B2B risk management: how to build a complete strategy

Risk management is essential nowadays.

Despite discussions on the topic, the benefits of this approach are still little known to many companies, especially SMEs.

It is often believed that risk management activities are complex, expensive or – worse – unnecessary. A mistaken belief that must be overcome.

After all, the years 2020-2022 have shown how unpredictable events can be just around the corner, ready to disrupt our business operations.

While predicting the future is impossible, it is true that choices can be made that mitigate risks and their consequences.

Maturing a vision based on risk and its management is therefore a prerequisite for building a resilient business. We have discussed this concept here.

Today we will focus on the types of risk and the activities to manage it effectively if you work in a B2B company.

A definition of risk management

According to ISO 31000, risk management is “coordinated activities to direct and control and organization with regard to risk“.

We immediately understand how the concept is extremely broad, incorporating
both theoretical and practical aspects.

For a company, it is a matter of defining procedures to assess the actual presence of risks, the probability of their occurrence and, at a later stage, the actions to be put into practice.

To this end, it is necessary to identify the persons responsible for the process, the resources to be allocated to and the control systems to be implemented.

What risks are really present inside and outside the company? Who should manage them? Are the actions taken effective? Are the monitoring tools suitable or should they be improved?

All questions that need to be answered with a plan to ensure the continuity of the company, the achievement of results, the protection of reputation and stakeholders’ interests.

In fact, risk is divided into different types, each capable of impacting on different areas of an organization: finance, operations, communication and others.

This is why risk management is an ongoing and comprehensive activity.

Upside and downside risk: what do we mean

A first distinction is the one between upside risk and downside risk.

Contrary to what one might think, risk can in fact have both a negative (downside risk) and a positive (uspide risk) connotation: for a company, exposing itself to a risk therefore means facing the consequences of an unforeseen situation that could bring both gains and losses.

For example, a positive risk might be the profit gained from the development of a new product against the risk of loss due to the costs incurred.

A negative risk, on the other hand, could be an external factor over which the company has no control, capable of compromising business performance. An example? The closure of a distributor due to a natural disaster.

Managing business risks therefore means finding a balance between positive and negative risks, handling the former and reducing- or eliminating if possible – the latter.

For a long time, the approach to risk was ‘insurance-based’, with a tendency to offload risk management onto insurance companies. Today, a managerial approach is preferred, whereby some of the risks are identified and managed by the company itself.

Let us now look at the main types of risk we have discussed so far.

Types of risk

Generally, it is possible to distinguish between strategic, operational, financial, image and IT risks.

• Strategic risks are related to the choices made by the company’s top management, and usually occur in the medium to long term. They depend heavily on the company’s mission and its positioning, both in terms of market and product. They are often influenced by the legislative scenario in which the company operates, international regulations or macroeconomic variables.
• Operational risks are linked to the day-to-day operations of the company and its specific business. For example, a transport company might be impacted by adverse weather conditions that make a shipment impossible.
• Financial risks concern the purchase and trading of financial instruments, and may be linked to unfavourable exchange rates, excessive debt or a deterioration of the company’s credit positions.
• Image risks relate to the company’s reputation and how it is perceived by its stakeholders: customers, suppliers, investors and others. Imagine, for example, an investigation involving a historical partner of a company, with consequences for the latter as well.
• Finally, IT risks concern the company’s IT resources and their management. A classic example is the risk of cybercrime involving the theft of reserved data, which is crucial for the company’s R&D activities.

We must bear in mind that all risk dimensions are interconnected.

Think for a moment about a SME well positioned in the European market, but with a very small group of client companies due to ownership choices.

The bankruptcy of one of them leads to a drop in orders for the company, which impacts on its liquidity. The situation creates delays in payments to suppliers, with inevitable image damage.

This is how a risky strategy leads to impacts on most areas of the company’s business.

This is why risk management must represent a true governance model, based on a holistic view of the company, its processes and the external environment.

What are the fundamental steps to be followed to develop such a model? Let us see them using a concrete case as always.

The steps of the risk management process: an example from B2B

The approach to business risk is described by numerous theoretical frameworks, more or less complex. Starting from the assumption that there is not one that is valid for every company, there are activities that cannot be missing from a complete risk management strategy.

These include:

• The identification of risks in the light of the company’s mission and objectives;
• Their evaluation on the basis of qualitative, quantitative and hybrid methodologies: how likely is it that a risk will occur? With what effects? What are the costs to be incurred to manage them?
• Their management, based on precise choices. Which ones should be managed internally? Which ones are best protected against by insurance? Are there some that can be ignored because they are irrelevant?
• The analysis of management results, to take corrective action and develop more efficient procedures.

Let’s go back to the SME mentioned earlier.

The company, which specializes in components for industrial automation, is faced with an unforeseen situation that affects almost all areas of the company.

The owners thus realize that the strategy adopted up to that point was short-sighted: crisis bring with them failures, and the principle also applies to their customers.

Of course, foreseeing such an event is not easy, which is why a comprehensive risk assessment must balance the probability of its occurrence with the severity of its impact.

For a company like the one in our example, the loss of even one customer, however remote, represents a very serious risk, given the poor differentiation of the customer portfolio.

Ownership thus decides to adopt a differentiation strategy, identifying new potential buyers abroad in markets where demand is growing.

Not only that: the same principle is also applied upstream along the supply chain to protect against a potential supply risk. One of the company’s suppliers, in fact, has recently started delaying shipments of key components due to production problems.

Finally, a performance monitoring system is established on a quarterly basis to verify the results of the choices made. The financial area, together with the sales department, will be responsible for checking the data and identifying any critical points.

What is the impact of new sales on cash flow? Are the new customers satisfied and is it possible to build a long-term relationship? Do alternative suppliers have competitive prices that can be renegotiated in the medium term?

These are some of the questions to be answered.

But first, it is necessary to identify the right tools to manage the risk. B2B market analysis is one of them. Let us see why.

The help of market analysis for B2B risk management

The risk management strategy outlined by our SME is based on a mapping of alternative customers and suppliers that can guarantee continuity of production and revenue.

The construction of this ‘backup list’ is done through tailor-made market analysis.

After finding the most promising countries for export, the company’s Account Managers define the key characteristics of their potential customers.

These include both qualitative and quantitative aspects:

• A solid financial structure, with turnover and EBTIDA growing over the last five years.
• Presence in the catalogue of products incorporating the actuators manufactured by the company.
• Possession of specific product certifications.

Similarly, the alternative suppliers to be identified must manufacture components with the exact technical characteristics required by the company.

In both cases, having a clear overview of the target market makes the research of companies for the differentiation strategy easier.

Matchplat’s Artificial Intelligence applied to a database with more than 400 million companies cuts down on time and costs for company research.

In this way, a crucial phase of risk management becomes simpler, allowing the company to focus on other tasks that cannot be fully automated, such as the identification of risks themselves.

Conclusions

We have explored the concept of risk in the business environment by considering both its positive and negative connotations.

A positive risk is, for example, the possible growth in margins as a result of increased sales in new markets, compared to the costs incurred in entering them.

A negative risk, on the other hand, is the political instability of the country in which you are operating, which could affect your business.

Now more than ever, managers and entrepreneurs need to adopt a risk governance model that can contemplate both positive and negative risks, managing them themselves whenever possible.

This approach must start with an analysis of the company’s external and internal environment in order to identify, assess and ultimately manage the risks present.

As we have elaborated, these are divided into strategic, operational, financial, image and IT risks.

There are many approaches that can be used to map risks, but whichever one is adopted, it is necessary to compare the probability of a risk with the severity of its impact.

In this way, it is possible to define priority areas of intervention to reduce or eliminate – where possible – situations that could compromise the continuity of the company.

From this point of view, each reality represents a case in itself and requires specific solutions for managing its risks. What is important to remember is that no company – large or small – can consider itself a stranger to this activity, especially today.