Commentary on Emerging Risks Survey: Part 3

Part 3: Blind Spots in Identifying and Assessing Emerging Risks

The survey underscores that businesses are struggling to identify and adequately assess emerging risks, even though they've made a point of being more transparent about risk. 62% of respondents rate their organization as ineffective or moderatly effective. What is more, the least effective practices occur in three specific and vital areas: operational planning, capital allocation, and strategic planning.

Executives feel overwhelmed. One chief risk officer noted, "We've cut down the frequency of our risk assessments because we end up with too many risks on our register and not enough time to do anything about them." (15)

One wonders how Heads of School at independent schools must feel. "Overwhelmed" certainly comes to mind, but there may be other adjectives that carry even deeper significance, given the current economic climate.

My guess is that most (but not all) independent schools, like these 650 businesses, are experiencing the least effective planning in the same three areas:

• operational planning: are we continuing to plan for school program in much the same way that we have for the past "x" years? Have we identified the risks associated with doing so, as well as the upside? (The "upside" may equal "stability of enrollment", rather than decreasing enrollment)
• capital allocation: when it comes time for the finance committee to discuss annual budget, how are we weighing risks when making our decisions? If your school has debt, what are you doing to anticipate higher interest rates in the future? Are you taking advantage of current rates to restructure your debt? In terms of funding normal operations, are there places where you can cut back, perhaps over the next three years? Conversely, are there initiatives that you feel ought to be funded because they could position the school to be stronger in the long term? How about faculty and staff salaries--have you been holding back on an increase for the past two years? How much longer can you continue to do that before they begin to look elsewhere, and, in so doing, increase your chances of negative word-of-mouth, which can be ten times more "effective" (in the negative sense) than positive word-of-mouth? Will you allocate your capital as you always have, just because it's comfortable, and because it delays having to take a stronger stance?
• strategic planning: if your school is in a weak position vis-a-vis capital, are you delaying any strategic planning because you don't have funds? Do you feel that this delay is going to help your strategy? I would argue that "delay is a strategy." What is more, it is most likely the wrong strategy. Schools need to be planning right now for what they're going to look like five years from now. Some may no longer exist; some will not change; some will be stronger. Where will you be?

Following are a few areas of interest to schools, in that businesses are not focusing much on them right now, which suggests (to me, at least) that schools are focusing on them less, as well:

• pandemics/infectious diseases (4.8% of the 650 businesses surveyed continue to focus on this area). Given the hype surrounding H1N1 last year and its potential deleterious effects on schools, can we afford to ignore the potentialities surrounding infectious disease? The liquidity crisis may be hitting us hard, but a pandemic may just be the nail in the coffin, so to speak, for schools. Has your school prepared a plan that allows you to continue school in the event of a pandemic or infectious disease? If not, when were you planning to prepare for that?
• aging populations in mature economies (2.2% of businesses continue to focus on this area). For many independent schools that find themselves in mature marketplaces, demographic trends are not favorable toward schools; at best, projections are flat over the next five to ten years. If your school needs to remain at current enrollment levels in order to sustain operations, what are you doing to ensure that your piece of the pie continues to be the same size? Have you considered alternate revenue streams? What do they look like, and are they significant enough to offset a potential decline?
• growing demands for sustainable and socially responsible business practices (2.2% of businesses continue to focus on this area). NAIS has been great with its focus on sustainability, but I wonder what percentage of independent schools continue to maintain that focus? Financial sustainability is certainly a priority, but my guess is that other forms of sustainability have taken a back seat in most schools. This specific category of business risk is a perfect umbrella for risks in school, I submit, because it covers the two areas mentioned above, as well as many others. If we center in on sustainable models, we can deal with pandemics and issues that accompany mature economies.

The biggest challenge for schools is likely the same as the biggest challenge for businesses: "recognizing that the future will not look like yesterday," as the head of internal audit in the manufactuing sector suggested.