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Risk Management and Business Consultancy Services Risk Management in Service Organisations â&#x20AC;&#x201C; Is There a Difference?

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Risk Management for Start-Ups

Contents

Business Consultants and the Start-Ups Hedging Against Risk Risk Management in the Digital Age

Foreword 2 Tom Cropper, Editor

Risk Management in Service Organisations – Is There a Difference?

The first in a series of 3 CEO Reports from Mark Langley-Sowter, Managing Director, ProfessionsUK* (London, England and La Herradura, Spain). Published by Global Business Media

Published by Global Business Media

10% vs 90% So What Really Makes a Service Different? So How Does This Change Our Approach To Risk Management?

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Predicting the Future

Publisher Kevin Bell Editor Tom Cropper

Tom Cropper, Editor

What is Risk Management? The Company Killers The Competition

Business Consultants and the Start-Ups

Business Development Director Marie-Anne Brooks

James Butler, Staff Writer

Senior Project Manager Steve Banks

Rise of the Start-Up

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From Idea to Sustainability The Value of Consultancy

Hedging Against Risk

Jo Roth, Staff Writer

What is PI Insurance? Choosing Cover Assessing Their Risks Developments of the Future

Risk Management in the Digital Age

Tom Cropper, Editor

Technology in Business A Rise in Cyber Crime Refining Security

References 15 © 2015. The entire contents of this publication are protected by copyright. Full details are available from the Publishers. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical photocopying, recording or otherwise, without the prior permission of the copyright owner. WWW.CEOREPORTS.COM | 1

SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

Foreword R

ISK IS part and parcel of everyday life. Some

vulnerable. Entrepreneurs are inexperienced and

problems may not be predictable and others

prone to mistakes. Management teams are small with

may not have an easy solution. However, the more

low margin for error. Cash flow problems can hinder

we can cast our eyes forward and spot problems

a firm’s ability to be successful and competitors can

further down the line, the better placed we’ll be to

mount aggressive campaigns against them. It all

resolve them. This is the very essence of strategic

adds to create a list of different dangers which can

risk planning for businesses.

adversely affect the ability of a business to perform

In the first article in this report, Mark Langley-

to its expectations.

Sowter, examines the importance of flexibility in risk

Elsewhere in the Report we’ll look at the world of

management procedures. In particular he looks at the

professional indemnity insurance. While offering an

difference between risk management for businesses

important safeguard against many of the issues

which are involved with the service sector and those

which can go wrong in business, it remains a much

which are providing a tangible product. Traditionally

misunderstood issue. Jo Roth will be providing a guide

there has perhaps been a view to adopt a one-size-fits

on what business owners need to know.

all approach, but he argues this is no longer the case.

Finally, we’ll look at the developing world of risk

Businesses are changing and they require tailored and

management. As business leaders become more

individual risk management procedures to assess the

sophisticated in their planning and execution, they are

unique challenges these bring.

paying more attention to risk management. We’ll look

Nowhere are these issues felt more than with start-

at that trends the future might hold in store.

up enterprises, and in the next two articles, we’ll assess the challenges these are facing. The majority fail within the first few years of doing business and it’s easy to see why. These firms are at their most

Tom Cropper Editor

Tom Cropper has produced articles and reports on various aspects of global business over the past 15 years. He has also worked as a copywriter for some of the largest corporations in the world, including ING, KPMG and the World Wildlife Fund.

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SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

Risk Management in Service Organisations – Is There a Difference? The first in a series of 3 CEO Reports from Mark Langley-Sowter, Managing Director, ProfessionsUK* (London, England and La Herradura, Spain).

ISK MANAGEMENT pervades our lives, not only in business, but also in the way we approach each day when we set off for work, go for a jog, and take a trip to the shops or the kids to school. Some of this risk management and assessment is created by our own sense of the world around us, and some is ‘imposed’ upon us by others who feel they know better. Yet do we differentiate? And if we do, how? Similarly, when it comes to risk management in business, do we differentiate bet ween ser vice and manufacturing environments? That is, do we tailor our approach, systems, processes and training, as well as our leadership and management styles, differently to a service organisation, rather than a manufacturing one? By ‘services’, I mean any business that requires human interaction at the point of sale, service or ‘product’ delivery e.g. Banking, Insurance, Legal Services, Consultancy, Beauty, Personal and Sport Therapies or the National Health Service. And by ‘manufacturing’, I mean the production of goods, minerals and utilities and such like, away from the market to which they will ultimately be distributed. In some industries of course, service and manufactured products co-exist at the point of distribution, such as an airline, supermarket, chemist, mechanic’s workshop, or car showroom. However, I aim to show that there is still a requirement to inculcate a philosophy and reality of risk management (the what?) in a service or service-oriented business, differently (the how?), to that of a manufacturing environment. But to start with, let us look briefly at the historical development of management and leadership as a discipline within business in general. Then we can develop the premise that services are different and necessitate alternate strategic, operational and interpersonal approaches to managing risks and issues in creating, developing and growing a sustainable service organisation.

10% vs 90% Until the early 1970s, it was assumed that all businesses could be run in the same way. In fact, to the present day, a majority of schools and universities around the world still propound this theory in their teaching and exams, although this has at last begun to change over the last 10-15 years. However, a vast majority of business books published world-wide perpetuate a general status quo by exalting the ‘4 Ps’ principle of marketing and management or other variations such as the ‘7 Ps’ and equivalent acronyms. Simply put, Product, Price, Promotion and Place and then you can add People, Processes and Programs. There is even an 8th P that has been mooted recently, suggesting Productivity (& Quality, so it’s a PQ really!), in the eyes of the customer or client, needs also to be measured and quantified. Yet you know this already, and it works well in manufacturing, but throws up myriad other questions when applied to service businesses, primarily, as I will show, because the ‘point of interaction’ in a service cannot be fully structured. Why? Well ultimately, because the customer or client is involved in the outcome as well, and educate them as well as we might, there is always potential for the unpredictable. As research by Professor Christian Groonroos** established in the late ‘70s and early ‘80s, the starting point where services are different to manufacturing is how they ‘face’ their markets (see Figure 1 below)

Figure 1

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SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

Generally systems and procedures are put into place to make sure the service provided is consistent all the time; however, there will always be subtle and sometimes major differences, and not always for the better

What Groonroos showed for the first time was that, whilst only 10% of staff on average of a manufacturing company dealt directly with the market (sales, marketing, client services), 90% and higher had a direct impact on the market in a service organisation. In some cases, this was 100% such as a consultancy, solicitors and accountants firms, where everyone in the business has the potential to delight or disturb a customer. Taking this concept a little further, I would suggest that we care little about what the staff and management are like at the car manufacturing plant from whence our shiny new 3.5 Litre model has just arrived. Nor do we care about their personal hygiene, their dress sense or the manner in which they speak to others. However, in a service environment such as a bank, solicitor’s office, wine bar or chiropractor, we do. And this is where managing a service business starts to become different to manufacturing. Technology increasingly improves services from a supply perspective (not always from a demand point of view I would add, as seen by a customer’s innate dislike for multiple choice options on an automated answer service, before reaching a ‘live’ individual), but ultimately, with management’s desire to ‘control’ the various intricacies at the point of interaction, technology cannot fully control the human element. The reverse is true in a manufacturing, aerospace, and pharmaceutical or engineering environment, where technology has advanced design precision and safety dramatically over the past 25 years. Yet accidents do still happen and are usually of the human kind!

So What Really Makes a Service Different? Premise Much like managing a football (soccer) team, managing a service is a complex business. You can set a strategy for the style of play you desire, you can train your players, you can coach them, you can get them to hone their technical ability, you can even have them practice set moves in anticipation of specific opportunities such as corners or free kicks. Yet ultimately, you, as manager, are helpless when they walk out onto the pitch and play the game; a unique game, since no two games will ever be the same, no matter how many times you may play the same opposition. Of course, you may argue that you do have some influence on proceedings such as issuing and shouting instructions from the touch line, which may or may not be implemented or making substitutions, which may or may not be effective. In simple terms, you have no control over the 4 | WWW.CEOREPORTS.COM

hundreds of ‘interactions’ that will take place between your players and the opposing team. And then you have the influence of the referee and his/her assistants, the crowd, the pitch, time of kick off and so on. Yes, managing and then marketing a service is a much more sophisticated challenge than conventional manufacturing and the marketing of products, even those products which rely on service to be delivered to market. Sadly, as I have said, too many business schools, universities and other forms of higher education, are consistently emphasising the importance of the traditional ‘marketing mix’, as applied to manufacturing businesses and not teaching the intrinsic qualities of developing, managing and marketing service organisations. What exactly are the characteristics of a service? How are services different from a product? In fact, many organisations do have service elements to the product they sell, for example McDonald’s sell physical products i.e. burgers, but consumers are also concerned about the quality and speed of service; are staff cheerful and welcoming and do they serve with a smile on their face? I believe there are 5 key characteristics to a service, which are detailed below. 1. Lack of ownership. You cannot own and store a service like you can a product. Services are used or hired for a period of time. For example when buying a ticket to the USA the service lasts maybe 9 hours each way, but consumers want and expect excellent service for that time. Because you can measure the duration of the service, consumers become more demanding of it. Other services, such as banking, legal, healthcare or insurance, have an occasional and often much shorter service time experience, although more frequent. 2. Intangibility You cannot hold or touch a service, unlike a product. In saying that, although services are intangible, the experience consumers obtain from the service has an impact on how they will perceive it and thus they have a tangible memory of the service. What do consumers perceive from customer service? And what do they perceive of the location and the inner presentation of where they are purchasing the service? 3. Inseparability Services cannot be separated from the service providers whereas a product when produced can be taken away from the producer. This is a crucial difference. However a service is produced at or near the point of purchase.

SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

Figure 2: Management and Staff Bureaucracy |-----m<>s<------>m<------>s----------m<----->s-----------m<>s---|Enthusiasm (Sample shown represents 4 branches) m = management replies to questionnaire, s = staff replies to questionnaire

Take visiting a restaurant – you order your meal, then the waiting and delivery of the meal, the service provided by the waiter/waitress is all a part of the service production process and is inseparable. The staff in a restaurant are a part of the process as well as, and often as much as, the quality of food provided. 4. Perishability Services last a specific time and cannot be stored like a product for later use. If travelling by train, coach or air the service will only last the duration of the journey. The service is developed and used almost simultaneously. Again, because of this time constraint, consumers often demand more. 5. Heterogeneity It is very difficult to make each service experience identical. If travelling by plane, the service quality may differ from the first time you travelled by that airline to the second, because, for example, the service team is more or less experienced/ attentive. A concert performed by a pop group on two consecutive nights may differ in slight ways because it is very difficult to standardise every song to the end or dance move. Generally systems and procedures are put into place to make sure the service provided is consistent all the time; however, there will always be subtle and sometimes major differences, and not always for the better.

So How Does This Change Our Approach To Risk Management? The first proposition is that management and staff taking and making day-to-day decisions in a service organisation, are rarely ‘a matter of life or death’. This, of course, is less true in manufacturing, chemical, utility and engineering organisations. In the early 1980s, an original piece of research was carried out by two Professors (‘Bureaucracy vs. Enthusiasm’: Parkinson & Schlesinger, Harvard Business Review 1983) to determine the balance between ‘bureaucracy’ (the structure, systems, procedures and rules of an organisation) and ‘enthusiasm’ (the flexibility, creativity, entrepreneurialism and individuality of an organisation), in a service. Two basic assumptions were made: •n o service company could survive, or exist for very long at the extremes of a continuum

which at one end had ‘bureaucracy’ as the descriptor, and at the other, ‘enthusiasm’ • s uccessful service companies, in the eyes and perceptions of the consumer or client, would sit closer to the ‘enthusiastic’ end of the continuum. To carry out the research, the Professors developed a questionnaire for staff, management and consumers of a small bank that had 26 branches of various sizes (3 staff to 300 staff). What they discovered was both revealing and, in some sense, surprising. First, they found that the same pattern (the difference between staff and management’s views about what was important to each other, as regards service and how the organisation was run) existed in all 26 branches (see sample results, above, Figure.2). However, this pattern existed along the whole length of the continuum; i.e. patterns were in as many cases towards the ‘bureaucratic’ end as they were toward the ‘enthusiastic’. When consumers were questioned, a difference in perception of service at each branch appeared, and in the following way: i) C onsumers gave evidence of ‘good service’ regardless of where the branch ‘sat’ on the continuum (Remember, a definition of good service is ‘meeting expectations’). ii) ‘ Good service’ was only perceived where and when the views, opinions and expectations of staff and management were closely matched and not, widely spread apart – see Figure.3. Figure 3: Consumers m<------>s m<------------------->s √ X When the results were more spread out, no matter where the branch ‘sat’ on the continuum, consumers perceived poor service etc. Therefore, both assumptions were disproved, to the Professors’ great surprise. You can be a rules-driven and bureaucratic organisation and be successful. Provided that you make the ‘bureaucracy’ work and meet the expectations of the consumer/ client that you set for them, as well as those which they may expect from you. The process to achieve this balance is, of course, to ensure that staff and management know what to expect of each other and are both going in the same direction, even though each group will always have a slightly different perspective of how the business could be run!

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What does matter, is that the views, values and expectations of both staff and management need to be close, aligned, mutually shared and make a difference within the organisation

Figure 4:

An example of this in a multi-national franchise operation is again, MacDonald’s (whether you like them, frequent them or not), where the culture is very ‘rules-driven’ and ‘structured’. However, the staff and management know clearly what to expect of each other-regardless of status or position – as do we, the consumer, when we go into dine at their restaurants (Has anyone ever asked to have the gherkin taken out or a ‘Big Mac’ cooked rare?). This was later confirmed in other service studies during the 80s and 90s and early 2000s in both the UK and across Europe, including solicitor firms, insurance companies, banks, retail services, accountants, major multi-nationals, as well as small, new and established, business enterprises. Over the last 10 years, we at ProfessionsUK have updated this research and found it to apply to every service business and have developed an in-depth questionnaire and model to show clients their individual profile. To summarise, any service business will not survive at the extremes of the continuum – a total bureaucracy has no room or time for consumers; a purely enthusiastic company promises what it doesn’t deliver and ultimately, probably forgets to send out invoices!

However, it is not where you are on the continuum that matters most, except that the very nature of some businesses will not allow you to travel much towards the left or the right (e.g. a financial institution requires many rules, whereas a corner shop will have fewer). What does matter, is that the views, values and expectations of both staff and management need to be close, aligned, mutually shared and make a difference within the organisation. These, in turn, will then be reflected in the eyes and perceptions of the consumer. Where this changes a service organisation’s approach to risk management is that everyone, and to use the cliché, everyone’s “Hearts and Minds”, must buy into the company’s strategy from the outset and the creation of a culture to match that philosophy and strategy is crucial to ensure risk management is taken seriously, on a day-by-day and moment-by-moment (points of interaction – see Service Triangle below) basis. All the best-written and agreed procedures in the world (e.g. ISO 9001-4, Basel II, Lexcel for Lawyers) will not matter much if they are not applied. Staff and management, even Directors, have to align, with respect and transparency being key to any successful, commercial service enterprise. Is this perhaps what has been missing at Tesco’s recently and was missing in the corrupt parts of the financial institutions, which helped cause the last recession? The diagram below raises more questions than it answers However, what is key here is that service organisations who appear to be providing similar services will look ‘average’, in the eyes of the potential client i.e. they will ‘look’ the same or be difficult to differentiate from other competitors. Successful services will be differentiated through the way (the how?) in which they attract, treat, support and retain clients through individual service, (not simply the what?), so that each side of the triangle mirrors the other. Similarly, risk management strategy and systems need to incorporate a facility for this ‘individualism’, which in essence, is the fundamental difference between services and manufacturing businesses. Mark Langley-Sowter, October 2014 * ProfessionsUK and the

™ logo are trading

names of Newspecies Limited. Trademark applied for June 2014

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Risk Management for Start-Ups Tom Cropper, Editor The business world is full of risks, but for start-ups these can be fatal. Good risk management procedures can be crucial in helping you weather the storm.

NTREPRENEURS ARE by nature optimists, but here are some statistics none of them want to hear. The majority will not survive for five years and around a half will not even make it until their first birthday! Of those company failures, many are down to problems which could, and should have been avoided, because entrepreneurs forgot to remember the first principle of Murphy’s law – whatever can go wrong will go wrong. Had they been more aware of the risks and the possible consequences, there’s a chance they could have survived. That’s why risk management should always be high on the agenda of any new start-up.

Predicting the Future In the summer of 2008, Gordon Brown made an important and – with hindsight – very bad decision. He had widely been expected to call an early election, and most experts believed it was an election he would win. However, a sudden bump in the polls for the Conservative Party forced him to think again. It seemed more sensible to wait and see if this was a temporary swing or something more genuine. What he didn’t know was that in a few weeks’ time, the world would experience its biggest financial trauma since the Wall Street Crash. His poll ratings collapsed and David Cameron became Prime Minister. Brown wasn’t the only one caught out by the banking crisis. Thousands of otherwise successful enterprises were caught out, stranded like fish above the tidal line. The crash was one of those events risk managers call a ‘company killer’ – something major and unforeseen which has the potential to wipe out your entire business. While entrepreneurs may not enjoy spending time and energy on negative thoughts, risk management can play a crucial role in the success – or otherwise – of their business.

What is Risk Management? There is a reason that hypochondriacs tend to

live longer. They’re constantly on the lookout for anything that can be wrong with their health, so when something actually does, they will almost certainly spot it early. The similar principle applies to risks management; it’s the art of guessing what could go wrong, what might happen if it does and what measures can be taken to mitigate it. Risks can be anything from minor issues such as running out of stationary (to which the solution is rather obvious – buy more) to a major client defaulting on payment. Not all these risks need to have a strategy associated with them. Instead they should be classified according to the likelihood of a problem occurring and the consequences if things go wrong. This allows you to assess whether it’s worth taking any actions and, if so, what you can do to mitigate these problems. At the most basic end of the scale are minor risks. These are issues which might have a low probability of occurrence and minimal consequences. The cost of taking mitigating action will be more than the impact of the problem itself. Therefore you can safely ignore the problem and choose to deal with it if and when it occurs. Insert Image – LAW OFFICE – No caption The next category is common everyday risks. These are things which can easily happen during the course of a working day. They do have a significant impact on your business, but that is something you can resolve by simple adjustments in behaviour. For example, if the email servers repeatedly crash, that represents a nuisance and a significant cost in terms of lost man hours and productivity. This can be addressed by paying more attention to your IT and making sure equipment is up to date.

The Company Killers The last and most important sector refers to those company killers – external problems which could seriously damage the ability of a company to WWW.CEOREPORTS.COM | 7

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Having a cushion in the finances to allow for late payment can stop your company running out of money

function. These can be things such as cash-flow issues, regulatory problems, or market difficulties, which can throw up serious obstacles to the overall health of a business. Financial issues are possibly the most damaging. The world is full of entrepreneurs whose businesses failed because they did not take into account unexpected financial issues. Poor cash flow, disappointing sales, increased overheads, high wages, can all erode profitability and developing plans to address them can be important. A common mistake is to fail to plan for eventualities. Entrepreneurs often make financial plans which rely on best case scenarios. They require sales to meet or exceed expectations, costs to be kept under control, productivity to meet targets and much more. The problem with this is that by doing so you multiply the potential for error. Unexpected cost increases throw financial planning into turmoil, so it pays to factor in a budget for eventualities – things which can happen and might harm your trade. Customers and suppliers are undoubted assets, but they can also present a business risk. Suppliers often require larger orders from new firms with whom they are yet to build up a working relationship, which means the short term operating costs of a business can be significantly higher for new entrants. Equally, late payment of invoices represents a major business risk for small firms. Having a cushion in the finances to allow for late payment can stop your company running out of money. People management is also a critical issue. Start-ups tend to operate with small teams,

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which means the reliance on individual team members is that much greater. In any business there will be times when individuals are not up to the job, but with an early stage start-up team the consequences of an under-performing employee can be severe. When planning recruitment strategies, it is always worth factoring in natural wastage. In other words – over a three year period you might expect to have members of your team who have to be let go due to substandard work.

The Competition Every business will face competition and this can present a risk in a number of ways. Obviously, there is the risk that their products or services may be more successful than yours, but there are many other ways they can hinder you. An opponent may copy your idea, bringing it to market more quickly or cheaply than you can; they can start price wars, or launch an aggressive marketing campaign. In this world of digital media it has also been known for competitors to start rumours about companies online and through social media. It is helpful to think about how competitors might affect your company and what threats they can potentially bring. This means you’ll be in a better position to employ effective countermeasures against them. The risks for any business, then, are significant, but in almost all cases these are magnified for start-ups, small businesses and early stage enterprises. These are at a fragile stage in their development and, therefore, are more vulnerable than many other businesses to these kinds of attacks.

SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

Business Consultants and the Start-Ups James Butler, Staff Writer The majority of start-ups fail in the first few years, but good and effective business consultancy can be key to their success.

CONOMISTS CALL them Gazelles – early stage enterprises which are growing rapidly – and they’re proving increasingly important for our economy. However, the number of these rapidly growing businesses is falling as many new start-ups fail to make the grade. Reversing this trend is leading to a more intensive approach to business consultancy designed to equip first-time entrepreneurs for the challenges which lie ahead.

Rise of the Start-Up In the wake of the economic crisis, start-ups have become a more important part of the economy. A report from Start-up Britain found that the number of start-ups had increased six-fold since 1971. The report found that 380,000 businesses had been launched in 2012 spurred on by government schemes such as the Enterprise Investment Scheme. Entrepreneurship has become a crucial part of the economy and is responsible for creating around half of the new jobs in the UK1. However, many of those new enterprises are struggling to make it. The sixth Barclays Entrepreneurship Index showed that the number of enterprises with a turnover of £2.2 million to £100 million had declined. The number of businesses dubbed Gazelles (those reaching more than 33% revenue growth for three years and then 10% growth for a minimum of two years, had fallen from 23.2% in March 2013, to 21% in 20142. The implication is clear: while new enterprises are being created, too many are failing to become fully sustainable and profitable businesses. There are many reasons for this. A volatile economic landscape creates numerous obstacles to businesses, but all too often it’s down to the entrepreneur’s own fallibility. The problem is highlighted by Kastis Kemezys, who is part of a new business incubator called Cinnamon Bridge. His experience of working with

start-ups and attempting to start his own drinks brand has been crucial in his own development. “The problem is that the majority of start-ups in the food and beverage industry do not go on to become successful and sustainable brands,” he explains. “We, ourselves, tried to launch a beverage brand in 2011 and, although we got off to a promising start, it did not work out….. The problem is that no brand will be successful if it is launched before it is complete – and that’s the case with so many products on the market.” Cinnamon Bridge believes they have to go further than their competitors who do little more than try to connect entrepreneurs with investors. Instead, they focus on building the skills and capacity of the entrepreneur, helping them spot market opportunities, refine marketing and improve their packaging design. It’s all part of an intensive programme which aims to equip the entrepreneurs for the challenges that lie ahead. In other words, before they meet investors, they try to ensure they represent a much more investible option.

From Idea to Sustainability Other incubators, such as Virgin Start-ups, are following the same model, delivering a mix of early stage investment together with mentorship. Gary Keery, who – together with his brother – founded the Cereal Killer Café in Shoreditch is one of the businesses to have benefitted. “They not only helped us with funding, but gave us great business advice and helped us with a business plan,” he explains. The Cereal Killer Café is a good example of the challenges businesses face. Gary and his brother had an interesting idea – a café dedicated to different cereals from around the world. What an incubator was able to help them with was to develop a business plan, identify the best route to market, and help shape their concept into a sustainable business. WWW.CEOREPORTS.COM | 9

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The problem is that the majority of start-ups in the food and beverage industry do not go on to become successful and sustainable brands

Although there are several other incubators around, they are only available to a limited number of enterprises – namely those which apply and are accepted to the programme. For others, employing a business consultant can offer real benefits, but it also represents a cost. Early stage start-ups with limited supply of capital can struggle to see the benefits versus the costs. All they can see are the downsides, while the benefits are intangible. The problem is exacerbated because many first time entrepreneurs do not know where they are weak. It’s easy to be emboldened by the confidence that inexperience can bring. Ironically it is only later – when an entrepreneur has tried and failed to develop a business – that they are in a better position. Armed with some bitter lessons from their failure, they would have the knowledge and experience which could have helped them become successful.

The Value of Consultancy A consultant’s job, therefore, is to help entrepreneurs learn these lessons before it’s too late. They can help to refine a business plan into

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a workable proposition, identify a route into the market and help with the day to day operations. Most of all they can be there to identify risks and challenges which might lie ahead. In today’s rapidly evolving marketplace there are numerous threats to business success including economic downturn, interruption of supply and security of digital data. Moreover, the requirements of business are changing. A greater emphasis on sustainable and ethical business practices means those enterprises which are able to gain a positive reputation can realise a number of tangible and intangible gains. Consultants, therefore, are having to become much more intuitive and flexible. They have to recognise the inherent characteristics of any business and adapt their approach to suit. Service orientated businesses, for example, will have a range of different challenges when compared to product-based companies. Online traders will have different requirements from physical retailers. Meanwhile, entrepreneurs need a greater awareness of their own vulnerabilities and the benefits consultants can bring.

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Hedging Against Risk Jo Roth, Staff Writer Professional indemnity insurance might not be the most exciting topic, but it can be crucial for any business.

E ALL like to think we’re the best at what we do, but mistakes can happen “and if your client decides you’ve made a mistake which has cost them money they can claim compensation against you. Even if you have done nothing wrong, the costs of defending yourself can rapidly mount up. For small and early stage companies working with much larger clients, therefore, it can be difficult to mount an effective defence against a better funded team. That’s why professional indemnity insurance is so important. In this article we’ll look at some of the things every business should know when selecting their cover.

was of historic and monumental proportions, many other businesses can learn from their example. If you’re not careful, your mistakes could end up endangering your company, which is where Professional Indemnity Insurance (PII) comes in. PII is a way of insuring against any mistakes your business makes. It’s particularly useful for any business that gives advice, handles client data, provides a professional service or deals with intellectual property. As such, it’s most likely to be used by IT professionals, engineers, financial advisers and architects, but every business and self-employed professional can potentially benefit.

What is PI Insurance?

Choosing Cover

April 2010, and an explosion on a BP oil rig in the Gulf of Mexico sent millions of barrels of oil into the sea. Over the next few weeks the coastline and wildlife were devastated and countless local businessmen saw their livelihoods threatened.

The first task is to look at whether you need PII. Ask yourself if you’re the sort of business whose mistakes can lead to a sizable financial impact on any client. For example, if you store any client data, the consequences of leaking that data could

Once the spill was finally cleaned up, the task of counting the cost could begin and for BP this has proved to be a traumatic experience. The US is currently preparing for a trial which could see the company fined $14bn, but the pain could continue indefinitely. In 2012, they agreed a catch-all deal which would lead to almost $8bn in payouts3. It’s an extreme example of what happens when a company makes mistakes. Although BP’s error

be profound. Equally, a financial adviser who offers incompetent advice could cause serious problems for the business. Next, ask yourself what the consequences of any error will be. Start-ups and individuals are at their most vulnerable as their capital reserves are minimal. Equally, they are the ones most likely to skimp on PII as cash flow margins can be critically slim. WWW.CEOREPORTS.COM | 11

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It’s important to find an adviser who is 100% impartial and free of any affiliations

For start-ups, the biggest problem is knowledge and skills within the organisation. An established organisation will have risk management officers and other professionals who have an understanding of PII and the inherent characteristics of your business. That’s not necessarily the case with a smaller start-up which is why it’s worth turning to the services of a broker or adviser. Even so there can be some problems here also. Not all brokers offer entirely impartial advice. They can be affiliated with insurers or have arrangements whereby they receive commission for some deals made. It’s important to find an adviser who is 100% impartial and free of any affiliations.

premium mount up to more than the damage which could be inflicted, it might be a business expense you can do without. When assessing how much cover you need, an escalating cost assessment can help you pitch this at the right amount. Remember, any compensation you’re forced to pay out over and above the limit of your cover will have to come out of your own pockets. This becomes an issue, for example, if you think there is only a very small probability of being forced to pay out a large sum. If that’s the case you may be tempted to set your limit lower and, in the event that you are forced to pay that out amount, you’ll accept the financial impact on your business.

Assessing Their Risks

PII is having to adapt, along with other areas of risk management, to an evolving business environment and, in particular, the digital environment. Increased use of technology among businesses raises a number of risk factors, including the security of data. With contact details and data stored on remote servers, they become vulnerable to accidents and deliberate theft. For any company storing data remotely, the integrity of that data is critical and, if they fail to maintain its safety, they may be liable. PI insurers will be required to develop an understanding of digital risks and adjust their product offerings accordingly. Ultimately, PII is something you never want to need. It will only become a necessity if you make a mistake which leads to a compensation claim against you. As such, risk assessment and risk mitigation can go a long way to avoiding any claims against you – and also reducing the amount you end up paying out in PII. Any insurance policy should work hand in hand with any risk assessment strategies you undertake.

All insurance policies come with differing levels of cover. These might be anything from £50,000 to several million. Naturally, the higher the cover limit, the more you’ll be paying in premiums, so businesses must strike a fine balance between buying too much or too little insurance. To do this they need to accurately assess their own risks. Among those professionals who skimp on PII cover, the most common reason is the thought that they are in control of events. You might be able to influence the risk yourself, for example, by ensuring that you have processes and safeguards against mistakes. However, although you can take measures to reduce your liability, it is impossible to eliminate all risk. Therefore, any business will have to factor in a risk value of human error. This risk value must incorporate firstly the probability that error might occur, as well as the financial and reputational damage that mistakes can bring. If the costs of taking out an insurance

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Developments of the Future

SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

Risk Management in the Digital Age Tom Cropper, Editor

As businesses become more reliant on interlinked computer systems, they are becoming exposed to a growing range of high tech risks.

ECHNOLOGY HAS had a transformative ef fect on business over the past few years. Companies can now interlink teams of professionals from all over the world, via global networks. While this brings greater efficiency, speed and connectivity it also opens up a whole new Pandora’s Box of risk factors. Identifying these and developing solutions is the next big challenge for risk management teams.

Technology in Business Businesses of all sizes have embraced technology. Cloud computing enables real time sharing of documents between project teams based in multiple locations around the world. Rather than storing documents in physical locations, businesses are now able to move much of their administration into the virtual domain, saving time, money and reducing their paper usage. However, with all this information making it into the digital environments, businesses are becoming exposed to a new range of threats that many are not equipped to cope with.

A Rise in Cyber Crime The sheer volume of information available makes a tempting target for cyber criminals. In February 2015 a gang of Russian hackers stole £650 million from banks around the world in what is the largest cyber-crime in history. They used a malware program that lurked within computer systems of companies, gathering information and feeding it all back to the gang. They were able to instruct cash machines to dispense money at set times during the days. The virus they used was so sophisticated they were able to view real time video feeds through computers which were thought to be secure. Computer viruses have been a problem for decades, but the criminals are developing at a considerable pace and in many parts of the world business is lagging behind. According to Inga Beale, Chief Executive of Lloyds of London, UK companies lose out on £268 million every year through cyber-crime. Speaking to the Telegraph, she said: “Cyber risk poses the most serious threat to businesses and national economies, and it’s an issue that’s not going to go away. The London WWW.CEOREPORTS.COM | 13

SPECIAL REPORT: RISK MANAGEMENT AND BUSINESS CONSULTANCY SERVICES

New threats will mean new kinds of insurance policies, and while companies in America are some way ahead in this respect, most businesses in this country are still exposed market has a long, proud history of finding innovative solutions to insuring large, complex risks that are challenging to underwrite locally.”4 Here in the UK 90% of businesses suffered a data breach of some kind, according to the Security Breaches Report.5 PWC, meanwhile, reports that banks view cyber attacks as being one of their biggest security threats6.

Refining Security Businesses of all kinds are adjusting their strategies to adapt to the new challenge. According to Gartner, 2015 is expected to be the year which sees the emergence of a new kind of professional – the Digital Risk Officer. By the end of the year their survey predicts that more than half of CEOs will have a senior digital leader among their staff. By 2017 a third of large enterprises will employ a Digital Risk Officer – or a similar role, and by 2020 60% will have experienced a systems failure because of a problem with their IT. Having dedicated people who can develop risk strategies to cope with those eventualities could be crucial. “Digital risk officers will require a mix of business acumen and understanding with sufficient technical knowledge to assess and make recommendations for appropriately addressing digital business risks,” explains Paul Proctor, Vice President and a leading analyst at Gartner. “Many Security Officers will change their titles to Digital Risk and Security Officers, but without any material change in their scope, mandate and skills they will not fulfil this role entirely.”7 New threats will mean new kinds of insurance policies, and while companies in America are some way ahead in this respect, most businesses in this country are still exposed. Most traditional insurance policies will have nothing about digital risk, but there is an emerging market for specific cyber threat insurance. Incorporating the 14 | WWW.CEOREPORTS.COM

appropriate insurance product is an important part of any digital risk strategies. It was with this in mind that Lloyds produced a report looking into cyber risks. They made a number of recommendations for how risk managers could improve their procedures. These include setting up a working group to review the digital threats facing the business; becoming more involved in IT; drawing up best practice procedures and making sure all stakeholders are aware of them; and taking on appropriate insurance policies aimed at cyber threats. Such policies can provide an effective shield, but risk officers need to understand what risks they are in fact facing so they can tailor their insurance in the appropriate way. That in itself is a considerable challenge. The goalposts are constantly moving. As businesses use technologies in ever-more sophisticated ways they open themselves up to threats of increasing volume and complexity.8 At the same time, criminals are evolving and developing evermore sophisticated means of attack. Identifying these threats and creating your own defences is a difficult task. It requires genuine in-depth knowledge about the topic as well as constantly updating your processes. Inevitably, these new challenges will require a substantial rethink and shift in culture. As much as technology is used in business, there is still relatively little understanding of precisely what it involves. Business leaders are often unaware just how much information is out there and what the threats might be. Although it seems as if business is now waking up to the problems, it will always be playing catch up with the criminals in an ongoing game of cat and mouse. As one side updates their processes, so too does the other. Digital risk management is something which will be increasingly occupying the minds of business leaders now and in the years ahead.

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References: Growth of British Startups Accelerates: http://www.ft.com/cms/s/0/96c45aae-26bd-11e3-9dc0-00144feab7de.html#axzz3XYZ7TrFp

Number of High Growth Companies Down 2%: http://startups.co.uk/number-of-high-growth-uk-companies-down-2/

BP faces never-ending battle:

http://www.telegraph.co.uk/finance/newsbysector/energy/11351822/BP-faces-never-ending-legal-battle-for-Deepwater-disaster.html

Cyber Risk the Most Serious Threat to Business:

http://www.telegraph.co.uk/finance/11516277/Cyber-risk-the-most-serious-threat-to-business-says-Lloyds-chief.html

Security Breaches Report: https://www.gov.uk/government/publications/information-security-breaches-survey-2014

Bank bosses say a cyber attack is among their biggest fears:

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11416073/Banking-bosses-say-a-cyber-attack-is-among-their-biggest-fears.html

Gartner says 2015 will see the emergence of Digital Risk and the Digital Risk Officer: http://www.gartner.com/newsroom/id/2794417

Managing digital risk: https://www.lloyds.com/~/media/lloyds/reports/360/360%20digital/lloyds_360_digital_risk_report%20(2).pdf

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