Roy Gilbert

How to Calculate Risk Based on Where Your Profits Come From

hbr.org

Summary. Risk heat maps are simply mappings of various business elements’ magnitude of risk. Many companies use them as their primary risk-assessment tool, but they don’t paint a complete picture. The action question is how to integrate a company’s key…

If most midsize companies have a formal risk management process, why did so many fail even in pre-pandemic years ? The problem is that risk heat maps — many companies’ primary tool for assessing risk — have fatal deficiencies.

The risk heat map process looks at big, blunt risks (like sales force effectiveness and potential hurricanes), but doesn’t clearly identify the more granular and immediate risk elements that threaten profitability and possibly survival, especially in today’s fast-changing markets. The good news is that transaction-based profit metrics greatly increase your risk management effectiveness. The Traditional Risk Heat Map

A risk heat map is simply a mapping of various business elements’ magnitude of risk. An element’s importance is on one axis, and the likelihood of problems is on the other. For example, consider Coastal Distributors (not their real name), a $650 million industrial products distributor: The company’s sales force is critical to its success, so its importance is high, while its sales reps are numerous and well trained, so the likelihood of problems is low.

Coastal ships most of its products through its network of distribution centers, so its importance is high, but if a problem were to arise in one facility, it could easily use a nearby facility to serve the affected […]