Keeping a cool head in tough times

South Africans are a rare breed of caution coupled with very short term focus.With us it’s all boom or bust.

But says Craig Smith, Risk Analyst, Enterprise Wide Risk Managementat Alexander Forbes Risk Services, “the fact is that cycles come and go. The trick is not to panic and not cut what is essential or valuable when things get rough.”

Instead, make sensible and sustainable adjustments to your business and your risk management strategyso that companiesare ina strong position when the recovery comes.

“If you are not circumspect about what you cut in hard times, you could find yourself in a poor position to capitalise on the good times when the market improves” warns Smith.Companies that have overreacted in tough times often find themselves understaffed, short of skills or over exposed to risk when the market picks up.In short,“getting the ‘sustainable’ part of sustainable risk management right in tough times separates the winners from the losers when the turn around comes” adds Smith.

First prize of course is to self insure a percentage of your risk and adopt sustainable risk retention strategies in good times. Companies thatdid this during the good times werealready preparedforthe current cycle.

And even if you took a short term view in the good times “you can still plan for recovery in hard times” says Smith.In short, companies should not make short term decisions,that could be very difficult to reverse later on, too quickly.

So while, right now, Smith suggests companies consider relying more heavily on self-insurance this doesn’t mean that companies should self-insure 100% of their risk.“Companies need to decide, in conjunction with a reputable risk retention specialist, which and how much risk they can reasonably self insure” says Smith.

Companies taking on a larger chunk of their own riskneed to do this intelligently so that they are truly in a position to manage this risk in the event they need to.

In fact in tough times, if properly managed, risk management can unlock earning opportunities that many companies may have overlooked.Correctly assessing risk can remove the doubt and uncertaintywhich often cause companies to be more cautious than necessary, preventing them from going as big or as far as they could.

As such “risk management is also about managing the up side, working closely with companies to understand their objectives over the next 24 or 36 months - and then working out a risk management strategy that will actively contribute toachievingthese goals” adds Smith.

For example,in a poor commodity cycle there is a tendency for mines to cut things like mine safety, training, research etc., even though these, ‘non-core’ activities play a vital role in the recovery of a mine when commodities pick up.Knowing what to cut, and how much to self insure is critical in positioning any business for instant turn around when the recovery comes.

“Too many companies continue to suffer the consequences of short term thinking well into positive cycles because they panicked and crippled their business in tough times” concludes Smith.