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The risky business of effective risk management

Wednesday December 19, 2018

The risky business of effective risk management
 
In today’s world, there is no such thing as ‘business as usual’. The only thing you can count on is change, whether global, technological, political or social. Given these volatile conditions, innovative approaches are increasingly required to manage an ever-expanding assortment of risk.
 
Effective risk management entails measuring the anticipated impact of risk, taking into account factors such as globalization, competition, input costs, compliance, weather, exchange rates, regulations and competition, to name a few.
 
Internal risk is risk that pertains to factors inside an organization, such as a company’s employees, supply chain, operations and competitive position. Meanwhile, external risk includes factors that are often outside a company’s control such as interest rates, foreign exchange rates, global regulations, data theft and security, weather and energy costs. In "The future of risk: Protecting and enabling performance”,  a survey held by Ernst & Young, 96% of organizations believe they can improve risk management, while nearly half believe that committing additional resources to risk management could actually protect an organization’s valuable assets, and create competitive advantage.
 
Another factor that influences risk is an organization’s agility – their ability to react when new situations, opportunities and threats occur. Specialization, combined with functionally-based departments (sales, operations and finance), can mask the impact of uncertainty on the organization as a whole, as managers must deal with uncertainties within their respective silos. Thus, departments tend to focus on how risk affects them, not the entire organization. For an organization to effectively manage risk, it needs to move out of its silo and reach across an entire organization, taking into account big-picture risks that might emerge in the future.
 
The third approach to managing risk is to eliminate the risk itself, or its impact. However, eliminating risk (or its impact) can be expensive and could reduce return on invested capital. If the removal of risk is not financially viable, companies may opt to cushion or "buffer” processes from high variance. Often, this occurs through the creation of excess capacity, which allows greater flexibility, or using inventory as a buffer between successive operations.
 
Risk management can thus be divided into two basic activities: weighing the available options or considerations, then taking the risk. However, it can be difficult for companies to understand the best choices within a portfolio of options. 
 
SCORE has various models and collection scores that allow business owners to mitigate the impact of risk on their accounts receivables. By allowing organizations to understand risk factors, interactions, aggregations and consequences, risk is quantified and analyzed, with critical risk areas and potential actions simulated in order to reduce cost and increase performance.
 
Part of this service is a risk-based pricing model based on segmenting the quality of accounts for third party collections. This allows increased revenue on a net-back basis for the credit grantor rather than the standard flat fee for service for suppliers.
 
The SCORE risk-based pricing model scores a portfolio of accounts and ranks the probabilities of recovery. This is done by reviewing the historical performance of agencies to determine the type of accounts they are adept at collecting. By ranking and segmenting accounts into low, medium and high risk, agencies are targeted with accounts that they have been historically successful at collecting. This allows improved results, recoveries, commission dollars, liquidation rates, yields per account and commission dollars for each segment. As a consequence, netback also increases. In addition, SCORE monitors results on a regular basis to ensure the continued performance and integrity of the program.  
 
At SCORE, we develop models that maximize recoveries and profitability on accounts receivables. By continually monitoring inputs and output, SCORE helps you to better manage your risk portfolios. Contact us today on (647) 309-1803 to get the conversation started.  
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