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The importance of process in risk management

Australia has over 2 million small businesses and every day, over 500,000 of them are playing Russian roulette with their livelihoods. Okay, maybe that’s a bit of existential hyperbole, but they’re definitely risking a few toes and they are crucial in maintaining balance.

A study by the Australian government found that 26% of small and medium businesses lack risk awareness. All major corporations started off as a small business, they didn’t just pop up overnight like an unsightly weed on your drive, and part of their success is down to recognising and managing risk.

One of the things that set them apart from small businesses is their continued approach to risk. Compared to larger corporations and their mature policy environment the risk management procedures of Australia’s SMEs are frankly pants. Big business uses policy like an overzealous bouncer or suspicious mall cop. It might seem a bit much but it maintains order and security. Some of our SMEs are treating risk like a random at a house party – they pay no attention to them as long as they’re not causing trouble. Problem is, far too many wake up the next morning with a sore head, wondering how to tell mum and dad that someone nicked the TV and set the bathroom on fire. Most will recover from that, uh, setback… some will find themselves out on the curb.

Consistent with the Australian government’s study, Aon’s 2015 Global Risk Management survey found that as little as 26% of SMEs have developed risk management procedures. Shockingly that’s actually one of the more flattering figures in that report.

The majority of small business owners are aware of risks to their business however that awareness isn’t translating into clear and defined processes and procedures, and that is worrisome. As Carly Rae Jepsen might sing “Hey, I just met you, and this is crazy, here’s some policy, implement it maybe.”

There are benefits to employing a stricter procedural environment. It reduces wasteful duplication, improves efficiency, shortens training time for new employees, allows companies to better track KPIs, and helps give a more consistent customer experience by enhancing accountability which returns a lower rate of errors or non-compliance.

A procedural environment like that is sometimes referred to as scientific management, the basic principle of which is to simplify tasks and closely measure employees work in order to boost productivity. There are disadvantages to scientific management such as the criticism that it creates automatons and androids which is a strange dismissal as androids are supposed to be really smart unless they’re worried about some small business accidentally creating Skynet. Truth be told, the original application did discourage lateral thinking but the modern interpretation is purely about encouraging efficiency and that’s advantageous to your business.

Developing a modern scientific management inspired standard operating procedure can be costly, let’s not sugar-coat that but the medium to long term benefits are indisputable. There are so many practical ways to implement this across various industries – indeed global businesses have defined their procedures on this basis.

Internet retailer Amazon and fast-food giant McDonald’s are just two companies who use scientific management to good effect. The portioning of tasks, regular performance measurement, standardised operating procedure and separation of duties has increased efficiency, produced a consistent customer experience and grown market share for these companies.

McDonald’s in particular is a great example because the products and service are almost identical wherever you go. So, despite the majority of McDonald’s restaurants being franchises their standard procedures and policies ensures that you’ll always be lovin’ it.

Over at Amazon, Scientific management in their warehouses has allowed them to offer a reliable next-day, and in some areas same-day, delivery service. This would not be possible without defined process and is arguably responsible for the continued growth of Amazon. Hands up who has bought something on Amazon that could be bought cheaper elsewhere because of Prime delivery to your door.

Detailed procedures also help with fraud prevention. Organisations employing a separation of duties matrix are better protected against the risks of theft and fraud than those who do not. There are so many practical applications of separation of duties from McDonald’s ensuring their food, preparation and cooking areas and facilities meet the most rigorous health and safety standards to most postal services requiring electronic signing from drop off to delivery to track the chain of custody. Businesses use it every day to make sure the approvals are not made by the requestor and protocol is followed by two-tick checks.

Scientific management in the digital age encourages creativity and lateral thinking, it is designed to enhance motivation and complement the modern, dynamic business environment.

Did your grandmother ever tell you not to pull faces in case the wind changed and you got stuck like that? Well, process is important in risk management and defined procedure improves your business’s chances of not being stuck gurning when the winds of the market start blowing in a different direction.

About the author

Peter Khalil is the Founder of Perris Knightsbridge Chartered Accountants. He previously wrote Overcoming the barriers to tech start-up ecosystems flourishing across Australia and Why developing risk awareness in your small to medium business is an absolute must

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Peter Khalil

Peter Khalil

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