SMEs and the Art of Risk Mitigation

It’s risky enough being in the software industry these days–what with
terrorism, wars, border tensions, SARS, sexual harassment suits, arrests and
visa problems–all competing to bring down the performance and prospects of
software exporters, every quarter of revenue and profit growth seems to be good
news for managements and boards alike. Being a small company with a few
customers and a limited product or service range aggravates these risks further
and entrepreneurs need to exercise extreme caution to ensure business prospects
do not get irretrievably damaged by inadequate attention paid to these risks.

from the issues of pricing and payment terms, interest rate and
currency fluctuations in a dynamic money market need to be monitored
at very senior levels”


Let us survey the risk universe and see what precautionary measures are
available to mitigate these risks and enable entrepreneurs to get a peaceful
night’s sleep. Operations Risks are the most obvious–customers could get
lost because of poor service or product failure, product development efficiency
may be less than planned and product performance and scalability may prove to be
less than acceptable. Capacity may prove to be inadequate for executing a larger
than anticipated contract. The best way to mitigate these risks is careful
contract negotiation and attention to pricing and commercial terms that will
protect the company’s commercial interests.

The next big category of risks to be considered is the ‘Financial Risks’
basket. Apart from the standard issues of pricing and payment terms, interest
rate and currency fluctuations in a very dynamic money market need to be
monitored at a senior level to ensure there is minimum exposure to unanticipated
losses. The last category are the Management Risks, which is where young SMEs
have the maximum to learn from their larger brethren and where the mentoring
processes that forums like the Nasscom SME Forum have the most to offer.
Empowerment risks stemming from the leadership style, the risk of demotivation
stemming from inadequate incentive for good performance, the susceptibility to
management and employee fraud, illegal acts and unauthorized use of intellectual
property by others within the company or outside all add up to Integrity risks
which have to be addressed by the leader of the firm. Then there are also a
bunch of Environmental risks, which may vary depending on the nature of business
a company is engaged in and the exposure it has to political or economic

With so many risks of being in business, one may wonder whether it isn’t a
better idea to open a store or switch to farming! Not really, these risks have
always been there in any business and it is only the many pressure points that
have emerged in the recent past that has brought the risk elements into sharp
focus. One of the jokes in our own company is that every presentation to a
client has to contain a mention of four risks pertaining to disaster recovery.
The local risk which we address by having complete backups at two locations in
Pune, the city risk (did you know that Pune and Mumbai are on the same seismic
plate?), which our Bangalore center mitigates, the country risk for which we
have units in Chai Chee, Singapore and Zhuhai, China and finally the risk of a
world war, which some intrepid company will soon counter by setting up a
development center on the moon. We live in strange times. But having said all
this, the IT industry continues to be one of the most exciting places for both
entrepreneurs and career seekers to seek both a living and an ongoing high.
Where else can one be dealing with complex technological solutions on one day,
having breakfast at Heathrow airport with a potential sales manager the next,
making a presentation in New York on the third day, addressing students in a
West Coast campus on the fourth day and sipping sake with a Japanese client in
Tokyo to end the week? Would you trade all that for going back to the shop floor
of a factory? The choice is clear!

Ganesh Natarajan
The author is deputy chairman & managing director of Zensar
and chairman of Nasscom’s SME Forum for Western India

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