Identifying business risks: two consultants urge finance executives to become the eyes of their corporations--looking for threats and opportunities inside and outside--and to take the lead in risk management and decision-making to ensure their companies' long-term survival.

• Author: Axson, David
• Position: Risk management

Often, companies stagnate, decline or die because they minimize or miss profound changes. No one individual is responsible for observing external and internal risk factors to assess their implications on the company. To influence the outcome in such situations, finance should become the eyes on the inside and outside of the corporation, watching for threats and opportunities. Issues that emerge as pressure points over decades then often behave like dominoes, cascading in causal relationships that affect multiple organizations.

Consider these examples:

* The serial decline in U.S. manufacturing in the 1970s and '80s in the face of lower-cost foreign competition;

* The demise of numerous minicomputer makers due to the rise of the personal computer;

* The rise of special-interest attacks around sensitive issues such as foreign child labor, employment discrimination and offshoring;

* Regulatory assaults like that perpetrated by New York Attorney General Eliot Spitzer, which have roiled the securities, mutual fund and insurance industries in rapid succession.

To prepare for and respond to such threats, finance needs to be able to identify trends and to determine materiality and probability. A starting point is to analyze external change drivers (demographics, technology, globalization, channels, competitors and regulations) and determine how they affect the specific organization.

With an examination of the key external change drivers in hand, information in silos throughout the corporation should be ascertained and amassed from multiple sources and could prove invaluable. New technologies that enable the aggregation and organization of data can speed this process greatly.

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In today's crusade for corporate survival, the finance function is in position to lead the organization through the uncertainty, volatility and complexity impacting every business and industry. The real value-added role for finance is in helping the organization extend the life of a flagging business, to lessen the steepness of a decline or to seek new opportunities that can fill a void.

A new management model is needed to alert senior management to impending risks. This system involves an understanding of market risk, the development of dynamic planning and decision-making processes and the maintenance of operational control in the face of continuous turmoil.

To launch such a system, finance should start by halting all incremental process improvement efforts and begin outsourcing all transaction processing and administrative work. Next, those seeking long-term survival must take four steps:

1. Establish a risk-based early-warning system to recognize major threatening trends that take years to emerge, assess the degree of exposure to the business and enable managers to act early and decisively.

2. Radically refocus performance reporting and analysis on key relationships and linkages; rebalance measures in terms of leading and lagging, internal and external information.

3. Replace the annual planning process with a repeatable, short-cycle, tactic-focused process that takes less effort and time and yields better results.

4. ...