shared services, outsourcing non-key functions and working closely with suppliers to wring inefficiencies out of the supply chain are some of the practices being considered and implemented.

Blindly cutting costs, especially in crucial risk and compliance functions, can be greatly counterproductive. Reducing resources in these areas would lead to diluted controls and increased chances of fraud.

Overall, there is a greater need to improve monitoring processes. Careful design of the organization's KPIs and tracking these indicators as part of your normal reporting cycles is essential to strengthen monitoring of the operations.

Cope with declining demand.

Demand across all sectors and industries has shrunk in the face of massive job losses and surrounding uncertainty. In this scenario, consider how you can build on existing customer relationships and enhance the customer experience.

Leading companies are improving levels of customer engagement, enabled by collaborative web technologies and social networking tools. Several companies in the technology, consumer goods and apparel industries are co-creating products and services with customers, instantly making the product or service more relevant to customers.

With companies attempting to reduce R&D and capital spend, this is one way of developing a pipeline of products and services that are tailored to the requirements of customers and benefit from ideas not limited to within the organization. Rebuild trust through effective risk management. Ultimately, it is imperative to rebuild stakeholder and public trust to bring about a perception in the market and among regulators that you are doing the right thing and working diligently in the interest of the organization and its stakeholders. The Board and management are being looked upon to play this key role of building trust through principled leadership and governance supported by effective risk management.

To learn more about how to overcome your organization's risk management challenges, or to find out how you can work with top-level expert consultants like the author, please contact your local Ajilon Finance Solutions branch today.