One of the biggest challenges I face is keeping a prospective client’s eyes from glazing over when I use the words “risk management.”
It’s almost as though those two words are part of a magical incantation capable of putting otherwise engaged executives into a trance.
I understand why. Risk management isn’t particularly glamorous. It’s not exciting or flashy. It certainly isn’t as satisfying as landing a big customer, launching a new product, or closing a major deal.
The problem is that ignoring risk can get very expensive.
A $500,000 lesson
Several years ago, I was having breakfast with the controller of a client with roughly $60 million in annual revenue.
We had worked with the company for several years. The controller had always been receptive to our risk management efforts, but one of the majority owners was less enthusiastic. His colleagues described him as a maverick—a “shoot from the hip” entrepreneur.
You probably know the type.
Despite some resistance, we had helped the company put more than $400,000 back on its bottom line over the previous three years through fairly basic risk management strategies.
But there were certain areas the owner considered his domain, and he preferred that I stay out of them.
Fair enough.
One of those areas was product development and procurement.
During breakfast, I was looking through the company’s financials when something caught my attention.
The legal expense line was substantially higher than the previous year.
I asked the controller, “This number looks bigger than last year—a lot bigger. Am I missing something?”
He explained that the company was involved in significant legal disputes with two outside parties involving possible patent infringement and intellectual property issues.
“How much has it cost so far?” I asked.
“About $500,000 in legal fees alone—and we’re nowhere close to resolution.”
That was just the direct cost.
It didn’t include management time, lost productivity, distraction, missed opportunities, or the other indirect costs associated with prolonged litigation.
The risk we never got to evaluate
Years earlier, I had recommended an enterprise-wide risk assessment.
Management welcomed the idea, although with some skepticism. But product development was carved out of the process.
I argued against excluding it. Risk doesn’t respect departmental boundaries. A decision made in product development can become a legal problem, an operational problem, a financial problem—and ultimately an ownership problem.
I didn’t win that argument.
Years later, the legal expense line told the story.
That experience reinforced several lessons for me.
1. Risk management takes a team
No owner, CFO, controller, attorney, insurance broker, or risk manager sees everything.
Surround yourself with people whose skills complement your own. Play to your strengths, but recognize where someone else’s expertise can help identify a problem before it becomes expensive.
The objective isn’t to eliminate risk. Businesses have to take risks to grow.
The objective is to make sure you understand the risks you’re taking.
2. Put dollars around risk
If risk management remains an abstract discussion about “best practices,” it’s easy for executives to tune it out.
Translate risk into dollars.
What could this cost us?
What could we save?
What happens to profitability if this goes wrong?
What would it cost to prevent or mitigate the problem today versus dealing with it after the fact?
Risk management becomes much more interesting when the conversation moves from hypothetical exposures to actual dollars hitting—or leaving—the bottom line.
3. Use teachable moments
A $500,000 legal bill gets everyone’s attention.
The unfortunate part is that many losses like this can either be prevented or substantially reduced through better due diligence on the front end.
That doesn’t mean every lawsuit is avoidable. It means asking better questions before making important decisions can dramatically change the outcome.
A relatively small investment in legal review, contractual analysis, intellectual property due diligence, insurance review, or another appropriate risk-control measure can look awfully inexpensive compared with $500,000 in legal fees—and counting.
That’s what good risk management should look like.
It isn’t a binder sitting on a shelf. It isn’t an annual insurance meeting. And it isn’t someone telling an entrepreneur all the things they aren’t allowed to do.
It is a disciplined process for identifying what could derail profitability, deciding which risks are worth taking, and putting safeguards around the ones you choose to take.
Do you think that owner might be a little more willing to sit down and talk about risk management today?
Probably.
And one final lesson:
Never say, “I told you so.”
