Countering the biggest risk of all

  • Slywotzky A
  • Drzik J
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Abstract

You're insured and hedged against many risks—but not the greatest ones, the strategic risks that can disrupt or even destroy your business. Learn to anticipate and manage these threats systematically and, in the process, turn some of them into growth opportunities. Whatever your business, consider for a moment the remarkable turnaround over the past decade in the U.S. banking industry. In the early 1990s, the industry—rocked by the Latin American debt crisis, a major real estate bust, and economic recession— suffered massive loan losses, erratic earnings, and the highest rate of bank failures since the Depression. A decade later, as much of the economy reeled from the dot-com bust and another recession, banks were generally flourishing. The number of bad loans was down, earnings were relatively stable, and the banking industry was outperforming the market as a whole. The turnaround occurred in large part because banks were able to develop new tools and techniques to counter risk, in the process giving birth to an entirely new discipline of financial risk management. Sophisticated credit-scoring measures reduced banks' credit losses. New forms of options, futures, and counterparty agreements allowed banks to redistribute their financial risks. In fact, banking regulations now require companies to employ financial models that quantify their market risks. We cite this example because the risks that plagued banks 15 years ago are emblematic of the challenges that companies across all industries increasingly face today. What if these companies could also employ tools and techniques that would provide some protection against a broad set of high-stakes risks?

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Authors

  • Adrian Slywotzky

  • John Drzik

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