It is no surprise then that ERM principles and literature are tailored to large corporations. To focus on exactly these types of non- traditional problems, the Janet and Mark L. Goldenson Center for Actuarial Research was established in 2009 at the University of Connecticut. The annual revenue from the Goldenson family’s initial gift funds applied ac- tuarial research projects undertaken by students and faculty. One such project that I had the op- portunity to launch in my capacity as director of the center (a position funded by the global professional
services company Towers Watson) was the ERM for Small
Businesses initiative. To encourage small businesses to participate, the service is offered free of charge. The center pays
students in the university’s actuarial science program a stipend for their efforts. At the end of the project, the students
provide a formal written ERM report to the participating
small-business owners and share any software tools that
may have been developed in the course of their work.
■ ■ While every small business is unique, it is generally
easier to assess the risks facing a small business and find
practical ways to mitigate these risks, compared
with a large corporation.
■ ■ Qualitative risks may be just as important as risks that can
be quantified; these qualitative risks should be mitigated
to the extent required by their priority/likelihood.
■ ■ The analysis must be understood fully by the small-business
owner and must provide practical and actionable steps to
undertake over a short time horizon of one to three years.
■ ■ Beyond this time horizon, the ERM analysis will have to
be revisited to remain relevant.
ERM for Small Businesses— Case Study T HIS CASE STUDY INVOLVES A THREE-STORE BAGEL CHAIN in the Connecticut region. the operation is owned by three people and has been in business for 20 years. While the business carries on in the face of competition from larger regional bagel chains, sales have been relatively flat over the past five years. Some of the risks and opportunities identified by the Goldenson Center include: ■ ■ the inability to identify the most profitable items easily; ■ ■ Insufficient tracking of store growth or unit profits by store; ■ ■ A store image that fails to engage younger clientele; ■ ■ An outdated business website and Web identification, and the lack of other forms of Internet advertising; ■ ■ A full menu at the drive-through, which slows customer traffic. the project deliverables included a written report and a formal presentation to the owners, as well as the creation of a simplified rive-through menu of the store’s most profitable items, an excel model that tracks real-time profitability of individual items and individual store performance, and various other recommendations on how to promote the business and boost sales. the findings enabled the owners to better understand their business performance and when and where to implement a few practical changes that could help the business grow and prosper.
The outcome of this three-year experimental initiative
has been remarkable. An idea that wasn’t supported by
any well-formulated theory has now grown into a highly
defined and efficient process that continues to improve.
In the absence of formal literature, the center
has generated ERM principles unique to small businesses. The sector’s fundamental ERM principles
are no different from those for large corporations:
Identify/prioritize risks, model/quantify the risks,
and create risk-mitigation strategies.
But based on our experience working with
small businesses, we have identified several unique
■ ■ Any risk management analysis for a small
business has to incorporate business growth
strategies as well.
■ ■ Risks that receive focus are reasonably likely
events with extreme consequences (versus low-likelihood events with extreme consequences).
■ ■ Small-business owners are knowledgeable about
the risks facing their businesses as well as business growth
strategies. Much of the primary input for analysis is drawn
directly from the business owners.
■ ■ The consequences of a risk shock are far greater for a small
business than for a large corporation, as small businesses
generally lack any surplus cushion or political clout or
diversification. As a result, a small business may not have a
second chance when something goes wrong.