The challenge of balancing risk and growth is ever present for risk managers and corporate officers. John F. Ryan explains how to maintain this balance.

"The next century is already here, indeed, we are well advanced into it. We do not know all the answers but we do know the issues . . . We are entering a post-capitalist era in which organizations will have to innovate quickly and be global." - Peter Drucker, Post-Capitalist Society.

Peter Drucker has framed the debate - we need to determine the answers, not the questions. Speed, innovation, and growth are the issues that must be addressed and answered. As risk managers and corporate officers, you are confronted daily with the challenge of balancing risk and growth. The components of maintaining this balance are assessing the risks associated with growth, reviewing ways to control risks, and determining the best method to transfer or share risks.

Factors associated with growth

The shape, size, scope, and substance of companies are altered as they grow. It is necessary to factor changes into a company's business plans and strategies. This will assure that the plans and solutions are appropriate and the alignment of business processes are effective. There are three factors associated with growth that must be considered by companies today:

Complexity

Growth adds complexity to the production process, perhaps adding new locations in different states or countries. It may change a company's financial position, possibly increasing leverage as well as demand for letters of credit. It will most likely involve increased channels of distribution and more complicated logistics. From a risk management perspective, it will complicate the risk assessment process by adding new exposures and increasing current exposures.

Control

Growth has a diminishing effect on controls unless they are re-engineered. It will place new limits on the span of control of a growing work force and require that a company review its risk control procedures. Companies need to determine how much risk is acceptable and how it will be measured. Many companies are forming risk management committees to define these issues. The committees are generally composed of operation managers, financial executives, and risk managers.

Communication

Growth also causes old styles of communication to be inadequate. At the most basic level, what was once a hallway conversation will now be a conference call. The distance between operational units may increase, perhaps crossing multiple time zones. The number of people who need to be involved will increase as well as the chance for misinterpretation.

Risk managers in growing companies need to communicate accurate and timely information on disability management, accident response and investigation, safety practices, and claims reporting to all areas of the company. New media, such as intranets, may be needed. Companies such as Microsoft use an intranet to communicate information to a geographically spread out work force. The intranet can contain information on a wide range of risk management issues, everything from how a company's rental car insurance works to how to report a workers' compensation claim.

Operational risks associated

with growth

The operational risks associated with growth can be divided into three areas: workforce risk; physical risk; and international risk. Each area adds new dimensions to the risk profile of a company and presents risk managers with a new set of issues to address.

Workforce risk

Workforce risk grows as the work force expands. This will not necessarily be a straight-line proportional increase, however, since the three factors of complexity, control, and communication will change the dynamics. Companies should be aware of the risks associated with hiring or acquiring new employees.

According to Liberty Mutual claims data, new employees (those with less than one year tenure) account for 40% of workers' compensation claims, and employees with less than five years' experience account for 70% of claims (see Chart 1). Effective loss prevention techniques such as preplacement screening, a mandatory training and orientation program, and comprehensive safety practices can make an enormous difference in achieving results that differ from these startling statistics.

Other challenges caused from an expanding workforce are maintaining high quality control of products, minimizing the exposure to product liability claims, and dealing with issues related to an aging work force. Risk managers should review the manufacturing or production processes with operations management while focusing on any risk management concerns. This is a good way to identify and control any expanded exposure.

Companies that grow by acquisition inherit a workforce and an existing workers' compensation program. In the preacquisition phase, the risk manager should review all open policies and any available actuarial reports to develop an estimate of exposure. Once acquired, the risk manager needs to gain control of the program as soon as possible.

Consideration should be given to closing open liabilities with finite risk insurance. If employment practices liability claims exist or litigation is pending, the risk manager should review the history and experience of the company.

There is a lot to be learned about companies by looking at their experience: claims history by type of claim; frequency of experiencing the same type of claim; existence and enforcement of written policies; and claim investigation and personnel management techniques. After researching a company's current practices, it is necessary to determine how this will fit into the acquirer's existing approach to managing these types of claims. This can help with the decision on whether a different or interim strategy for the new entity is needed.

Physical risks

Growing companies also face changes in character and scope of their physical risk portfolio. New facilities need to be engineered so the maximum safety features can be built into the plans. Ergonomic changes can be less expensive to make during construction than after the building is completed. A preconstruction review of the plans and blueprints can help identify these needs and make sure they are addressed. Loss prevention engineers can help in a variety of ways such as determining the proper heights for work surfaces, reviewing warehouse layouts for safe shelving techniques and vehicle flow, and identifying lighting needs for good visibility.

The same thought process should be used for acquiring new equipment. An ergonomic review of how equipment will be used should be made, including how much heat, noise, and vibration result to determine the safest way to use the equipment and prevent injuries. If a new product line is being introduced, a thorough review of the product liability issues including shelf life of the product, protective packaging, quality control safeguards, and a review process for warranty claims can help to make the new product's risk profile the lowest possible.

If the acquisition of a new company includes its physical assets, then many issues need to be reviewed. The fire protection and security of each facility as well as existing property insurance coverage should be evaluated. New facilities should be integrated into the disaster recovery plans, and any new products must be factored into the crisis management plans. The time to plan for the worst is before the worst happens.

Fleet safety is another aspect of physical risk that changes with growth. If an acquisition includes a large number of new vehicles and drivers, then many areas need to be reviewed. This would include reviewing existing safety practices, vehicle maintenance standards, accident reporting techniques, and driver qualifications.

International risks

Since the US gross domestic product is growing at a steady but relatively low 2.4% annually, many growth-oriented companies are actively expanding internationally. A recent survey showed international growth exceeding 15%. In that survey, risk managers identified four challenges that global operations present.

The first challenge is that programs need to be co-ordinated to ensure adequate limits and coverage while eliminating gaps. Next, communication systems need to be developed that will span a wide range of time zones and a diversity of cultures. International companies tend to use the internet or in-house networks to e-mail messages and rely on some unconventional methods such as calling from home in the evening to reach counterparts in other countries.

The third challenge is to create a comprehensive transit coverage program. This program should address the land, air, and sea components of transit exposures, factor in loss prevention techniques especially for shipments to third-world countries, and ensure seamless coverage is in place for all shipments.

The last challenge that was identified is obtaining consistent service, including good claims investigation and reporting as well as loss prevention. Local service is critical to ensure that the program runs smoothly. Finding a carrier that has a comprehensive network and stands behind the service it sells is an important aspect of risk management. Companies that have the leading edge in productivity enforce world class standards for health and safety. This can mean benchmarking global operations in each country against best in class standards and establishing goals to reach the benchmark standards.

Five steps for facing global risk management challenges

The global risk management challenges that are faced by all companies with international exposures can be effectively managed by following five steps:

Step 1: Link risk to value

Invest in risk management where it can make a difference in lowering costs and increasing productivity.

Step 2: Plan, do not react

The crisis plan a risk manager writes today is the one that will be used to manage the crisis. Investment in good plans is a sound strategy.

Step 3: Build in strategic controls

As companies grow, the span of control and the need for excellent controls increases. Review current controls on reporting, monitoring, and responding. Be sure they work in the new organization.

Step 4: Establish written risk management policies and procedures

The policies and procedures may be communicated in a variety of ways, such as being placed on an intranet. No matter how they are communicated, it is necessary to make sure they are widely known and easily available. This provides a common definition of risk and effective risk management practices across departments, countries, and joint venture partners.

Step 5: Measure results

Establishing and tracking measurable results is an essential element of a good growth-oriented strategy. Risk managers should spend some time defining exactly what will be measured with the cfo and then keep the tracking current.

Growth means being prepared to change

Growth often requires changes in the infrastructure of risk management. Policies and procedures need to be reviewed and harmonized between the parent company and the acquired company. Growth as a business strategy will place new demands on risk management and offer new opportunities to make a difference in the company's profits. Lloyd George said: "Don't be afraid to take a big step if one is indicated, you can't cross a chasm in two small jumps."

John F. Ryan is vice president and manager of commercial marketing for Liberty Mutual Group, Boston, Mass.