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Some small and medium-sized U.K. companies are losing up to the equivalent of a full year's profit due to unmanaged business risk, according to a new survey.
Eighty-eight percent of the U.K. companies surveyed could not even give a formal definition of what they believe business risk to be, according to the survey, released by the U.K. subsidiary of New York-based Pricewaterhouse Coopers L.L.P.
The London office of PwC developed questions for a telephone survey of 450 U.K. "middle market" companies in the second quarter of this year as part of its quarterly "Barometer" surveys. PwC defines middle-market companies as those with annual revenue of between 5 million pounds and 200 million pounds ($8.2 million and $328.7 million).
The survey, released last week, showed that four out of 10 such companies surveyed admitted experiencing financial losses as a result of unexpected, unmanaged risk.
Of those companies that said they experienced a risk-related loss, 60% had losses exceeding 100,000 pounds ($164,350) a year. Seven percent estimated their losses to be between 2 million pounds ($3.3 million) and 10 million pounds ($16.4 million) annually. In some cases, this amounted to losing a full year's profit.
Richard Anderson, a partner in PwC's London strategic risk management practice, said the survey highlights the need for U.K. middle-market companies to develop integrated risk management strategies that look at the "whole picture" of business processes, strategies and people factors.
He said risk management should be a key element of any aspect of business, from human resources to brand value to financial control.
The PwC survey showed that 46% of middle-market companies see their approach to risk management as flexible and responsive-i.e., it is event- or process-driven and looks only at individual risks when they occur.
Only 16% of those surveyed described their risk management strategy as being fully integrated.
Twenty-one percent of those surveyed described their risk management approach as selective, i.e., they focused only on their greatest risk exposure; 9% described their risk management approach as structured; and 8% described their approach as partially integrated.
"Although most companies say they are managing risk, they only do so when the need or the problem arises," Mr. Anderson said.
"Effectively, they are closing the stable door after the horse has bolted," he said.
David Gamble, executive director of the U.K. Assn. of Insurance & Risk Managers, said there is no reason small companies cannot be good at risk management.
"Managers of small companies, once they understand risk, are among the best risk managers," Mr. Gamble said.
"The problem is, they lack sufficient time and resources to think about risks coming up to bite them," he said.
Mr. Gamble said large companies can encounter risks in one area, absorb them and pass on the lessons to other areas.
"But smaller companies are not so lucky," he said. "The first loss may sink them."
Mr. Gamble said large companies with the best loss records are those that have developed a risk management culture right down the management line to the lowest-ranking employees.
He said smaller companies should take the same approach. "Managing directors and finance directors should be working with all staff to promote risk management awareness and culture."
AIRMIC is looking at ways to boost its marketing and assistance to middle-market companies, particularly through easy product advice and Internet information services, Mr. Gamble said.
The survey found that fast-growing middle-market companies are more likely to have fully integrated risk management strat-egies.
While only 16% of all companies in the survey described their risk management approach as integrated, the percentage rose to 40% among companies forecasting annual growth of 40% or more.
"It is clear that the fastest-growing organizations realize the opportunities that risk management can bring beyond the confines of traditional financial control," PwC's Mr. Anderson said in a written statement on the report.
"At the same time," the statement continued, "these organizations have also been the most successful in avoiding losses and delivering added value."
Mr. Anderson said the challenge ahead for middle-market companies is to manage risk to their own advantage and use it both to grow and seek out new opportunities.
"Managing risk effectively not only minimizes the threat of loss but is critical in creating competitive advantage by improving the quality of decision making throughout the organization," he said.
For a free copy of the survey, write to Peter Bomer at Pricewaterhouse Coopers, 1 Embankment Place, London WC2N 6NN U.K., or telephone 44-171-213-5693 or send e-mail to peter.c.bomer@-uk.pwcglobal.com. PwC's Baro-meter surveys also are on the Internet at www.pwcglobal.com/middlemarket/barometer.