Risk management may not be a priority during boom time, but when everything hits the buffers, badly managed risk can begin spiraling out of control and add to the pressure on business. This has been a salutary lesson for countless companies in Romania, both foreign and local, many of whom neglected to devise their risk strategies before disaster struck. They now have to pick up the pieces and fit them together in a sound recovery strategy. But what does risk management mean? It is not only about the foreign exchange risk, which has been obvious to many companies affected by the fluctuations in the strength of the Romanian currency this year, and which they have countered through hedging. Risks come from badly managed organizational structures, a badly managed portfolio of products or clients, human resources, IT systems and the inability to recover debt with additional pressure on cashflow. It covers everything in an organization that can go wrong at any time. Most foreign companies active in Romania employ risk management procedures and run scenarios in their home markets, but did not do so in Romania for fear of losing market share. “Many firms have not collected and analyzed the market signals affecting their cash position, access to financial resources and condition of their business partners, customers and suppliers. Now they are paying for it,” says Ulrik Rasmussen, partner with Pedersen & Partners. Numerous firms in Romania and other emerging markets saw abundant opportunities to capitalize on low costs and high margins. But while Central Europe experienced a relatively gradual inflow of capital, South Eastern Europe saw an overnight boom which overwhelmed the country and most businesses. “For this reason, many firms in countries such as Poland and the Czech Republic were better prepared for the crisis than those from Romania,” says Ulrik Rasmussen. During the economic boom, “risk strategies were not really a critical topic on the agenda of key decision-makers. The exchange risk was usually addressed – if at all – with traditional financial instruments,” says Michael Weiss, principal at AT Kearney. “The general attitude seems to have been, as long as the margins allowed it, ‘why fix something that is not broken?',” adds Rasmussen. Even in cases where risk management is in place with a strong commitment from the management, “we are observing, especially in Romania, that risk management has been implemented more as an additional accounting module that is not connected with the strategic and operative processes of a company,” Weiss goes on. The current crisis has brought risk management into the spotlight again. “Emerging risks, systemic risk, risk management effectiveness, developing a new risk culture – these are all issues to which senior management has to devote considerable brainpower,” says Daniela Nemoianu, partner and head of advisory with KPMG. Managing risks is not just something heads of companies or specialized departments have to do by default. It is mirrored in reduced insurance and capital costs, reduced hedging and even in a lower variability of financial results, says Nemoianu. All these result in improved cashflow, which is a day-to-day concern for companies now. So who should step in to solve risk management issues? While in the end it all relates to a company manager's ability to come up with a sound strategy, a risk manager should be in charge of this segment. It is a position that many companies overlooked when drafting their organizational scheme when the sea was calm. “I think defining the role of a risk manager will change dramatically, because different skill sets, in my view, are needed for a risk manager than just a kind of number crunching and box ticking,” says Nemoianu. However, each head of department should play their part in managing risks, and this is a starting point for companies that do not have a clear risk management structure. “Financial directors have the responsibility to analyze operational and financial risks in the constantly changing situation, marketing and sales managers must collect and analyze commercial data, the HR manager must assess human capital risks and IT managers monitor the risk of a deficient IT infrastructure,” says Rasmussen. It is in the hands of the head of the business to collect and analyze all these sets of data and come up with a sound decision. “Many heads have only been exposed to a high growth market and have therefore not learned how to manoeuvre in an economy driven by an indebted market, analyze and fight over margins, as we see in mature countries,” the Pedersen & Partners representative goes on. A large number of these heads of business even have to return to school in order to learn how to build and manage a tightly run and sustainable ship, he concludes.