Five reasons SMEs need political risk analysis

Five reasons SMEs need political risk analysis

One third of EU-based small and medium sized enterprises may benefit from including political risk analysis within their decision making process. Here are five ways how.

Small and Medium Sized Enterprises (SMEs) have been playing a historic role in the social development and the economic growth of the western European market. In the last decades, this position has been identified and fostered by European Union (EU) policies.

According to the latest report requested by the European Commission (EC) in July 2014, SMEs within the EU28 zone accounted for 58% of the total added value created in the EU and provide jobs for up to 88.8 million people. More than 21.6 million SMEs were registered in the EU in 2014, 30% of which base their business models on the export of goods and/or services.

While it remains true that a vast majority of SMEs operate on a mainly national level, over a third of them, or approximately 6.5 million businesses, have regional and/or global interests including production facilities, subsidiaries, and providers as well as substantial financial investments. As such, they represent a largely untapped market for firms providing political risk analysis and services aimed at mitigating risks encountered by players with international interests.

Political risk can be defined as the effects caused by the intersection of political decisions, socio-economic events and market evolutions that may impact specific business interests and situations.

The reason why SMEs seldom invest in political risk products is twofold. On the one hand, SME managers may not be fully aware of the opportunities generated by a comprehensive understanding of international political risks. On the other, companies providing these services have traditionally targeted larger corporations, thus creating a potential discrepancy between the available products and the SME market needs.

Here are five key reasons why SMEs with international operations need to include political risk analysis within their decision-making processes:

1. A different approach to risk

SMEs have a structurally different approach to international operations in regards to large corporations and international organizations.

For the majority of firms with fewer than 250 employees based in the EU, the bulk of business travel, transactions, and contracts involve operations in countries that are generally assessed as having a low to moderate political and security risk environment. As such, these firms have come to develop a more pronounced risk aversion that hinders the potential capability to financially and operationally expand outside of a current investment comfort zone.

However, SMEs with international exposure do rely on subsidiaries, service providers, and production infrastructure at times located in medium-to high- risk countries. As such, the risk analysis of key political and security factors carried out by professional companies is an essential element that should be included in the financial decision making process in order to facilitate a smoother globalized operational structure that takes into consideration the specific risk appetite of SMEs and mitigates the risks to business continuity and financial stability generated by international operational structures.

2. Protection of key employees and assets

The strategic element with which business risk consultancies can support SMEs is providing their management structure with the necessary information needed to protect key employees and assets. This goes through the understanding of the client-specific operational processes, decision making structures, and travel policies.

As such, programs including business travel risk management, political risk analysis, and insurance coverage are essential for SMEs to successfully develop and maintain global operations, as these companies are especially exposed to social unrest, financial fluctuations, legal changes, and political instability in a way that makes them potential customers to specific political risk services.

3. Provide strategic environment-specific information

More often than not, SME managers have an excellent understanding of the business sectors within which they navigate. However, there is often a knowledge gap present between the consideration given to key financial factors and socio-political elements in areas of operations and regions in which clients are based.

To improve their decision-making process, safeguard employees with international travel, and protect against present and future potential risks, SMEs greatly benefit from a greater understating of the political environment in which they operate. As such, business risk consultancies can provide training and educational programs, as well as specific reports, aimed at enhancing the knowledge of key decision makers and managers with international travel needs.

4. Assessing the Stability of the Network of Providers  

Regardless of the business type, chances are its providers’ network expands beyond national and regional boundaries. SMEs involved in the production of services and goods seldom evade this rule.

The precise analysis of the political, financial, and socio-economic environment in areas in which their providers are based is an essential service that can contribute to enhancing the efficiency and ensuring the continuity of business. In this sense, the needs of SMEs are at the cross-roads of business intelligence and political risk analysis, where business risk consultancies are essential partners in mapping and assessing the providers’ networks.

5. Generate Opportunities

The analysis of political risk is too often limited to the identification of threats that could negatively affect the financial and operational stability of clients’ companies. However, it is in SMEs’ favor to conceptualize the use of political risk analysis tools as a potential lead to generate new commercial and development opportunities.

The possibility to receive the professional assessment of political decision making structures, legislative processes, and national specificities provides SMEs with an additional competitive edge over their global competitors and generates an opportunity to safely expand in pre-identified investment friendly areas. As such, the analysis of political risks should be fully integrated in new market entry strategies in order to maximize the return on investment and mitigate risks.

While a third of EU-based SMEs may benefit from including political risk analysis within their decision making process, it is essential to recognize that business risk consultancies should improve the SMEs’ access to the aforementioned products and this should be done in three ways.

SMEs should be offered specific services that are not only a limited version of those sold to larger corporate clients. For this, the user of political risk services must be identified as a single individual rather than a group of employees, and specific attention should be given to key processes within targeted companies.

The second point should focus on adapting marketing channels, pricing structures, and overall selling strategies to reach and educate potential clients within the SMEs market.

The third and underlying step consists of reshaping the concept of political risk services offered to client companies with the objective of crafting products aimed at highlighting business opportunities rather than solely focusing on the negative aspects of risk, which will appeal to more risk adverse clients.

Categories: Economics, International

About Author

Riccardo Dugulin

Riccardo Dugulin is an analyst at Drum Cussac, a global business risk consultancy. He specializes in supporting international organizations and large corporations operating in emerging markets by providing them with critical risk management intelligence. His regions of expertise are the Near East, the Gulf, North Africa and Continental Europe. He previously worked as project manager for a French medical assistance company. He gained field experience in the Middle East having worked for leading think tanks in Dubai and Beirut. Riccardo holds a Master in International Affairs from the Sciences Po – Paris and a Bachelor in Middle Eastern Studies from the same university. Follow him on Twitter @RiccardoDugulin.