Risk Management Strategy of Virgin Group

Virgin brand name is associated with various products and industries. To name a few – music, soft drinks, telecommunications, megastore, computer games, financial services, railways, airways and the latest is spaceport. When I had heard the venture of Virgin Galactic to fly commercial flights to space for passengers, I thought this idea is not out of the box, it is out of the world. Right!

Whenever I think of Virgin group, I am scratching my head. It is difficult to fathom how all these products under one brand name and diverse industries function as an integrated whole. Virgin Group has a finger in nearly every pie and keeps growing bigger and bigger. It is defying all conventional business wisdom and doing wonderfully well.

glightglobal.comFrom a risk manager’s perspective, the question which keeps cropping up is how does the group manage various risks? When charting into unknown territories (spaceport is completely unknown) how does it assess risks of the new venture?  What will be the impact of one product failing on the group companies? 

Reading Richard Branson’s autobiography “Losing My Virginity” provided some insight on the risk philosophy and strategy of the company. It is quite simple really. The risk is segregated in different small sections so that one failure does not bring the group down, like in case of Enron or more recent threat to Citibank. New venture risk is calculated by determining the downside of the venture at the time of investment and an exit route planned. This two-pronged strategy ensures that at a single point of time, only a small percentage of the group is affected by a disaster, if it occurs.

The group turnover is in billions (real figures not known as it is a privately held group) consisting of over 200 companies.  The differences in approach from a typical multinational company are:

1)      Long-term Planning: The group is privately held and in the decision-making public investors are not involved. Hence, the decisions are taken from long-term growth perspective. The group does not need to focus on short-term profit to show performance in the stock market as it is privately held. Hence, the decisions are made on a sound business platform without the pressure of showing immediate results. According to Mr. Branson – “Beneath all the fun and razzmatazz of selling it there is a sound business plan”

 2)      Companies Operate Independently: The group is loosely structured under a common brand name. The private companies run as independent units and as Mr. Branson states “stand on their own feet”. An organization culture exists which makes each company responsible for mitigating risks and managing their own disaster scenarios.

3)      Containing Company-wise Risk: When a company grows beyond a specific size, the company is divided into two or more. This keeps the company manageable and while minimizing the impact of its failure on the group. Each company’s risk is contained as investors of one company do not have rights on assets of another company. Hence, if a company or venture fails, it will be contained to a single company and will not spread throughout the group.

4)      New Product Identification: The group identifies new markets and products based on an analysis of the existing market. The existing market for the new products is frequently either a monopoly or oligopoly. The existing players are either identified as inefficient or costly. Normally, the group identifies a way to work efficiently at lower costs, acts as a customer’s champion and sells products at a price lower than the competitor’s. Hence, entering the market is strategically easy.

5)      Financing New Ventures:  In financing new ventures, Virgin group generally did a partnership agreement with a company which had the technological knowhow while Virgin group could leverage its brand. Mr. Branson states –“I still believe that a fifty-fifty partnership is the best solution to financing. When something goes wrong, as it invariably will at some point, both partners have equal incentive to put it right”.

 There are two risks which the group has faced from start till recently. The analysis would not be complete without explaining them.

1)      Brand Dependent on Branson: Richard Branson is the face of Virgin Group and the brand is strongly associated with his name. With his various balloon flying and other adventures, the fear of sustainability of the brand and company were high. If a mishap occurred which resulted in his untimely death, the group’s biggest asset its brand value would reduce considerably. Although a highly talented management team exists within the group, none of them have visibility or popularity equivalent to Richard Branson.

2)      Cash Crunch Within Companies: In early 2000’s Virgin group was facing severe cash crunch. As Richard Branson put it – “No matter how many successes Virgin had had, there was always the danger that cash would run out. Virgin has made money, but I have always invested in new projects in order to keep the group growing. As a result, we had rarely had the luxury of spare cash to use as a cushion.” Virgin Music was the most profitable company and other companies were making losses or little profits.  Virgin Atlantic was at risk after 9/11. A decision was made to sell Virgin Music to keep Virgin Atlantic for further growth. The cash received from the sale was re-invested for the growth of the group.

The Virgin Group has had a remarkable growth for the many hurdles and pitfalls it faced. It survived and grew despite often facing adverse situations.  This basically indicates remarkable leadership in difficult times and an instinct for survival. Some risk management lessons can be learnt by the organizations from Virgin Group.

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Brand Building of Risk Management Department

“Your brand is created out of customer contact and the experience your customers have of you” – Stelios Haji-Ioannou, Chairman, EasyGroup

The risk management departments are sometimes perceived in negative light due to their role in the organization. The business operation teams view the risk management departments as office police, watch dogs, critics and messengers of bad news. The basic job function of the risk management departments is to:

  1. Conduct audits and reviews of business operations and identify weaknesses, non-compliance and non-adherence issues. This generally negatively impacts the business operation teams as their work is under review and shortcomings are identified.
  2. Ensure compliance to all statutory and legal requirements. This activity sometimes results in business operation team needing to adopt a longer process with more controls and/or sacrifice a specific strategy of earning profits because it contravenes laws. Here risk managers advise sacrificing profits to maintain ethics and laws, which again negates the activities of business operation teams.

The negative image causes a lot of damage to the department and team members. The following reactions of business operation teams are sometimes observed:

  1. Lack of transparency or hiding facts from risk management team.
  2. Obstructing risk management team’s participation in critical meetings and discussions.
  3. Creating political scenarios where risk management teams credibility is put in question.
  4. Ganging up or retaliating against the risk management team at a personal level.

These reactions are driven by emotions of the business operation teams. It is a scenario where the messenger of bad news gets shot. As one senior manager said to me when I was responsible for fraud investigations – “Sonia, your presence in my office indicates to me big time trouble, so I can’t say I am happy to see you. However, as there is trouble and I know it is you who is handling it, it gives me a level of confidence that it will be handled efficiently.” This statement basically indicates the sentiments of most professionals when they see a risk manager in their office. Sometimes the views are so clouded that a risk manager’s professional job and personal personality are considered one, and they are viewed as being critical, ruthless, rude, etc. in personal life.  

These negative emotions build resistance to the risk management department and their work is made more difficult. The need of the hour is for the risk management department to focus on building a positive brand image. The following process should be adopted for building a brand of the risk management department.

1)   Vision & Mission of Risk Management Department

The risk management department needs to position themselves such, that stakeholders and customers view them as value adding agents. The vision and mission statement should be communicated to all the stakeholders and customers to ensure that same message is received by all. This can be done by putting up on the company intranet in text and video. Mass newsletters and emails can be used to convey the message.

2)   Understand customer requirements

The risk management department should do some internal selling to build awareness that business operation teams will benefit from associating and involving them. Organization surveys, group forums and one-to-one in-depth interviews should be conducted of the business operation teams. The purpose should be to understand their requirements from the risk management teams, and their positive/ negative emotions regarding various aspects of risk management. The business strategies and operations should be understood along with personal aspirations of the team.

With this information the risk management team should conceptualize and discuss a method by which they can hand hold the business operation teams in achieving their goals with complete compliance to legal requirements.

3)   Build trust and credibility

The risk management department at some level is viewed with fear and apprehension by the business operation teams. The perception is that the negative points highlighted in the reports will be used as political ammunition to harm the business operation managers. This creates an environment of distrust.

In a risk management department trust is the key component of its reputation. A risk management department perceived as unethical, political and self-serving can damage not only the department but also the organization.

The risk management team needs to first focus on building a non-political independent image which is for the benefit of the organization. Few aspects need to be ensured:

  • Reports issued focus on process shortcomings and are not person specific.
  • CXO’s and other managers do not use the reports to settle their personal political agendas.
  • Develop relationships at all levels of the organization to address employee concerns regarding the reports and their impact.
  • Ensure transparency in the process and obtain buy-in of the business operation teams on the recommendations and way forward.

In nutshell, the department should always be perceived as following the high moral ground and using ethical means to manage issues.

4)   Focus on the bigger picture

The image of risk managers is that they are focused on nitpicking and make mountains out of mole hills. The other aspect is that they do not appear at the CXO radar since the observations are immaterial from the CXO’s standpoint of business. This image is basically formed as the risk management departments are focused on transaction audits.

The risk management department needs to develop a strategic focus and understanding of the business. They need to involve themselves at the point of strategy formation and provide viewpoints for increasing shareholder value while minimizing risks.

The present day organizational challenge is to build a healthy work culture. Risk managers can be key drivers for building an ethical and constructive work culture. They need to develop the core values of the organization and work with organization behavior change management team with human resources department to build a uniform culture throughout the organization.

5)   Reward and recognize accomplishments

The next negative viewpoint of the risk management department is that it is viewed as a department which dishes out the punishments with a stick in hand. People suffer emotionally from the criticism and the management actions taken for implementing the recommendations.

Here the risk management department needs to bring an attitudinal shift in business operation teams. The good things about their operations and positive compliance should be recognized and rewarded.

The risk management department can initiate a formal recognition and reward system with the help of human resources department. The criteria for achieving the key performance indicators should be communicated to the operations team. In some manner a competition can also be set up to check on the awareness of risk management practices and adherence to the same.

Last but not the least, the reports submitted should provide a balanced view. For example, if 20 internal controls checks have been done, and 5 are considered weak. The report should indicate that 15 internal controls are good and only 5 are weak.

To summarize, risk management department to build a positive image needs to ensure that the business operation team experiences with them are favorable and perceived in positive light. They should take care that they are not perceived as selling negative services.

Welcome your opinion on building a positive brand.