Risk Management is a Team Sport

This week, ClearRisk is proud to present a guest blog post by Allan R. Morton, Jr. CIC, CRM.

Allan is the managing partner of Morton Insurance & Risk Management. 15 years in the industry is marked by his passion to drop money to their bottom line and increase negotiating leverage with insurers via proactive risk management. He is a Certified Insurance Counselor as well as Certified Risk Manager.

One of the biggest challenges I have is how to keep a prospective client’s eyes from glazing over when the phrase “Risk Management” is mentioned. It’s almost like those two words are part of a magical incantation which puts many in upper management into trance-like states. It confounds me. There is something utterly unglamorous about it I suspect. It’s not exciting, flashy, or as sexy as landing a big deal.

Many can’t seem to visualize how it would play out in their organization. Case in point, I was having breakfast this past week with the Controller of a company with gross revenues of $60,000,000. They have been a client for several years. Though the Controller has always been open to risk management, one of the majority owners has been less receptive and held me at arm’s length in certain areas. His peers describe him as a maverick “shoot from the hip” kind of entrepreneur. You know the type. Even with pushback, we have been able to drop over $400,000 in revenues to their bottom line in the last three years through basic risk management techniques. However, this owner has deliberately kept me out of areas he deemed “his domain”. Fair enough. One of those areas was product development / procurement.

As I was looking over their financials during the breakfast, I noticed what appeared to be an anomaly under the “Legal Expense” line item. “This number looks bigger than last year…by a lot. Am I missing something?” The Controller proceeded to tell me they were in the midst of significant legal battles w/ two outside entities over possible patent infringement and intellectual property issues. I asked how much has the conflict cost. “$500,000 in legal fees alone and we are not even close to resolution.” Please note these are direct costs and do not even take into account indirect costs in loss of opportunity and productivity.

When I met with this client several years ago and suggested performing an enterprise-wide risk assessment, it was welcomed though with some skepticism but excluded the area of product development. I pleaded my case about the pitfalls of carving out areas to no avail. The result is an erosion of profitability.

The lessons learned?

It takes a team. Surround yourself with people containing skill sets that will aid the organization’s mission to be fruitful, socially responsible, and to drive profitability. Play to your skills and bring people in that excel in their areas of expertise
Tie dollars to risk management. If you can’t quantify numbers that drop to the bottom line as a result of risk management, you’re dead. Game over. Risk management professionals must find a way to make it compelling to C-Level personnel. Money talks but evaporating profitability squeals like a schoolgirl.
Make the most of “teachable moments”. Losses as described above are avoidable or at the least able to be mitigated with proper due diligence. A small investment on the front side to save $500,000 (and counting) only makes good sense. Use these third party stories to put meat on the skeleton of risk management.

Do you think that the Owner would be open to sitting down to talk risk management now? Oh, and one other lesson… Never say “I told you so”.

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6 Responses to “Risk Management is a Team Sport”

Maria McKay on May 27th, 2011

Great lessons. So true.
Sam Codder on May 30th, 2011

blog.clearrisk.com is amazing, bookmarked!
David See on June 1st, 2011

I am not able to put numbers or losses to risk events despite if I have a risk tolerant.Now certain events are really intangible esp strategic risks.

Can you share with me your experience if this is possible in most situation as you said if not RM is dead!
David See on June 1st, 2011

Hi Allan,
In your situation if you were given the chance earlier what changes can you bring baout on the legal/product failure by using ERM?

Please teach me! I am based in South Asia trying to do a good ERM internally but is like facing the Great Wall.
allanrmorton on June 1st, 2011

David,

I think I understand your question but redirect me if I am off base. There are two key components that I believe you are struggling to get your arms around. One is Qualitative Risk Analysis. The other is Quantitative. The first can not be easily measured with an actual dollar amount. The second can. Quantitative risk analysis can put a dollar amount on the actual cost paid in medical / property damage, increase in premiums, cost of administration, etc. Qualitative areas are harder to measure such as loss of opportunity. The example I shared in my story was one that could be measured because there were direct costs incurred as a result of failure of management to incorporate proactive risk management in that area. There is the qualitative piece as well such as the loss of productivity that just can’t fit into a formula easily.

Often when communicating with stakeholders, I am not only trying to address their current pain but also their future gain. Lets say for example your company needs a new sprinkler system because it is incapable of handling the risk exposure in the building. Define the costs of the sprinkler system. That is easy enough, but how to you communicate to your company a return on investment? You can lay out “future pain” scenarios (ie. cost of fire that will not be kept in check, loss of revenue, or cost of insurance premiums if you lose your preferred insurance carrier). You have to find the key motivation to the decision makers in my opinion. Then appeal to it constantly.

If the client I was working with on the intellectual property (patent) had allowed me to deploy the system we wanted to, these costs would have been somewhere between 10-20% of their current expenditures. You can avoid all lawsuits. Just not a reality. However, third party stories like these go along way in helping to persuade your audience to employ an ERM model or at least do a complete risk assessment. I encourage you to be patient, keep putting good data and thoughtful solutions in front of them. Look at what other firms like yours are doing. Appeal to the pride of the ownership group that we want to set the standard, not playing catch up to others. If you do that, it will be like water on a rock. With enough time, you can wear away even the toughest of exteriors.
Charles on August 5th, 2011

It’s true that a risk assessment really is team work.