Business risk: Expert advice on reducing it for small companies
Profit's executive roundtable examines how to grow your business safely and protect all that you've built.
Doug, your company gets input from all your employees about major decisions. Do you see this as a risk-management tactic because engaged employees will execute better and help you make more informed decisions?
Doug Cornell : I do. No matter what change we're considering, we bring in every employee, from client-service reps on up, to get their input. We find that employees take more responsibility when they know we're counting on them to offer insights into the business and they have some say in what the company does.
Donna Ince : Including your employees in risk-assessment exercises is great because they know when things aren't going well long before you do. They're great at identifying a risk, telling you, "You know what? There's a weather issue, so we can't ship those goods today that have to be at that convention next week."
What do others here think of involving employees in assessing risks?
Jeff Nugent : The Conference Board of Canada has published a paper stating that employee engagement is one of the top ways to mitigate operational risk. You should make employees part of the risk analysis and the decision-making, making sure they know where your business is going and the downside risks to it.
Shantal Feltham : That's what we do. We have a challenge this week at a client, and we'll be getting together to discuss that. And I put it out to my entire team last week and said, "Tell me what all the challenges are, and then tell me how we can fix this." This means everyone has ownership. We also consult closely with our clients. Last year, we were struggling, and a mentor advised me, "Get on a plane and go visit your clients. And don't go in a sales capacity; just go and talk." So, I did 75 or 80 flights in 2011-I was in the air all the time. I'll visit clients and say, "We're about to change our company and here's what we're planning, but we want to make sure we address your needs directly. So, tell me what your challenges are and where you see them coming, so my company can address these proactively." That's how I'm mitigating my risk. In 10 years, my company could be obsolete. And the pharmaceutical company that's driving the most change in our industry is now tell me exactly what they're doing and what my company needs to do in response.
Even if you get input from key stakeholders, ultimately you'll need to make most of the big decisions yourself. What do you do to maximize the odds of making the right decisions?
Feltham : I have an idea of where I want to go, and then I listen to everyone's input. I have some key people I listen to, and if they look me square in the eyes and say, "Bad idea," I stop and take notice. But I'll say this-and my money says that everyone around the table will say the same thing-that at the end of the day, I follow my gut.
Cornell : I agree 100%. I have key people I talk to, including my business coach. And I usually talk to my wife. Sometimes, people under me will say, "You're nuts." But it does come down to me in the end. One thing I'm mulling over right now is creating a board of directors, specifically to help me with big decisions. It would be more of a sounding board and...
Feltham : ...to hold you accountable. I'm looking at the same thing.
Jeff, how do you come to the right decision?
Nugent : Often, it's based on understanding what's going on in my industry. I'll come up with a bit of a crazy idea, then say, "This is where we want to go. I think there's something there." Also, we have an advisory board that includes banking and insurance professionals. Because of the high cash-flow needs of what we do, we want to make sure we can navigate the cash flow properly. And I'm a heavy user of social media. I've made a lot of industry connections through that and have made some decisions based on polling my network. That may sound a little crazy in this world of hyper-competitiveness, but you will-depending on your reputation in the industry-find that you get instant responses and great feedback.
Feltham : And honest feedback.
Nugent : Very honest, because it's quick: "I think this, and you should think about that." Based on that, then you can reach back out to those advisors. I'm not saying I send it out to all my 1,500 contacts, but you know which ones make sense to ask. If it's a big decision, I'll often ponder it, ponder it some more, then sleep on it for a month. And then I'll move forward. Phoebe, how do you handle big decisions?
Phoebe Fung : I'm a big fan of evidence based decisions. But, after weighing the evidence, I'll listen to my gut. One thing that helps me make decisions is that we have an advisory board. When I set up my company, I created it by choosing my shareholders. I asked myself, "Whose skills do I really need?" But I didn't really want to pay for that. So, I asked people to become my shareholders, pretty much saying, "You're going to invest in a business in a sector with an 80% failure rate. We'll look to you to give us free advice as a shareholder, and you're going to pay full price when you come in. Welcome aboard!" And we got a bunch of people who said, "That's a unique approach-OK, I'll do it." Another thing I do is sit down three or four times a year over a glass of wine with our key suppliers. It's always easy to tempt people with a glass of wine. We talk about what's coming in the industry and what's happening in their world. You're not going to get that input from your competitors, but your suppliers all deal with the same people. And what a great source of competitive intelligence!
Let's talk about the "what ifs." Shantal, how do you ensure that if something goes wrong, you have a fallback position that will keep your business afloat?
Feltham : Remember how people used to do Plan A and Plan B? Well, we do Plan A, B and C-and usually Plan D as well. How we hedge it is by getting everyone in the company involved from the outset in identifying the potential risks and how to mitigate them. When something bad does happen, I don't have to bring the group together and start anew.
Phoebe, what's your fallback position?
Fung : When we set up the company, we included clauses in all our major contracts covering what would happen if things went wrong. That's the benefit of having lawyers on call. I worked side by side with them so that everything from our development plans to our leases to key contracts with suppliers include contingency plans that we agreed upon up front. As well, we've relied on the shareholders I have chosen. If something goes wrong, you don't want to be the only person left holding the bag. It's a lot easier if you have a pool of shareholders you've chosen who have committed to your company and have skin in the game.
Nugent : A big issue in our industry is health and safety claims. We've invested a massive amount over the past year in creating health and safety programs for our contract workers, specifically because we're taking a lot more of them on in Alberta, where they aren't just white-collar employees sitting in offices. These are highly paid field engineers, pipefitters, welders-you name it. And with these kind of folks, health and safety is a big issue. Unfortunately, because they're external service providers rather than employees, health and safety is often overlooked. So, we spend a lot of time accumulating the documents that show that health and safety standards are being met on these job sites and that workers have received training in this area. So, if there is a health and safety incident, our research managers have been trained in how to analyze and deal with these incidents, and all the contracts are in place. That mitigates our risk-and, potentially, our clients' risk-in the health and safety area.
Doug, how do you CYA?
Cornell : How do I cover my ass? I blame it on Jeff! [Laughter.] Actually, we're very meticulous. We've created processes to try to reduce the number of errors and make sure we have the right insurance coverage. We've also built up valued vendor relationships over the years-and that's huge. When we have encountered problems, we've been able to go to our vendors and have them handle these problems very quickly and efficiently. This has included when we've had cashflow issues and have proactively gone to vendors to ask for an extension. They know that we always meet our obligations to pay vendors. So, if I go to them in a tough time and say, "I need more time," they'll reply, "How much do you need?"
Phoebe, in your wine-bar business, I'm guessing you've seen some volatility-because, as economic confidence ebbs and flows, so does people's interest in dining out.
Fung : Absolutely. Food and hospitality is largely discretionary spending and an indulgence. We opened in 2008, during the recession. In retrospect, that was a great time to open, because it taught us the discipline needed to operate in a tight economic environment.
You're now opening two new locations. Where do you get the sense of security that this is a wise choice?
Fung : I'm opening a restaurant and a wine store. We planned this two years ago, and by the time we open at the end of this year, it will feel like the right economic climate. What gives me some confidence is that we survived the recession. Also, our target market is 30- to 50-year-olds, who tend to be more optimistic about the economic environment. And it doesn't hurt to be in Calgary, with oil at US$105 a barrel.
Is diversifying by opening a restaurant and wine store a defensive strategy?
Fung : No, it was part of our strategy from the beginning.
But with revenue justification?
Fung : We see it as having a portfolio of different types of businesses, but without straying too far from our core competency.
Jeff, do you have any reservations about the risks entailed in your expansion plans?
Nugent : We developed a master plan three or four years ago to expand internationally. All our research showed that the challenges employers in Canada face in dealing with their contract workforce are the same in the U.S.-even greater, in fact-and in Europe and Asia. One of them is that employment and tax laws are forever changing. With that kind of evolving market, I asked myself in our early days: "Where's my bread and butter? What do I know?" The risk of expanding too fast into markets in which I didn't have all the answers about employment and tax laws could have sunk the ship. So, in the early days, we held very tightly to the Canadian market and expanded rapidly within it. Now that we've developed the infrastructure and capabilities to deal with other markets, we've started to expand into the U.K. and U.S.
Donna, you oversee a lot of commercial insurance. What's your view of how small-business owners are reacting to economic uncertainty?
Ince : They're looking for opportunities to hold onto more of their cash. That includes whether they can reduce their insurance costs, which are high for many firms. So, they want to know: "What can I do to reduce that cost without ending up with more risk?" And that's challenging. Some business owners are considering raising their deductibles to shave a bit off premiums, and others are reducing their coverage. Sometimes, that's warranted, such as if your revenue goes down or you move into smaller premises. But sometimes, it isn't warranted, and I think owners need to be mindful about how much additional risk they take on. There are many things that can really damage your business. They can even quickly put you into bankruptcy if you shortchange yourself on insurance-whether that's liability, property damage or business interruption insurance.
Phoebe, what approach have you taken to meeting your company's insurance needs?
Fung : I've built a strategic relationship with my insurance broker, rather than a disposable one. There are two reasons for that. One is around competitive advantage. Having the right insurance, such as for health and other benefits, can help you attract and retain employees. The other reason is risk management. Having a good relationship with your insurance broker-and I've kept the same broker and insurance company throughout-is so important. Because they provide you with their experience in the insurance industry. They act as a think-tank for you, doing research and providing you with the information you need about risk. For a small-business owner, it isn't just about price. It's about where you can reduce your risk, about looking at the likelihood of various occurrences and having your broker advise you on how to keep your business afloat if they do occur.
Are small businesses missing any opportunities in the way they use insurance products?
Ryan Mitchell : Definitely. We see it every day in terms of what insurance is really there for, which is to cover large losses. It's not to cover, say, a stolen laptop that's worth $2,500. In good times, when your cash flow is great, you may want to increase your deductible and you can manage that deductible if you have a claim. But in tough times, you may want to lower your deductible, even if that means spending more per year for insurance. You'd do this because if you're hit with a claim during tough times, that $25,000 deductible that would have been fairly easy to absorb in good times-now, not so much. The typical losses are for fire or water damage, which might put you out of business for a couple of weeks. But the ones that are significant can put you out of business completely. We had one claim in which a devastating fire closed down one of the plants in a family-run business. All of this firm's customers left, because the company couldn't supply them any more. So, while this firm was rebuilding their plant, they also had to go out and find new customers. Fortunately, this company had a contingency plan. They moved all their production to another plant they owned and were able to keep their cash flow going and pay their bank, even though it took about 18 months to become fully operational again. The key thing is to avoid being under-insured. If you're about to acquire new assets, be sure to talk to your broker about this and make sure you're using the correct values in calculating how much insurance you'll need.
There are some things that you can't insure against...
Nugent : That's true. But there are some interesting ways that you can mitigate risk. For instance, I actually ask the different government bodies that regulate our industry to come in and audit us every single year. People laugh and ask me, "Isn't that a pain in the rear end?" And I say, "No, it's a 15-minute audit. But then we have a conversation for an hour and a half with the auditor to help us understand what's on the horizon around the employment tax law issues. So, gaining information and arming yourself with knowledge is a good way to mitigate some of those other risks.
Is it really just a 15-minute audit?
Nugent : Most of the time.
Fung : If you think about insurance in a traditional mindset, then you figure out your risk and go to an insurance broker in order to mitigate it. But Jeff is pointing out that you can look at insurance in a broader way, as involving getting information from key people who could have an impact on your business, such as the Canada Revenue Agency. Or that could involve your suppliers, insuring yourself against the risk of a price hike in what they sell you.
How do you choose which insurance coverage you need and at what levels?
Feltham : I have a long-standing relationship with my insurance broker. In fact, I coach his son in hockey; so, if my broker doesn't treat me well, his son gets benched! I rely on my broker 100% to tell me what I need and don't need. I share all my numbers with him, and he knows where my company is heading so we can proactively make sure we're insured appropriately. Sometimes, there are types of insurance he wants me to have that I arm-wrestle with him about because I don't necessarily see the value. That doesn't mean we won't do it. But the past two years have been lousy, so I've had to pick and choose what I insure. I'm up front with my broker. I'll tell him, "Not yet-I don't have the cash flow to do that. We'll do it at another time."
Phoebe, how do you choose the type of insurance you have?
Fung : Our management team sits down and builds a matrix of the likelihood of each impact-so, if XYZ happens, what impact will it have on the business? Then, we look at what can be covered and how we can protect ourselves. Next, we speak to our insurance broker about which insurance products can cover off these events and who else could take on that risk. Sometimes, we tweak our supplier contracts to clarify: "OK, you're going to take this piece of the risk until I receive the product." That way you put some of the risk back onto other people. I sit down with my insurance broker twice a year, and I give him a call whenever the needs of my business change. We're now in a situation in which we have an operating unit and another unit under construction. And the day I signed the lease on the new unit, I called my broker and said, "Let's discuss how that will change my risks and insurance needs."
Ince : How do you make sure you aren't needlessly overly insured?
Fung : I rely on my insurance broker a lot for that. It's about mapping out the likelihood of a particular impact. I don't care if my laptop gets stolen, so long as I have a risk-mitigation plan in which I'm backing up everything automatically every week. It's about figuring out what is really going to sink your business, the probability of it happening and the impact if it does. I focus on those things that have higher probability and higher impact. Then, we look at our contracts with, for instance, lenders and landlords to make sure we're insured for what those contracts cover. Liability is a big issue in our business, especially to cover losses from patrons who drink and drive. You want to make sure you over-insure for that. Because even though the likelihood is low, the impact is very high.
Ryan, which questions would you advise business owners to ask before they consider working with a new insurance broker or to evaluate the service they're getting from their existing broker?
Mitchell : The biggest thing for a small business is to partner with a broker who has experience in your industry. Someone who knows your industry can understand the challenges you're having and be much better able to provide you with the best advice and the right coverage. They see the claims, they see the trends; they can advise you on how much and what type of coverage you should have. As well, a good broker will have contracts with the right insurance companies. You want to make sure that your broker has access to a lot of different markets-and the right markets for your business. Not every insurance company can insure every type of business and exposure. So, whether it's having multiple insurance companies or multiple products, I think experience is probably the biggest thing for a small business to look for in a broker.
If you go on LinkedIn and read people's resumés, it seems as if everybody has experience in everything. But how do you ensure that a broker you're considering really has the experience that he claims?
Mitchell : One important step you should take is to ask for client testimonials.
Donna, how should a company determine which insurance provider to go with?
Ince : I agree with Ryan that you should find a broker who specializes in your industry. Also, I think you can ask competitors if they're dealing with a broker they trust and who understands your business. One test is whether the broker is willing to come to your office. That will pretty quickly tell you whether she is interested in and understands your business. In terms of insurance companies, you should ask, "Mr. Broker, do you represent insurers that will deliver on their claims?" At the end of the day, what you're really buying is delivery on claims. You need to have that confidence from your broker that he is working with insurers that will deliver great claims service to get your business back up and running quickly.
Can anyone here share advice on how to pick the right broker or insurers?
Nugent : It's useful to attend meetings of industry associations that insurance brokers will attend to look for new business. You can ask a broker, "Who else in this room are you insuring?" Then, you can walk over to those clients-your competitors- and ask what they think of that broker: What does he do for you? How much is your insurance versus my insurance? What does it cover?
Fung : When I was looking for an insurance broker-and I've had the same broker since I opened-he participated in my first lease negotiations. We then went to our landlord and said, "Who's your insurance broker? I'm going to speak to him first, because together we can get the optimal coverage that will fit both our needs and savings." I find it really interesting when I sit down with my insurance broker. We sit down twice a year, and I always ask him, "What should I be worried about that I'm not worried about yet? And what are some of the trends that you see in the claims that will impact my business?" And because of those questions, he has helped me to custom-fit my insurance as my company evolves-and, often, at very little or no incremental cost. He has, for example, increased our commercial liability insurance because he has seen the claims getting bigger. Although there is a minimum expectation of what our liability should be, he has actually suggested increasing it. But the cost has gone up only by a very small increment, because we've been really proactive about it.
What does a good client/broker relationship look like?
Mitchell : One key is open communication. If a client is considering signing a new lease, we want to speak to them before they do that. A landlord will include a huge section about insurance in a lease and may demand too much. We're seeing, especially in downtown Toronto, landlords requesting pretty much everything under the sun. A landlord may make requests that we don't feel are appropriate for the client to have to cover and pay for. So, we'll help in negotiating with the landlord to try to get some of these coverages removed-or, at least, reduced to fit the needs of the client. We don't want a client overpaying for insurance if they don't have to. If you have open communication with a client, you might find out, for instance, that they're talking about creating an advisory board. That board might then turn into a full-fledged board of directors. But if that happens, there's DNO (directors and officers) insurance to consider, and that's a cost that the company might not have taken into consideration.
How do you keep a lid on your insurance costs?
Nugent : One thing we do is work with our insurance broker to help us negotiate limits on our liabilities and indemnities. Clients may come in simply assuming that we'll accept a certain degree of risk. But if we say, "That will probably cost us another $10,000 a year on your contract, which we'll have to add to the cost," they'll say, "Oh. Well. We already have commercial liability insurance, so we'll cover that risk."
Doug, what do you consider a good relationship with an insurance broker?
Cornell : For the most part, I haven't had a relationship with my insurance broker since Day 1. We have insurance for our business and the place we lease, and we carry health insurance for our staff. We run all our insurance through this broker. But the only time I ever hear from him is when I see a renewal notice come in the mail. So, we have no interaction whatsoever. We don't even hear from him-I swear to God. And I'm sitting here listening and thinking that we should be having a little more interaction with our broker.
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