My girlfriend Amy has a home-based, small business, working as a professional wedding and portrait photographer (one of the best in my very-biased opinion, but check out her site and judge for yourself.) I work with Amy as a PT photographer on weekends and also help her out on the business side of things. As I’ve learned the in’s and out’s of a home-based, single person business, I’ve been paying attention to its similarities and differences in terms of risk management.

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Amy’s small business has many of the risks faced by traditional brick and mortar businesses. She has equipment related risks. She has market related risks. There are the normal insurable risks. But Amy also faces some interesting risks that are unique to a home-based business. If school is canceled due to a snow storm, the kids are now around the “office” all day presenting a formidable distraction. There are always risks of getting diverted from the work activities to home chores. As the sole employee, Amy’s business grinds to a halt if she gets sick. There are also risks associated with the isolation that comes from being a sole proprietor.

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Amy’s business also has many of the same opportunities that are available to “traditional” businesses. Marketing, production efficiencies, technology, strategic partnerships, etc. all present areas that could be exploited for improved revenue or profitability. But a home-based business offers unique opportunities as well. There are lifestyle opportunities like being able to be there when the kids get home from school and having the ability to make instant adjustments to work/life balance (you know, like adjusting from 100/0 to 98/2). There are tax opportunities for home improvement related business expenses. Amy also has an opportunity to tap into a contingent workforce of small people that are willing to work in exchange for a only little extra computer time.

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Home-based businesses don’t have a free pass that exempts them from the need for risk management. In fact, I would argue that they have a more urgent need because each risk that becomes reality has a much larger relative impact on a sole proprietorship than it does on a larger business. (100% of a sole proprietor’s employees will be involved in dealing with a crisis, while only a portion of a larger business’ employees will probably be affected by a similar crisis.)

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I can already hear the chorus of sole proprietors: “We don’t have time to manage risks!”. I know you think you don’t. But I would suggest that every decision you make is driven by some type of risk or opportunity. I would also suggest that you are already managing risks, but call it something different – like running a business. The only difference I’m suggesting is take the time to jot down the potential risks as you think of them. Spend a little time thinking about which risks and opportunities would have the biggest impact on your life and then sketch out what you would do to exploit the opportunities and minimize the risks.

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Risk management does not need to be burdensome. The process can be scaled down – it just shouldn’t be scaled down to zero. Check out my other blog posts for step-by-step instructions. Here is a good place to start. Although most of my writing is written in terms of “traditional” businesses, you can apply the same principles to your home-based business.

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What type of assistance would be most helpful in getting you started, small business owner? Leave me a comment and let’s make it happen.

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p.s. Amy doesn’t know it yet, but a risk management plan is in her future

I regularly read Stratfor’s Geopolitical Weekly. It’s a fascinating glimpse into the world of foreign policy risk management. Take this week’s issue for example. George Friedman analyzes the stalemate between the U.S. and Iran over Iran’s nuclear ambitions.

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In the article, George writes about an Iranian incursion into Iraqi territory (which I hadn’t even heard about) and how it relates to Iran’s strategy for dealing with the U.S. demand to abandon its nuclear program. He provides a detailed analysis of the situation, the risks to each country, the possible consequences and the potential options for how each country might respond to those risks. Does the process sound familiar? It should. It’s the risk management process we’ve been talking about – identify risks, evaluate risks and plan for risks.

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Every time I read one of Stratfor’s articles, I can’t help but wonder how many analysts are working for the U.S. government on these types of analyses. I’m sure the number would scare me. And then I think about how many analysts are working for the other major countries of the world. No doubt it is a very large number indeed – a good thing in my opinion. I shudder at the thought of politicians making world-changing decisions based on gut-feel.

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Risk management plays a critical role in global life and the interactions between countries. It should play a critical role in your business life and the interactions with your stakeholders (customers, employees, financiers, et al.). The process is exactly the same, only the sophistication of the evaluation techniques differ. The decisions the world’s politicians make could change the world for all of us. The decisions you make in your business are world-changing for you and your stakeholders (granted, a smaller scale, but pretty damn important to your stakeholders, don’t you think?). Shouldn’t those decisions get the benefit of the same risk management process?

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Do you see the parallel? Do you agree or disagree? I dare you to share your opinion….

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p.s. I promise to get back to the how-to’s of the risk management process – how to plan for your risks – next week.

I learned a lesson this week. I implemented new technologies (yeah, that’s right – plural) and suffered some embarrassment because I didn’t manage the risks well. Here’s what went down..

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My Story

I have a day job at a company that doesn’t allow the use of social media sites by employees. I write my blog posts and supporting Tweets during non-work hours. I found that the schedule has a negative impact on building up the following of my blog via Twitter so I researched tweet-scheduling tools and started using Twaitter. During early testing, I noticed an improvement in my website’s metrics and felt comfortable using the tool to pre-schedule tweets. I felt good to go on the tweet scheduling front…

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One of my goals for my blog is to maintain a consistent editorial calendar with two posts per week on Mondays and Thursdays. So far I’ve done OK with getting two posts out most weeks, but I haven’t performed well on getting the posts out on my scheduled days. As part of my day job, I do a fair amount of business travel and my trips were impacting my blog schedule. There is a solution. The fix is to get one or two posts “in the can” - written ahead of time – so I could utilize the capability WordPress offers for pre-scheduling posts to publish automatically. I hadn’t really used the scheduling function, but it’s just clicking a couple of buttons. How hard can it be? I felt good to go on the post scheduling front, too…

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So I’ve got the technologies identified that will solve my problems. Life is good, and I’m ready to do some writing during the weekend for Monday’s post. I write the post and set the scheduled publish date and time in WordPress. I copy the permalink from the post and enter it into bit.ly to get the shortened URL for my tweets. Then I go into Twaitter and write a few posts. I schedule them to go out during the course of the day on Monday with the first tweet happening about 15 minutes after the post is scheduled to hit the web.

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I go to work on Monday confident that my post will publish and the associated tweets will go out. I check my website Monday morning and notice that the post didn’t publish. Strange, but no problem – I must have forgotten to click the “Publish” button. Oh well. I just go in and publish it manually. I can’t access Twaitter, but I don’t need to, right? The permalink is the same so the shortened URLs should be just fine…

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I have some personal business away from home on Monday night. I don’t check in with Twitter because I’m sure that everything is clicking and purring without a hitch. I’m sure tweeps are clicking and retweeting, subscribers are subscribing…

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Tuesday night rolls around and I check in with my Twitter account. I’ve got a couple of direct messages from @De_Risky letting me know that my links appear to be broken and are labeled as spam. Shit! Not a good thing for a early stage blog who’s trying to build a following. I send out a couple of tweets with the original short link and apologies, but the link still doesn’t work. I create a new short link and tweet again, apologizing sincerely to my followers. Tom screwed up big time…

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So let’s take a step back and review Tom’s lesson in terms of the risk management process…

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The Assumptions

• I assumed that since I was comfortable with new technologies individually, I could effectively implement them together.
• I assumed that I would not make a mistake in using the tools.

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The Risk

• If I don’t execute the new technologies correctly, I risk alienating existing followers and losing potential new followers/subscribers.

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Estimated Probability

• In my mind, the probability is pretty low. But if I had an objective second set of eyes, the real probability would probably be close to 50% – a pretty high number.

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Potential Impact

• Since my blog is non-revenue producing at this point, I can’t assign a dollar impact. But I can tell you that the potential impact in terms of reputation and future follower/subscriber growth is high, in my opinion.

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(What Should Have Been) The Plan

• I have a high impact risk with a 50% chance of occurrence. It is a risk that should be managed and planned for.
• The plan should have been to test each tool independently and repeatedly to prove that I was competent with them.
• Then I should have tested with the tools together to make sure I understood the interactions.
• Lastly, I should have given some thought to potential ‘gotchas’ (more risks, right?) and at least considered some potential contingencies.

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Obviously, I didn’t walk the walk. I failed at managing my risk with my blog posting and related tweeting….

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Here are the points I want you to take away from my story:

1. There is potentially significant risk associated with implementing new technologies – even the seemingly simple implementations.
2. Managing the risks doesn’t have to be an onerous, burdensome process, but it needs to exist.
3. Planning for and mitigating the risks can be very simple and straightforward – and much less painful than the potential impact.

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That’s my story. Please note that none of the applications I mentioned had any faults. I still use them all. The embarrassment still stings a little – a good thing, I suppose. Do you have other examples you can share with us? I’d love to hear about them.

If you will allow me to indulge, I’d like to depart a bit from my focus on business risk management. Risk management isn’t limited to business. What types of risk do you face in your personal life? In November I wrote a post titled “3 Categories of Risk“. I should have been a little more specific. In that post I was talking about categories of business risk. But what about personal risk? Here are some general categories that come to mind, in no particular order…

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Relationship Risk

Life is full of relationships – family, friends, co-workers, acquaintances, service providers, etc. Every one of us manages these relationships on a daily basis. Humans are social creatures whose existence depends on relationships. I can’t think of any risk more important than relationship risk. I doubt that many of us consciously consider our relationships and take specific steps to manage our risks. Should we?

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Liability Risk

We all face potential liabilities. Some are covered by typical insurance – homeowner’s/renter’s insurance and auto insurance will cover someone’s medical costs if they are injured on or by our property. But there are other types of potential liabilities. In today’s hyper-connected world, libel and slander are easier to commit than ever. Identity theft can create huge personal liabilities. What are you doing to manage the other less-known potential liabilities? Granted, there is a big overlap here with financial risk, but I think it deserves its own category. Does personal reputation risk fall in this category?

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Safety Risk

I don’t have to tell parents about safety risk. From the time our kids start to crawl, we are chasing them around to protect them from all the hazards in the world. We manage our own personal safety risks with seat belts, airbags, helmets and pads. Security companies produce TV ads reminding us that bad people might break into our houses and threaten us and our families. Smoke alarms, airline safety briefings and evacuation plans have become taken for granted. Does that mean we’re ready when they’re needed?

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Property Risk

We all own property and face risks because of it. There are risks that someone might steal it. Or there are risks that it might be damaged or destroyed. Again, typical insurance will cover some of the risk for your biggest properties, but have you considered some of the smaller properties? Think about your family photos. Do you have any heirlooms or items with sentimental value. How are your managing the risk of their loss, damage or destruction?

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Financial/Investment Risk

I probably don’t have to write much about this one. Most of us experienced a financial loss of some sort during the last year’s recession. Times were good there for a while and a lot of people got lax in managing their financial risks. The recession was a big bucket of cold water reminding us that we’ll pay the price if we’re not paying attention. Do you really need me to say anything more?

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Health Risk

Health risk is related to safety risk, but it’s different. People are becoming more aware of taking care of themselves and better managing their health risks. If you’re in the U.S. you can’t help hearing about the health care debates in the U.S. congress. Health risk management is big business and a very sensitive topic for many people. Do you think about managing your health risks on a daily basis?

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Employment Risk

During the last year, the U.S. unemployment rate doubled. Very few of us can consider our jobs completely safe. Do you think about what you would do if you were laid off or if your business wasn’t profitable anymore? Do you have specific plans? Is this risk the same as financial risk? I would suggest not. Most people get much more from a job than just a paycheck.

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Environmental Risk

I’ll be honest. This one was almost an afterthought for me, but it needs to be included. Whatever your thoughts are about global warming, going “green”, and tree huggers, it’s hard to argue that there is not environmental risk facing us. It may be on a micro-scale – mold in your house or a contaminated well. Or it may be on a macro-scale – melting glaciers and a depleted ozone layer. Wherever you want to look, we face environmental risk. How are you addressing environmental risk, either micro or macro?

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As I paused in writing this, it occurred to me that there are personal opportunities as well. How do we manage those? I’ll save that one for a future post. It seems to me that managing personal risks and opportunities is similar but very different from managing business risks. It’s an interesting topic that I want to come back to. What do you think? Can personal risks be managed in the same way as business risks? Are there other personal risk categories that I missed? I look forward to your thoughts…

I feel like I’m procrastinating. I finished my initial series on step one of the risk management process – identifying risk. Now the plan is to move into writing about step two – evaluating the risks. I’ll get there, but I’ve got one more topic I want to address. Let’s talk about the traits of world class business risk management…

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I’ve been thinking about these for about a week now.  The idea was triggered by a comment exchange with Kristen on my last post. We talked about “formal” process vs. “formalized” process. Kristen is absolutely correct that risk management needs to be formalized – meaning done in a proper and regular form. But I don’t think it needs to be “formal” – using the definition “stiffly ceremonious, burdensome or onerous”. I know it’s semantics, but the difference in perception will be the difference between effective execution and just going through the motions.

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That exchange about a specific trait got me thinking about what other traits would characterize world class business risk management.  Here’s what I’ve come up with.

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Regular and Periodic

I think, first and foremost, a world class business risk management organization executes their risk management process regularly. It might be monthly, quarterly or annually, but risk management will be a regular and consistent task. These companies recognize that the situation is constantly changing. They appreciate the need to stay on top of new risks that may develop or existing risks that may become more probable.

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Formalized Methods

Risk management must be formalized. What I mean by that is the steps in the process must be repeated consistently. When a task or process is performed on a regular basis, it will become formalized over time. And more than likely they will be written down, which brings us to the next trait..

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Documented Process

Any company that has a world class process will have it documented. The owners and managers will understand that the methods need to be written down so they can be repeated consistently, communicated to others and continuously improved. The owners will also recognize that the results of the process need to be documented so they can be communicated, evaluated and referred to later.

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Quantitative Methods

I’ll be the first to tell you that the numbers generated by a risk management process (e.g. the probability of risk occurrence or the potential impact of the risks) are not “real”. They are totally subjective and based on a team’s best judgment. However, just because the numbers may not be precise does not mean that they have no value. The numbers are necessary to successfully evaluate the risks and prioritize your plans.  As long as the methods are consistent, the resulting numbers can be used in comparison with each other.

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Part of the Organizational Culture

A company that is world class gets that way for a reason – because they place great importance on what they are doing. World class business risk management will be performed by organizations who are passionate about the benefits of the process and have intertwined the concepts into the company culture.

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Comprehensive

Business risk management can be (should be) applied to all aspects of business – strategic planning, marketing, operations, finance, IT, quality, human resources, etc.  World class companies will have some form of risk management implemented throughout.

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Communicated

This trait may be redundant with some of the others, but I included it anyway because I think it is critical. The concepts of business risk management will be communicated regularly by world class companies. There are many stakeholders to risk management: employees, owners, investors, bankers and insurers to name a few. Each stakeholder group cares about at least some of the risks facing the business. World class organizations recognize this and make a point to talk about risk management methods, benefits and results regularly.

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Well there you go. That’s my take on the traits of world class business risk management. Have I missed anything? I know there are a few of you out there reading this. I’d like to hear your opinions…

I was thrilled to read Tim Berry’s November 12 post in his Planning Startups Stories blog. He was talking about 5 basic entrepreneurship skills that business schools don’t teach. One of the skills Tim listed was risk management. He wrote:

I don’t mean the technical side of risk management. Business schools are generally excellent at teaching the numbers and analysis of risk, mathematical tools to evaluate the time value of money, for example, and formulas to compare technical investment risk like the internal rate of return (IRR).

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I do mean living with risk. Not betting things you can’t afford to lose. How to sleep at night when your customers owe you enough to destroy you simply by failing to pay what they owe. How to figure out which spend is a reasonable risk for generating a future payback, and which isn’t. How it feels to take a second mortgage, or how it feels to tell a graduating high-school senior with a great record that there isn’t enough money for the college he or she has earned.

The risks Tim described are what I’ve termed “Business Risk” (creative, eh?).  Business risk management includes more than insurance and hedges. It is the continuous, active consideration and planning for all of the potential good and bad things that could happen to your business. The process doesn’t have to be formal or sophisticated. Expensive software and consultants aren’t required. Managing business risk is a simple process. But, it’s a simple process that consumes entrepreneurs (whether they realize it or not) and should consume owners/managers of established businesses. In fact, maybe the day-to-day effort invested in risk management is what defines the “entrepreneurial spirit”.

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How do you feel about that last statement? Agree? Disagree? Tell me why.

I was working on my next post – 3 Categories of Risk – but got sidetracked by Naomi Dunford’s latest . It got me thinking. In my first post, I pledged the following;

I commit to do my best to engage you and be engaged. I will strive to earn your trust and trust you. I will endeavor to write things that you may want to pass along and discuss with others.

After reading Naomi’s post and all the comments, I realized that I’m not doing a very good job at living up to my commitment. Sure, I’m covering the subject matter in a very businesslike manner. But, if I want to engage you and earn your trust there needs to be more sharing - more than the bio, more than the LinkedIn profile and more than an occasional tweet…

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So what’s in it for me? Why am I bothering with writing a blog? There’s no advertising. I’m not soliciting consulting gigs or peddling the next great risk management toolset. What’s the motivation?

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The short answer is “I want to help.” (and I know your collective eyes are rolling with a smirk..) I truly believe that a majority of problems faced by businesses can be avoided or at least minimized with some basic risk management. The problem is that many business owners/managers a) don’t think about risk management; b) don’t care about risk management; c) don’t have time for risk management; or d) some combination of a), b) and c).

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I want to change that. I have developed a method that is simple, practical and effective. It just needs to be evangelized and taught. That’s why the blog is here and that’s why I started a Twitter account. In time, I hope to complement both with speaking opportunities and articles.

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Eventually, the book I’m finishing will show up here. Again, the primary purpose of the book isn’t to generate revenue (although it wouldn’t hurt my feelings to see a little return on the effort invested). I think there is a need for a straight-forward “how to” book that small business owners can read, understand and implement quickly. I am going to address that need.

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So what’s in it for me? I see an opportunity to provide a positive influence to the “long tail” of businesses and make a real difference in the world. Call me an optimist or naive – probably true on both counts – but I think we can do it.

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You’ve stuck with it and read the whole post. So let me ask you.. What’s in it for you?

“How does somebody develop a passion for business risk management?”, one might ask. Well, let’s just say that I  learned its importance the hard (read “expensive”) way.

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My partner, Phil, and I started a retail liquor store in our hometown – a small town in eastern Iowa. We did our research. There was a  limited local supply – only the town’s grocery store offered a very sparse selection of liqour, beer and wine with zero customer service. Our interviews with competitors, potential customers and suppliers all indicated that there was a solid market for the business as long as the prices were reasonable. We wrote a kick-ass business plan (”Best I’ve ever read”, said the banker), got our financing, set up our space and opened the business.

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The initial response was pretty encouraging. We had a great location and put together a nice marketing campaign to generate interest. The business was cash-flowing and life was good. But after about six months, we noticed sales starting to drop off. At first we attributed the drop to the end of the honeymoon every new retail business experiences, but the sales kept dropping off. Phil and I tried a lot of responses – increased marketing, special promotions, PR events, added services, expanded selection – but nothing seemed to stop the bleeding. We finally resorted to what we should have done in the first place…we started asking questions.  Our friends and former customers told us that the convenience of picking up their liquor, wine and beer while they were grocery shopping was more important to them than a better selection, better service and cool setting. Phil and I had assumed that a reasonably priced better selection with better service would win customers over. We assumed wrong.

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After about three years it was apparent that the business was never going to hit our target returns unless we made some major investments, and even then the returns would be questionable. We elected to close the business down and take the financial hit instead of throwing good money after bad.

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As we did a post-mortem on the good idea that didn’t work, it was clear that the bad assumption contributed to the loss. But the real cause of our loss was that we were not prepared when a key assumption didn’t pan out. As I’ve written before, assumptions are risks. We could have avoided the financial loss if we had managed our risks up front.

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We learned our lesson. Can you think of a similar situation? I’d love to hear about it.