Managing Risk in a Certainly Uncertain World

 
 

Managing Risk in a Certainly Uncertain World

Historic drought in the Midwest, scorching temperatures across the country, a rare “derecho” that slammed Washington, D.C. and Superstorm Sandy make extreme weather events a top-of-mind issue for business and consumers alike. The Washington State Department of Ecology earlier this year released a report entitled “Preparing for a Changing Climate”, an integrated response plan for the impacts of climate change on our state (http://www.ecy.wa.gov/climatechange/ipa_responsestrategy.htm).

The report is a response to the reality that more frequent natural catastrophes may be “the new normal”, placing individuals and organizations at higher risk. Scientists predict current weather trends will continue and in some cases accelerate, posing significant risks to human health, forests, agriculture, supplies of fresh water, coastlines, and other natural resources vital to Washington State’s economy, environment, and way of life.

Businesses would benefit from following the state’s lead in preparing for the impacts of climate change. Prudent leaders should take steps to understand and quantify the risks to their businesses, make adjustments where possible, and mitigate inescapable consequences through insurance or other innovative methods.

Below are three steps CEOs, CFOs and risk managers can take to prepare for an uncertain future, where the critical questions are not if, but when, will climate-driven catastrophes strike, and how devastating willtheir impacts be to operations.

Step 1: Perform a risk analysis to identify exposures based on the organization’s susceptibility to likely impacts of climate change. For instance, are you a manufacturer that relies on cheap power to produce yourgoods? How would a tripling of energy costs impact your bottom line? For fruit or vegetable growers, what would happen if water rates tripled, or access was rationed?  How will warming oceans affect a commercial fishing company’s catch?

Forward-thinking organizations are working to better understand natural disasters and their potential to disrupt business. Three years ago, I-5 was closed for a week due to flooding between Seattle and Portland. The entire Kent Valley braces for the impacts of the winter and spring rains, which seem to increase in intensity and frequency each year.  If your business involves transportation, warehousing or manufacturing in or near flood-prone areas, you would be wise to establish and test contingency plans now, rather than hoping for better weather.

By looking ahead and considering a wide range of possible scenarios, smart businesses can position themselves to protect, if not expand, their businesses now and in the years to come.

Step 2:  Insurance companies are (understandably) reviewing their approaches to offering policies, coverages and limits.  And you can be sure that rates will go up commensurate with increased risk and likelihood of claims.  Only after you have completed a thorough risk assessment can you create a proper cost/benefit analysis of available insurance coverage.

Step 3: In addition to traditional insurance policies that transfer financial impacts of hazard losses, there are new and innovative ways for companies to hedge climate risk. There is a wide range of products – forwards, futures, options, swaps – designed to enable buyers to reduce risk associated with adverse or unexpected weather conditions. These products are available to address an array of weather events, including temperatures, snowfall, frost and hurricanes, in many parts of the United States and the world.

Now is the time to take a serious look at your exposure to climate-related risks. Considering a range of potential futures enables you to make adjustments that may help you avoid material adverse impacts, and could position you to thrive in a changing environment. A rigorous assessment will also prepare you to make more informed choices regarding insurance or other hedging tools designed to address unanticipated or unavoidable climate-related losses.

Mark Twain is well known for the adage, “Everyone complains about weather, but no one does anything about it.” Today, organizations can challenge Twain’s maxim by deploying a wide range of risk management tools and techniques to evaluate, control, and finance weather risks.

 

Seth Shapiro is a senior vice president and risk strategist at Kibble & Prentice, a USI company. He can be reached at 206-441-6300 or seth.shapiro@kpcom.com

 

CEO Adviser: Paving the Way to Digital

CEO Adviser: Paving the Way to Digital

How the Northwest’s leading asphalt company is embracing technology.
| FROM THE PRINT EDITION |
 
 

“What’s the ROI on software?”

This is the question facing many leaders of traditional mid-market companies. For a well-established family-run business, there is often the temptation to invest in assets that can generate revenue faster in the short term instead of technology upgrades that don’t deliver immediate profit.

When I first met Mike Lee, president of Lakeside Industries, he asked an interesting question: “Are we doing the right things when it comes to technology?” Lee understood that his 600-person asphalt company in Seattle’s Fremont neighborhood had to make technology a strategic objective in order to ensure the future of the business.

Here are a few ways Lee showed leadership in making ones and zeroes important in an industry focused on rock and oil.

Establish crystal clarity about how digital can support the overall vision.

Lee had a compelling “why” and vision for the company in place: to make a lasting impact on our community, our relationships and our people, and to be the low-cost supplier that provides an exceptional customer experience. The core values focused on safety, environmental responsibility, quality and profitability. But there was no solid technology vision to realize it, and IT didn’t have a presence at the business table, so Lee made a point to involve the CFO/acting CIO. The beauty of setting a digital vision is in its simplicity — not looking at every solution available, but only those that can further the company’s reason for being. In Lakeside’s case, how could new technologies bring it closer to its employees, its community and its customers? How could software make it improve efficiency, visibility and environmental commitments? When Lee looked closely at his vision, it became clear that technology could help bolster it, but that it couldn’t happen without tech being elevated.

Identify the gaps that technology can fill. 

“There is more to our business than asphalt and paving,” says Lee. “We have to keep up with plant and equipment management, communications, competitors, security and environmental regulations.” Lee met with his CIO and IT directors to determine how technology was going to add value inside and outside the business. The firm developed a digital roadmap that provided clarity around the technology initiatives people were going to work on; for each, it set accountabilities, timelines and goals. They used this roadmap to manage ongoing progress and to determine whether or not the new “shiny technology objects” matched the vision and strategy. The most important initiative was to replace Lakeside’s aging enterprise resource planning system. This would require modernizing processes and technology infrastructure to support collaboration with business management across the company — a broad impact to the business. Another key initiative was improving how it estimated projects and managed customer relationships. This new system would only be successful with buy-in from the people in the field using the software.

Communicate the importance of technology to the management team.

While its employees are part of a family, Lakeside Industries is also a distributed business run by a group of autonomous regional managers who needed to believe in the vision. Lee presented the specifics of the strategy to all managers: The message was “IT can no longer be just a department.” Business and technology leaders — who rarely interfaced — had the opportunity to discuss and debate what was at stake. Their conclusion? Software isn’t a gutsy gamble or a bold bet — it’s table stakes. The result was a set of guiding principles, alignment and excitement for what’s ahead. For the first time in the company’s history, business and technology people now have harmony around a shared digital vision — working together as one to contribute to healthier profitability and improved customer relations. In the end, Lakeside Industries’ road to the future has been paved with much more than good intentions. 

TIM GOGGIN is president of Sappington, a Seattle consulting firm that advises clients on digital change. Reach him at tim.goggin@sappington.co.