How risk management can turn a crisis into an opportunity

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9 minute read 29 Mar 2018
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EY Americas

Multidisciplinary professional services organization

9 minute read 29 Mar 2018

A family business shares how they used risk management to recover from events that could have destroyed it.

Most business leaders follow a guiding principle when it comes to risk management: assess the risks your business is facing and try to mitigate them. But the right risk management strategy can determine how well, or poorly, a company reacts when crisis strikes. A risk management strategy that embraces certain elements of risk – rather than just running from them – can not only transform challenges and crises into opportunities; it also can be fundamental to the long-term growth and success of a company.

Businesses are progressing well when it comes to the alignment of risk management and business objectives, finds a 2015 EY study, There’s no reward without risk. Ninety-seven percent of the companies participating in the report say they have made progress in better aligning levels of risk with potential reward. However, further examination shows that a mere 16% consider the linkage between risks and the attainment of business goals to be close enough to effectively and efficiently respond to the sort of risk drivers that can emerge and evolve quickly, including shifts in the economy, technological changes and cybersecurity.

The difference in attitude toward risk management and the achievement of objectives is surprising when considering that there are numerous growth gains stemming from implementing risk management practices – even following a crisis. This is illustrated by Empresas Carozzi, a Chilean consumer goods export company.

Crisis to opportunity: a phoenix from the flames

Founded in 1898, the family-run business encountered in 2010 one of its most unusual trials: a fire that completely destroyed its 30,000-square-foot production facility in Santiago. The fire cost the company 100% of the facility’s pasta production capability.

In true risk-management response, Carozzi Chairman Gonzalo Bofill focused on what would come next. He didn’t halt business operations or panic. On the night of the fire, he told a trusted manager, “It’s not the moment to cry. It’s the moment to control the fire and start working.”

On the night of the fire, Carozzi Chairman Gonzalo Bofill told a trusted manager, ‘It’s not the moment to cry. It’s the moment to control the fire and start working.’

Bofill said that he came to view the fire as both an opportunity to build the company of his dreams. He put risk management measures in place to expand the market, to allow the company to compete on a global level and mitigate risk by reducing operational costs by upgrading infrastructure and technology.

That night, he, along with a core team of stakeholders, toiled until 3:00 am to chart the course of action. They began to plan the necessary committees, team leaders, projects and logistics to carry out the vision, he recounts, and also composed a letter to Carozzi’s 10,000 employees explaining what had happened and how the company would move forward.

These moves proved to be crucial in the risk management strategy, as Carozzi needed the confidence and support of the bank as well as the company’s insurance company.

Empresas Carozzi building

Channeling risk into growth: the game plan

The vision for reinvention was executed through multiple initiatives, explains Bofill, including borrowing US$500m from banks. “It really was a transformation in all the aspects of the operation, not only in buildings but in technology and the procedures to the way that we are now – a different competitor,” he says.

Part of the new risk strategy included bringing the company into a new competitive league so that it could compete with multinational businesses. The company implemented robotics and automization to upgrade efficiency and reduce overall cost production – as well as expanded its market through the acquisition of a pet foods company in 2011 to diversify the company’s offerings and differentiate it from competitors – all while the new facility was being built.

Another key risk management maneuver was that Carozzi was able to reduce its operational costs by winning back the trust of the company’s insurance carrier. As Bofill tells it, after the fire, the insurance premium soared. The company was considered high risk. “We had to reduce the rates that they asked us to pay,” says Bofill.

To change that perception, a group of Carozzi agents flew to Europe – where the insurer was headquartered – and explained the company’s plans for growth, upgrades and value creation. The insurers “believed in what we wanted to do,” he says, and within three years, Carozzi was back to paying normal rates.

While risk management has assumed more priority in companies across the board – particularly following the subprime mortgage collapse – there is still progress to be made. There is a “widespread perception that risk management stifles innovation and isn’t congruent with a rapid growth environment,” according to David Sommer, Professor of Risk Management at St. Mary’s University in San Antonio, Texas.

“That is far from the truth,” he says. “Good risk management maximizes the chance of successful, sustainable growth. It is about optimizing risk and undertaking it with your eyes open, assuring that you are best positioned to respond to adverse developments and exploit positive ones.”

A small business implements risk strategy and grows following a crisis

You don't have to be a family business to turn crisis into an opportunity to address a company’s weak points. For Chris Mittelstaedt, CEO of The Fruit Guys, a fruit-delivery subscription business, his response to crisis was the making of his company and risk management model.

Mittelstaedt started his business out of his San Francisco apartment in 1998. The business quickly took off, with many clients in the booming technology community, and hit US$1m in sales in 2000. “What I missed seeing at the time was a worst-case scenario perspective,” he says.

In 2000, the dot-com crash cut his business in half. Suddenly his young company was overleveraged after he’d borrowed US$85,000 from the bank to purchase a fleet of refrigerated trucks to expand the business. His wife had also recently given birth to twins. Mittelstaedt went back to barebones.

“I went from growth CEO to a route driver,” he says.

By experiencing hard times, he was able to see the risks he didn’t appropriately consider. Among them, the company didn’t possess the infrastructure to expand beyond the local region. Also, the company relied too heavily on the surrounding local economy, so when that became troubled, the business did too.

One of the strategies he put into place following the dot-com crash was that he avoided further bank debt – Mittelstaedt borrowed from his family to keep the business afloat. He also expanded his company’s market across the country so that his business wasn’t solely dependent on the health of the local economy.

To amplify his revamped risk strategy further, after mainly having won business clients in the private sector, Mittelstaedt diversified his client pool by going after institutional clients with different budget cycles. To date, his company is stable and growing, with 135 employees across the country.

Risk: an opportunity to grow

“Blessed fire,” Bofill marvels, looking back. The 2010 blaze was a pivotal moment in the remaking of Carozzi’s risk strategy and ability to scale. “How we put a lot of additional strengths into our culture [after] this fire was incredible … people wanted Carozzi to be different. Today we are a very profitable and solid company.”

Companies that succeed in dealing with adversity have a holistic view of risk management and have integrated risk thinking throughout the entire culture of the company.
David Sommer,
St. Mary’s University, San Antonio

Using risk management processes and structures to identify and mitigate a wide variety of risks, even when what arises is not one of the feared scenarios, your business will be in a stronger position to respond to crisis and grow.

Summary

Uncertainty is a constant in business, but robust risk management can help companies adapt and thrive.

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EY Americas

Multidisciplinary professional services organization