Best Practices

I think now is a particularly appropriate time to review your company risks, as the events of the last three years—including COVID-19 as well as changes in the macroeconomic environment—have likely affected your company’s risk profile. I favor a robust risk management process by which various parts of your organization perform their own risk management assessments, and the most significant risks in terms of impact are reviewed annually (or when something of significance changes) at the corporate level. At this time, I suggest you pay close attention to those risks that, like in the case of FTX , are “hiding in plain sight,” or those that you may have reviewed year after year but have not managed to actually reduce the impact or likelihood of them. 

Where might those risks be lurking? Here are some places to look for them:

• China. Tensions have centered around the risk with China over the past 5 years or so, and the trajectory of the situation is downhill. The Ukraine war has appeared to strengthen the relationship between China and Russia, and China’s intent to do something about the Taiwan situation seems to be growing. Focus carefully on raw materials or components that your company is sourcing from China, and seek to establish alternate sources. You may also want to consider project sensitivities to different China demand scenarios driven by heightened political tensions.
• Rail transport of hazardous chemicals. The recent Ohio derailment of a freight train operated by Norfolk Southern has drawn major attention and may result in continuing focus and additional regulations. There is also reputational risk associated with these kinds of situations. You may want to review the risks associated with transport of hazardous raw materials and components and how those are managed within your company as well as by your suppliers and transport partners.
• Personnel. It feels as if, in the good old days, people management was a lot easier. There was in general an ample supply of qualified people to fill jobs, people were generally satisfied with their job situations, and turnover was low. I think that the intersection of the COVID aftermath as well as the long-term transition to greener sources of energy has put a strain on the current and future supply of employees for our industries. In addition, people want to work from home and resist corporate efforts to get them back to work in the office. I suggest you pay close attention to the areas of recruitment and retention, and ensure your company’s value proposition for employees is attractive.
• Climate change. These risks come in a host of complicated forms. They come in the form of demand patterns that may be more vulnerable and difficult to forecast longer term. They come in the form of manufacturing risks to plants that are located in areas subject to increased storm severity and higher temperatures. They come in the form of electricity grids that are stressed and inadequate, especially as electricity demand grows. They come in the form of legislation at the federal and the state level affecting emissions and vehicle standards. They even come in the form of changing investor tastes for the oil and gas industry itself. I suggest you consider the risks in this area by breaking them down into all of the different forms they may take and focus on those that are most impactful on your business.

As you consider these risks, you may want to have some discussions with key suppliers both for insights as to how they are managing risk, as well as to understand the risks that exist in their supply chains. Certainly, you will also want to discuss with customers how they are managing these kinds of risks, especially those that may affect demand for your products over time.

Of course, you cannot afford to address all risks or to address them in the same way. Keep in mind the Four T’s associated with risk management decisions: Take, Treat, Transfer, Terminate. 

You may want to terminate some of the risks associated with supply from China by finding alternate suppliers, even if they are more expensive. You may want to treat the risks associated with rail supply of hazardous materials by seeking geographically closer suppliers or modifying your manufacturing process to use less hazardous raw materials, or investigating truck transportation. You can certainly find ways to treat the people risks by partnering with universities, creating internship programs, improving your company value proposition, and addressing any issues in your company culture that are leading to turnover. In the climate change area, you may need to take many of the identified risks, but most likely you will come away with a much better understanding of them. You may want to set up metrics and signposts to keep tabs on the pace of changes in this area. 

Overall, make sure your risk management process is taking into account some new types of risks that may be hiding in plain sight!  

Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. Contact her at saralefcourt@gmail.com or (908) 400-5210.