Did you only focus on individual risk factors when you last undertook a risk management matrix for your SME?
That’s OK, but the 2023 BDO Global Risk Landscape Report suggests widening your vista to the links between risks. BDO is one of the world’s largest auditing and accounting organisations and operates across Australia.
This article explains why you should consider the connections between risks and combinations of them for your evolving risk management strategy.
Moving to a risk multiplier mindset
Shifting to a risk multiplier mindset acknowledges we’re in a time of perpetual crisis. It’s where volatility, uncertainty, complexity, and ambiguity (known by the acronym VUCA) are increasingly the norm, says BDO.
It identifies the risk multiplier effect as when individual risks intersect with and amplify each other. For example, risk multipliers include:
- Political instability, such as within a nation
- Geopolitical tensions
- The Russia-Ukraine War
- The COVID-19 pandemic.
The United Nations has also declared climate change to be a ‘threat multiplier’.
BDO’s survey of 500 business leaders across the globe found more than eight in 10 said risks were becoming more interconnected and complex. That’s why SMEs should reframe their risk management.
Changing your mindset means welcoming risks rather than being risk averse. Seeing them as opportunities rather than challenges. Taking a preventative approach to minimising inevitable risks. Risk-taking isn’t necessarily part of our nation’s DNA. Consider that just 2% of Australian businesses are considered innovators in world-leading ways, according to the Productivity Commission’s February report.
The biggest risk multipliers
It’s important to identify and mitigate risks before they transform into what BDO terms ‘existential’ threats.
Business interruption has the most potent risk multiplier effect. When you combine it with capital/funding issues, those account for almost a quarter of the biggest threats to business, says BDO.
Next on the list of risk combinations creating the biggest threat are:
- Environment x supply chain (17%)
- Cyber attacks x fraud (13%)
- Cyber attacks x brand damage (12%), then
- Geopolitics x supply chain (9%).
Risks may be paired, tripled, or even quadrupled. This causes threats that overlap with each other and amplify the threat. Risk multipliers can be financial, operational, reputational, or, even where your business performance relies on a single customer, a product or market.
Most powerful risk combinations by industry
Here’s BDO’s lens on the most powerful risk combinations by industry:
- Financial services: Business interruption x capital/funding
- Tech, media, and telecoms: Business interruption x capital/funding
- Power and utilities: Business interruption x supply chain
- Oil and gas: Environmental x supply chain
- Real estate and construction: Environmental x supply chain
- Healthcare and life sciences: Environment x people
- Shipping, transport, and logistics: business interruption x supply chain, and
- Manufacturing: Environmental x supply chain (equal).
A new approach to risk
This article has covered taking a risk-welcoming approach, and shown how risks combine and multiply, thereby amplifying their effects. Three in four business leaders, who BDO surveyed, said they did not gather expertise across their business for insights into how risks increase and multiply. That’s not sustainable in a ‘perma-crisis’ approach.
Embed risk management awareness across every role in your business and:
- Conduct regular audits to identify possible risk multipliers
- Assess risks that have a multiplier effect
- Roll out strategies to target particular risk multipliers
- Build early-warning systems to identify risks before they move into other business areas, and
- Link expertise from across your business to manage risk multipliers and their effects.
A useful tool is a combinatorial risk matrix that allows you to assess the combined likelihood and impact of risks which could be more than the sum of the individual risks. Usually, such a matrix won’t come cheap, such as this one. Keep in mind, too, that research shows some risks you identify could happen at the same time, others may not appear at particular times, some risks can eliminate other risks and yet others may follow in an unexpected order.
The convergence of various risks will significantly influence the optimal coverage required for your business insurance policies. Check with us to make sure your sum insured is still correct.