October 17, 2021


Skillful Business Crafters

Risk management is essential to doing good business

The world may be flat (as author Tom Friedman’s bestseller argues), with countries all around the globe competing for the same jobs. But for companies assessing global market expansion or offshore outsourcing, the playing field is still strewn with dead ends, quicksand and land mines.

Risk management is, after all, the foundation of all advanced civilization, as described in Peter Bernstein’s 1998 classic, “Against the Gods: the Remarkable Story of Risk.”

Quantifying risk is the action of those individuals or societies who attempt to influence their own future. The alternative is fatalism or superstition.

Risk management is most commonly associated with financial markets and insurance, but the concepts are applied to every aspect of society.

Take sociopolitical risk. Risk management does not imply risk avoidance. New or troubled markets often have monumental upside, with little competition.

An executive of my acquaintance had great success in the 1990s as the owner of a telecommunications provider in war-torn countries such as Lebanon, Kuwait and Somalia. The oil industry is remarkably sophisticated in assessing sociopolitical risks and makes profitable billion-dollar investments in troubled areas such as the Middle East and the former Soviet Union.

But social and political risk is sometimes slighted in the process of selecting offshore outsourcing vendors. Risk management is considered relative to the vendor’s ability to deliver. Savvy executives have learned to build a large buffer of cost savings in offshore outsourcing contracts as a hedge against the unexpected (i.e., a risk premium).

What is the appropriate additional risk premium particularly for companies considering outsourcing customer and knowledge-based functions?

The cost savings of offshoring can disappear by selecting a vendor in a country that is not an appropriate fit, for example. Is this a country we want as a key element of our supply chain? A company with a global brand and a knowledge-based strategy would be foolhardy to become partners with firms in certain countries, however talented or inexpensive the services offered.

Ultimately, economic success, particularly in a knowledge-based economy, depends on accurate financial reporting and reliable contract law. These are inherently unreliable without political transparency, free speech and the rule of law.

Isaac Cheifetz, a Twin Cities executive recruiter, can be reached through catalytic1.com.