Business Models of Tomorrow: The Concept of Risk
With so much talk about change, NDIS, person-centred planning, strategy, planning and the like, one of the core concepts that has been overlooked is that of risk. By risk, we are not talking about operational risk, but strategic risk and very specifically, risk appetite. It is not a concept frequently discussed or dealt with by Boards yet will soon become a very significant issue as organisations grapple with the impending changes and opportunities.
At its simplest, risk appetite is the absolute amount of risk an organisation is prepared to take, to realise value; or the total impact of risk and organisation is prepared to take on in pursuit of their strategic goals. It correctly assumes that every organisation faces risk and that risk can be both positive and negative. The amount of risk an organisation will accept varies considerably and from our experience in the industry is impacted upon by:
External factors – whether these are seen as an opportunity or a threat;
People – the experiences decision-makers have had with previous ventures;
Decision-making – how clear this is (and whether or not there is a framework in place);
Compliance – how bound up the organisation has been with compliance. This is usually directly related to the level of government funding they receive and;
Brand – how they want to be perceived by others.
This is neither a criticism nor a plaudit, rather a statement of fact that seems to be pervasive through the social care industry. However, it will need to be better understood than it is at present otherwise organisations risk making decisions based on their past and not on the potential opportunities that lie ahead. Boards and senior management need to understand and adopt contemporary practices with regard to executing decisions that are based on their appetite for risk. A report form KPMG (2008) identified the many different ways that organisations managed their risk appetite which ranged from simple qualitative measures and risk categorisation, to complex algorithms and quantitative measures of economic value. They also concluded that irrespective of what an organisation did, risk appetite should provide the cornerstone for the organisation’s risk management framework. A well-defined risk appetite should have the following components:
Reflects the organisational strategy and touches every aspect of the business;
Acknowledges willingness and capacity to take on risk;
Includes a tolerance for loss or failure;
Is contained in a simple Risk Appetite Statement and;
Reviewed and reconsidered in light with changes and trends in the external environment.
What has been evident when sectors have changed is that there has been a misalignment between senior management and Boards over risk. Organisations in the social care sector seem to now be moving towards engaging and employing Business Development Managers, rightfully needing to forge new opportunities and markets, in line with the shift in funding. What waits to be seen is how well the ideas, aspirations and innovations generated by these roles are accepted by Boards. It is one thing to engage an experienced person, often from outside the sector, to develop new markets and business; it is another to have the essence of what they convey understood and embraced by Boards, not used to change and innovation.
The risks that organisations face in this new world are very different to those that existed in the world that was ‘’fully-funded’’. What is more important as organisations assess their business models will be the appetite they have for risk as it will largely determine what aspects of their strategy are pursued; for how long and with what success. It will go a long way to determining your sustainability.