OK, say that you’ve done everything we’ve suggested in the past six newsletters.

You’ve boosted the value of your company in every department, from information technology and workforce strategy to finance, sales, and marketing—all using the Enterprise Value Map™ (EVM).

So is it all smooth sailing now? Of course not.

The future generally does not unfold the way you expect. Tastes change. Technology evolves. So do laws and governments. Disruptions, disasters, and opportunities can render your plans obsolete, as we discussed in Volume 3: “Four Steps to Getting Flexible.” It’s a risky world out there.

You probably think you’re effectively managing all your risks. With insurance, for instance. Security and safety procedures. Business continuity plans. Long-term debt facilities. Currency hedges. Internal audit. Compliance. Sometimes it seems like you do nothing but manage risk.

(You don’t have much choice, do you? Not with shareholders on high alert, class action lawyers circling, and even Moody’s and Standard & Poor’s scrutinizing risk management capabilities these days.)

But are you managing risk wisely? Do all the components of your risk management system work together, across your entire enterprise?

Are you doing it in a way that’s likely to increase value by making you more resilient, or are you simply reducing risks?

That isn’t risk management. Not intelligent risk management, anyway.

If managed appropriately, risk can be your friend
The thing is, you don’t necessarily want to avoid all risks. You can make money by taking risks. Rolling out better products and services, for instance. Finding new customers. Conquering fresh markets.

However, what you do want is to avoid the “dumb” risks—the ones with no upside potential—and seize the smart ones—those calculated to yield significant rewards. Intelligent risk management can help you to distinguish between the dumb risks and the smart ones. It can help you to manage them wisely, to increase the likelihood of getting a high reward with the least exposure.

Intelligent risk management can help drive profitable growth by helping you to identify opportunities that could enhance value without betting the farm every time.

How do you do that?

Identify ways to fail, then find ways to avoid failure
Work your way across the Enterprise Value Map™ (EVM) from left to right, looking at each box. Only this time, don’t ask yourself: “How could we improve this, consistent with our strategy?” Instead, turn it inside out. Ask yourself: “How could we fail with this one?”

For a larger view, select the image Enterprise Value Map.

That’s right: focus on what could go wrong. How could you fail to achieve your targets for price and volume, for instance? What might cause that to happen? What would be the effect?

Also, what are you already doing to prevent, detect, correct, or escalate that problem? What levers and mechanisms do you have in place to manage that risk?

How well are they calculated to help retain and drive growth in revenues, consistent with your overall strategy? How vulnerable are you on that score?

Consider the same questions for each box under each of the other value drivers: operating margin, asset efficiency, and expectations.

Say you have a $95 million insurance policy on a $100 million factory. You may think that your exposure is just $5 million. But if your policy excludes flooding—and a once-in-a-lifetime deluge occurs—your exposure could be far more that $5 million.

Reducing the risk without sacrificing reward
Once you’ve identified the risks and vulnerabilities associated with each box, ask yourself: “What could we do, consistent with our overall strategy, to manage those risks, while at the same time making the most of each opportunity?”

Which levers and mechanisms might help to more effectively align risk management with your overall strategy? What would they cost you? How could you be confident that what you’re counting on to protect your company is, in fact, reliable and effective?

A simple example
In retail, one of the potentially greatest threats to revenue can be the inability to open your doors at all, say because of a power failure.

For some retailers that’s especially bad. They stock exactly the things people want during a disaster. Having to close their doors during a power failure means losing even more than they would at other times.

So Wal-Mart outfitted the back of each store with a high-capacity electrical outlet. If the power fails, Wal-Mart workers can simply pull up a portable generator, plug it in and then resume business.

Having that capability helped Wal-Mart to feed and supply Louisiana citizens after Hurricane Katrina, while most government officials and other retailers were still floundering. Wal-Mart’s wise efforts to mitigate the risk of a power failure probably enhanced expectations relative to the company’s agility and flexibility, as well as revenues.

A messy example
If only it were always that simple.

Risks tend to interact. Even if each department manages its own risks effectively, the interaction can lead to disaster.

Some 80 percent of all major value losses involve the interaction of multiple risks, according to a Deloitte Research LP study: “Disarming the Value Killers.”

At one company cited in the study, those who negotiated with lenders accepted covenants requiring the company to maintain a certain debt rating. When the rating slipped, all loans became due immediately and refinancing the debt proved impossible. The company had to file for bankruptcy.

Some companies attempt to avoid the risk of missed earnings by cutting R&D, only to wind up even worse off. Innovation can slip because they’ve cut the legs out of the product development pipeline. In turn, expectations regarding future revenue growth can suffer.

Our recommendation: look at the big picture. Coordinate your risk management activities enterprise-wide. Assign responsibility for each mission-critical risk, using common approaches where that makes sense and coordinating then all.

Costs
Be sure to plot the costs, as well as the benefits, associated with each move.

For instance, if you’re considering using a single-source supplier to save money, you also become more vulnerable to an interruption in your supply chain that might end up costing you your customer base. Using several suppliers may cost more, but you are typically less susceptible to disruption.

Stepping back
Tailor the solution to the specific problem, industry, company and strategy. But the same principles can work everywhere.

This publication contains general information only and Deloitte Consulting LLP is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Consulting LLP, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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