ERM and Economics – Making Organizations More Resilient in Difficult Times

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Upon reviewing a report from NC State discussing top risks for 2019, both Carol and I were surprised that an economic downturn was pretty far down the list of concern for executives. (As a quick side note, neither one of us are doomsday people thinking the sky is perpetually falling…)

I know nobody wants to hear the dreaded “R” word (“recession”), but let me take a minute to explain why I think there is cause for concern…

Although I am not an economist and shouldn’t be considered an expert, I have studied economic news and theory somewhat closely over the years, especially during and after the infamous crash of 2008.

According to data from the National Bureau of Economic Research, the U.S. economy emerged from recession in the middle of 2009. At the time of this writing, the current expansion cycle sits at around 112 months long, making it the second-longest in recorded U.S. history.

The longest expansion cycle on record lasted around 120 months from the early 1990s to around the year 2000 when the dot com bubble burst.

At its 2007 peak, the Dow closed at 14,164…in October 2018, the Dow Jones closed at 26,828, or nearly 50% higher!

A quick search of news about the Dow, Nasdaq, and S&P 500 will show how volatile equity markets have been in the last several months.

I’ve also been noticing increased chatter among observers and even mainstream news outlets saying that 2019 could be a rough year.

The Duke CFO Global Business Outlook survey for example shows that close to half of CFOs in the U.S. think there will be a recession by the end of this year. If we extend the timeline out to the end of 2020, the number jumps to 82%!!

And as this New York Post article explains, major hedge funds experienced steep declines in November with some even closing down altogether. Another report in The Financial Times explains that (at the time of its writing…) not one company had borrowed money in the high-yield corporate bond market in December.

Former Federal Reserve Board Chairman Alan Greenspan explained in an interview last May that he expects stagflation,  or a combination of high inflation and sluggish economic growth similar to what the U.S. experienced in the 1970s, to return in the years ahead.

With all of these warning signs, ERM can help organizations weather difficult circumstances…

Any organization factoring risk into their strategic planning process is already taking steps to help them survive any potential economic downturn coming down the road.

Just how a recession affects the ability to achieve objectives is very organization-specific…however, ERM helps the organization be proactive and know the specific areas that will be impacted by a downturn. One benefit of a robust ERM process that you don’t see mentioned often is how having this information ahead of time gives the organization and any relevant business units time to prepare and adapt to a difficult economy.

It’s also important to note that recessions can present opportunities for the upside depending on the industry and a host of other factors.

It’s commonly known that “sin industries” like alcohol and tobacco do well during recessions, along with discount retailers like Walmart. In fact, discount chain Dollar General added hundreds of new locations between 2008 and 2012.

However, as Carol and others say often, ERM as a practice isn’t solely concerned with negative risks.

Linking ERM to strategic planning and embedding a risk mindset throughout the organization also means opportunities can be uncovered. Examples can include cost savings through improved processes or even new market opportunities.

Just remember, pursuing opportunities should be carefully considered. Although something may seem positive on the surface, it can also introduce new risks to the organization, so take this into consideration.

Key risk indicators – one way to see if trouble is brewing

When used correctly, a key risk indicator (KRI) can act as an early warning system since it can be a leading indicator, rather than a trailing one. Good KRIs establish thresholds that, when triggered, alert management to the potential that a risk event is occurring or will occur soon.

What are 3 economic-related KRIs where sufficient data exists to track?

A simple example could be the market volatility we’ve been experiencing coupled with a decrease in orders…if this indicator reaches a certain threshold, it could be a warning sign that a downturn is in its early stages. From here, you and executive leaders can then determine how to handle the risk to ensure it doesn’t grow into a bigger problem.

KRIs do not have to be organizational data; it can be from external sources. A great example of an economic KRI is the spread between yields on 10-year and 2-year U.S. government bonds. With the exception of a couple of cases, each time the yield on a 2-year bond exceeded the yield on a 10-year one, recession wasn’t too far in the future.

In fact, this general indicator may be a good one for any organization to monitor regardless of industry…

This primer on key risk indicators is a great place to begin learning how KRIs can be set up in your organization. It’s important to remember that tracking KRIs and taking action on the information is something that can take a while for a company to works its way up to.

If your organization is just embarking on its ERM journey, you may want to just monitor external indicators like the yield curve and then go from there.

Are you concerned about the U.S. economy heading into 2019? How do you think a downturn will affect your organization?

Carol and I are interested to hear your thoughts on this matter…simply leave a comment below or pop over and say HI on LinkedIn.

Again, I know that news of a recession is the last thing anyone wants to hear, and it may still be some time before one occurs.

Having information and a process for understanding how one can affect your organization can be a valuable tool for surviving (and even thriving!) in difficult times.

This is one reason I took an interest in ERMit’s a tool for helping organizations be more resilient through both good times and bad. Of course, this helps reduce the risk of job losses and other consequences that can be painful, especially for those who depend on their jobs to support their families.

If your organization is trying to develop KRIs or just can’t determine risks to achieving strategic objectives and would like an outside perspective to get you unstuck, complete this form to be notified when Carol has some open spots on her schedule for consulting and coaching.

About the Author

Nathan Williams is the Chief Marketing Officer for ERM Insights by Carol. Before joining forces with his wife Carol, Nathan was a copywriter for a search engine marketing company, where he diligently crafted engaging and informative online content for clients in a variety industries. He and Carol both work out of the ERM Insights home office in Tallahassee, Florida.

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