A close focus on risk management will unlock SME wealth over the next decade

While South Africa’s New Year headlines focus on Eskom’s power generation woes, the reality is that our economy faces many and varied risks.

“Companies that wish to trade profitably a decade from today will have to identify these risks and invest in the necessary infrastructure to keep risk exposures within acceptable limits,” says Hollard Chief Risk Officer Wikus Luus.

What risks do South African businesses face? The World Economic Forum’s (WEF) Global Risks 2015 report identifies social instability, rising unemployment and the failure of national governance as among the top risks that the world faces today. It also warns of the potential for food and water crises due to rapid urbanisation and the poor management of agricultural land.

While there are subtle nuances, local risks largely mirror the risks that are playing out on the international stage. Inequality, as measured by the Gini coefficient, and rampant unemployment are both widely publicised domestically while concerns over ailing municipal infrastructure are commonplace.

More importantly warnings about electricity supply, food security and water quality have been in the public domain for more than a decade already. “All companies, but in particular small and emerging enterprises (SMEs) should be aware that the economic disaster playing out at our power utility today could easily occur in the provision of food or water a few years down the line,” says Luus.

It is becoming increasingly important for SMEs to pay close attention to the global risk environment and adapt their risk management strategies accordingly. Luus believes that the early identification and mitigation of risk is critical for SMEs hoping to achieve a competitive edge over the next decade and that company profits will be closely linked to successful risk mitigation programmes.

SME’s that have not yet put in place countermeasures for Eskom’s load shedding, for example, have missed a trick that will most certainly be felt on the bottom line. In stark contrast, businesses that invested in risk mitigating infrastructure – such as backup generators – following the rolling blackouts in 2008/9 will be in a much better position.

“Smart SMEs that plan and prepare for various risk scenarios will be able to trade profitably despite local infrastructure challenges, a lacklustre world economy and evolving global risks,” he says.

Luus believes that a ‘wait and see’ approach to risk is not advisable and that taking one’s eye off the risk ball over the short-term can lead to higher risks down the line. These risks then increase the probability of loss events which in turn place massive upward pressure on operational costs, including insurance.

Businesses should take a global view of risks and use this information to guide their infrastructure investment strategies rather than deferring much-needed investment expenditure until the good years.

“We urge SMEs to consider scenarios beyond the obvious, says Luus. “They should utilise global and local risk information to construct basic risk scenarios from which event response programmes can be developed – including response plans for the most unlikely risk events.”

Risk information can certainly assist in unlocking profit opportunities. Instead of dwelling on the costs of risk mitigation, company executives should focus on the innovation and opportunity that arise from dealing pro-actively with such risks. Scenario planning for power or water shortages could, for example, lead to wholesale changes to production processes that in turn increase outputs and reduce input costs.

What does the future hold? “If the start of 2015 is any indication then South African SMEs are in for a disruptive few years,” concludes Luus. “They will have to get the basics right to ensure productivity – and that means taking care of the simple things such as backup power, water supply, surge protection, physical security and fire protection as well as prevention measures such as regularly servicing electrical systems.”

Beyond this, businesses can take a scenario view on matters that may impact on the execution of their strategy such as the stability of supply chain, distribution and expected demand for products and services.

About Hollard Insurance

As South Africa’s largest privately-owned insurance group, the Hollard Insurance Group includes the Hollard Insurance Company and Hollard Life Assurance Company. Established in 1980, the Group provides short-term and life insurance as well as investment products to a diverse customer base including individual consumers, commercial entities and corporate clients. It ranks among a growing number of companies advocating an inclusive growth model, measuring its social dividends aside its shareholder contributions. Since inception, partnership has been at the heart of its business model, with the group today boasting over 100 ventures across the insurance value chain. Each one demonstrates the Hollard belief that there is always a better way.

Headquartered in the historic Villa Arcadia in Parktown, Johannesburg, the group embraces 6 million policy holders in 10 countries on four continents. Hollard employs almost 3000 people across the globe and posted R15.3bn in premium income in the year to June 2014.

Source: Hollard Insurance Group

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