Risk management is increasingly being seen as a management discipline that can add value to the performance of an enterprise, principally through helping it to:

• make better informed decisions, manage change and practice corporate sound governance

• deliver cost savings and reduce potential earnings volatility

• protect the value invested in people and assets

• directly address risks that cannot be insured because coverage is either unavailable, restricted or too expensive

To manage risk efficiently across a portfolio of investments requires consistency in the systems, procedures and communication protocols. This consistency enables effective resource allocation across the portfolio with which to deal with similar risks and issues. Benchmarking against best practices within the portfolio can also help to identify gaps to address and establish success measures on which to judge the future performance of companies in which an investment has been made.

Where to start?

For venture capitalist firms representing a range of investments it is important come to an agreed definition of what is meant by 'risk'. This will define the scope of management systems and controls that are introduced to address potential exposures. Some industries, such as the technology sector, are fast moving and ever changing and require continual assessment of the changes to 'risk profile'. Risks can come from new technologies, new market entrants, changes in buyer behaviour and the price of key components - the list goes on.

Once a common understanding of 'risk' is agreed a firm can begin categorising the risks it feels it faces. These are typically collected through a senior management brainstorming session and/or a workshop with individual line management. To assist with collection and analysis, risks are often split into four distinct categories: financial, strategic, operational, and hazard. Generally it is only the hazard risks that are insurable, such as fire and flood. This fact says a lot about how far risk management has come. Even if a business can't insure for an exposure there will probably be ways in which it can introduce resilience into a business process, reengineer a way of working or find a suitable financial solution that is alternative to insurance that can all meet the risk head on.

Once identified, risks and existing management controls can be analysed, typically using subjective judgements relating to their potential frequency and the impact they would be likely to have if material. Mathematical modelling can support this process wherever historic data on a certain risk (e.g. commodity price fluctuation) is available. Generally the approach taken to assessing risk will not be scientific but should be consistent, as the main motives behind it are to allocate management time and resources.

Once the optimum strategies have been introduced to treat the risks (which will include, but not exclusively, insurance) it is important that the risks are monitored and reported through the business. In a single organisation the reporting structure may be through management, but in the case of a venture capitalist it might be appropriate, for reasons of consistency, to keep the reporting lines the same throughout the whole of the portfolio.

=======================================================
About Marsh: Marsh offers risk management and insurance services covering a full range of services enabling clients to identify, value, control, transfer and finance risk.

For more information, see: http://www.marsh.co.uk