Quadrant has been fortunate enough to work for a very broad range of organisations over time. We’ve maintained a good cross section of client businesses, believing that lessons from one sector are transferable to others. And, looking back, a theme which emerges regularly is the need for proper risk evaluation. There is a tendency for management teams in certain business circumstances to underestimate or misunderstand the risks to their enterprises.
Certain circumstances? What we mean here are artificial situations which create a temporary advantage or opportunity. Frequently, management teams can’t, or won’t, fully appreciate how this can distort their business model, and what risks this creates for their future. A couple of examples where more thorough risk evaluation would have helped our clients:
The NAAFI has been, and continues to be, a major supplier to HM Armed Forces, with grocery stores, leisure outlets, catering and other services. In this position, it was well placed to create a sustainable, balanced business. However, for many years, it existed through a tax anomaly; it could sell duty free alcohol and tobacco, and generate big margins on these products. For many years, this part of its business underpinned all the rest, resulting in a major cross-subsidy and distortion of their business.
This situation carried at least two major risks for NAAFI:
- The government could change the rules on duty free
- The service clients would object to the NAAFI’s role in encouraging smoking and drinking by the troops, with the inevitable impact on their fitness for duty and health
It took a lot of courage, and a holistic approach to strategy, to move NAAFI away from a peddler of booze and fags to a less risky long term position, as a true supply partner for the military. We were fortunate enough to work with the management team who formulated and executed this tough decision
You can also observe instances of risky cross-subsidies in the banking industry. Here, the meaning of ‘bad’ and ‘good’ customers is reversed. The ‘bad’ customers, who go overdrawn, make late payments, and run up debts, subsidise the ‘good’ customers, who avoid these behaviours. It would be in the interest of the ‘bad’ customers if their banks helped them to adopt ‘good’ habits; but what would happen to bank profits? How would ‘good’ customers feel about having to pay real money for services? Eventually this cross subsidising will fall into disrepute and have to be replaced. But, it’s fair to ask, are the banks doing enough to educate ‘good’ customers about ‘fair charging’?
Risk evaluation and mitigation is another of those areas, like PESTLE analysis, that is sometimes a ‘going through the motions’ activity rather than a serious endeavour; a page to be completed by junior managers. In our experience, one of the characteristics of a good senior management team is the ability to really understand what risks the business runs, and how they might impact; and then put in place long term programmes to manage them down. For example, many major brand owners saw the long-term risk from retailer consolidation, and maintained long term investment in brand marketing and product development to mitigate this major business risk.
So- check the risk evaluation pages in your latest plan. Think the worst – or, as a good client once expressed it to me, ‘panic early’.