With any new project it’s valu­able to have strict cri­te­ria around when, and how, to re­view projects and have some clear go-no-go points. And to con­sider po­ten­tial bail-out op­tions be­fore pro­ceed­ing, writes Cathy Parker.

NZ Business - - CONTENTS - Cathy Parker is a di­rec­tor of Adrenalin Pub­lish­ing, the owner of Man­age­ment magazine, and serves on a num­ber of boards.

Governance of risk is a two-way street. By Cathy Parker.

PRETTY MUCH ev­ery­thing we do in life in­volves risk. If we were too risk ad­verse we would end up frozen in our present state and the same ap­plies to busi­nesses. You gen­er­ally have to em­brace risk to de­velop. And risk cov­ers both up­side and down­side.

Much has been writ­ten around gov­ern­ing risks such as health and safety but I want to fo­cus here more around governance of busi­ness risk as it ap­plies to busi­ness strat­egy and im­ple­men­ta­tion de­ci­sions.

This might be launch­ing a new prod­uct, en­ter­ing a new in­ter­na­tional mar­ket, mak­ing an ac­qui­si­tion or con­versely shut­ter­ing a prod­uct, ex­it­ing a mar­ket or mak­ing a di­vest­ment. All of these have risks but all also have re­wards (up­side risk) and it is rare you can look for an up­side with­out hav­ing a down­side risk.

Of­ten peo­ple, and es­pe­cially man­age­ment, can get swept up look­ing at the up­side part of the equa­tion for a project or pro­posal. It is part of a board's role to en­sure that con­sid­er­a­tion has also been given to the down­side and es­pe­cially what might be the worst-case sce­nario which, in some cases if things don't work as planned, could be the death of the busi­ness.

I have cer­tainly had a cou­ple of past governance ex­pe­ri­ences of pro­ceed­ing with projects where only the up­side was se­ri­ously con­sid­ered that have not worked out and the down­side that oc­curred had the po­ten­tial to crip­ple the busi­ness.

The governance role is look­ing to en­sure that projects are pur­sued where there is a dis­tinct (and prob­a­ble) up­side and, ideally, a smaller po­ten­tial down­side. Or one that can be man­aged and con­tained in a worst-case sce­nario and where, even if the re­sult is neg­a­tive, it is not sig­nif­i­cant in over­all terms for the busi­ness' on­go­ing vi­a­bil­ity.

Things that can help in this de­ci­sion­mak­ing is hav­ing some ro­bust ‘what if' anal­y­sis around costs, pro­jected sales vol­umes and sim­i­lar. Based on per­sonal ex­pe­ri­ence there can be a trend for man­age­ment to mas­sage project pro­jec­tions to demon­strate the board's re­quired out­comes in terms of sales, costs, etc, rather than be­ing re­al­is­tic on pro­jec­tions. So it is use­ful to see what hap­pens if sales are lower and/or costs are higher than es­ti­mated and also what the po­ten­tial exit costs might be.

It is also valu­able – in fact prob­a­bly in­valu­able – to have some strict cri­te­ria around when, and how, to re­view projects and have some clear go-no-go points and cri­te­ria. And to con­sider po­ten­tial bail-out op­tions be­fore pro­ceed­ing.

For in­stance, in my own busi­ness we have de­vel­oped sev­eral new prod­ucts re­cently where we have set a firm go-no-go date and rev­enue tar­get – if we don't reach the rev­enue tar­get we bail.

An­other project I was in­volved in re­cently at a governance level had a sig­nif­i­cant up­side po­ten­tial, but the down­side worst case would po­ten­tially end the or­gan­i­sa­tion. So again we set some clear pa­ram­e­ters and dates that the board had to meet and sign-off on based on progress as af­ter that date some sig­nif­i­cant un­avoid­able costs would be in­curred.

I am pleased to say we achieved the goals and pro­ceeded but had the op­tion to pull the plug be­fore cross­ing a thresh­old that could have en­dan­gered the or­gan­i­sa­tion, which is the essence of good governance.

We need how­ever to en­sure we don't be­come too risk ad­verse which could paral­yse de­ci­sion-mak­ing and take away many gen­uine growth op­por­tu­ni­ties. Rather that we ac­knowl­edge, and look to man­age the down­side risk, and aim for the up­side risk be­ing sig­nif­i­cantly higher than the down­side so the weighted re­turn is strongly pos­i­tive.

Newspapers in English

Newspapers from New Zealand

© PressReader. All rights reserved.