- Cost Transformation
Risk management focuses on what could stop the business achieving its cost transformation and management objectives. While businesses will invariably face risks that are unique to their market or organisation, certain risks to cost competitiveness may be more prevalent.
Developments in communications and logistics have helped to make competition global. Globalisation also provides opportunities for the supply chain – businesses can often source inputs like components and skills at lower cost in other parts of the world. But while it may pay a business to move elements of its business model offshore, this could have implications for its agility.
Technology improvements and breakthroughs
Such advancements present opportunities and risks to business models. While new technologies can enable a business to reduce its cost base, they might have implications for its cost structure. Technologies are also often readily accessible to competitors, meaning that businesses are sometimes faced with stark “adopt-or-die” scenarios to remain cost-competitive. Rapidly evolving technology can also force a business to write off older technology earlier than planned, which could be disruptive to cost models.
These typically fluctuate with supply and demand, and mitigating this risk is fraught with uncertainty. For example, a business may assume that the cost of a key commodity will increase and hedge against this scenario. However, if the commodity drops below the hedged cost, the business is left with a cost disadvantage relative to competitors.
Financial strength is a factor in determining a business’ ability to withstand such possible risk events, and management must consider its tolerance (or willingness) to expose the business to the possible risks inherent in its cost strategies.
When planning to exploit opportunities, management accountants must consider the risks inherent in doing so. This should not be an ad-hoc exercise; rather, risk should be managed formally using purpose-designed tools. The risk management framework should raise levels of staff awareness of the possible impact that perceived risks could have on factors including the ability of the business to:
- Achieve its strategic goals
- Assign ownership for risk accountability to individuals whose role it is to neutralise a risk event, reduce its impact or lessen the likelihood of occurrence
- Report to management risk events and the effectiveness of countermeasures.