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Business

How To Respond To New Competitors

It is inevitable that at some point, you will have to deal with a new competitor trying to enter the market or disrupt the industry. How you deal with this is imperative to the survival of your business.

When responding to new competitors, I highly recommend avoiding the knee-jerk reaction of trying to compete on price, if possible.

Lewis Hurst

New competitors will invariably try to poach customers by offering their products at a lower price. This is because they have to have some reason for people to look at their products when customers are already perfectly happy with the incumbent product. Even if the new product is better, people often aren’t interested if what they have already works for them.

Inevitably some customers will be lured by lower prices, try the products and move to the new competitor. The natural response to this is to reduce your prices to remove the incentive for customers to try the competing product.

The problem with this is that you have a business to run. You have costs to cover and profit to make, the new competitor does not. If their business fails, they have lost only their time. Also the lure of a new business venture will be enough that they are probably happy to give all their free time to make it work (probably while they support their living costs with a job elsewhere) – so they have no value on their time. They may also have some upfront cost of investment that they are using as justification to make the business work at any amount of effort, and they won’t have ongoing costs such as staff to consider. All of which justifies the new competitors business decisions, despite those decisions making no sense in the business world.

Consequently if you compete against them on price, you will drive the price down and down until it’s unprofitable for you to run the business, and your competitor will succeed because their mindset will be to make the business successful whatever the cost (and they’ll be measuring success by customer uptake, rather than profit). The result will be that the industry is not worth the effort to compete in. This is bad because it stifles innovation, quality, functionality and other things that consumers benefit from.

A better way to respond to new competitors is to compete on things other than price, such as quality, functionality and service. Obviously this depends on what you’re selling – if you sell nut’s and bolts, and someone else sells nut’s and bolts cheaper, you’re probably going to be competing on price (assuming you can’t create barriers to entry, such as contractual agreements with suppliers).

Competing on quality, functionality and service is good because you can keep the profit margins required to make a successful business, while providing things a customer wants. Because you’re providing things a customer wants, you may even be able to charge more, and thrive despite the increased competition.

If for example, you sell accounting software and a new competitor comes along with a rival product, instead of competing on price, add new features that the customers want. A customer would rather pay more for a product that does what they want and makes their life easier, than pay less for a product that doesn’t quite do everything they want.

In reality, you will probably lose some low value customers to the discounted product, but this is acceptable loss compared to the alternative of competing on price.

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Business Investing

Business Performance

Thinking about buying a business and looking for some industry stats or wondering how your business is performing compared to others? Stats NZ have launched a great new service called the Business Performance Benchmark, which lets you look at various financial aspects of average businesses in given industries.

It’s a very cool tool (which may be construed as being on the verge of disclosing industry secrets), which you can access here:

https://statisticsnz.shinyapps.io/bpbench/

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Business

Thought Of The Day: Netflix

Netflix have an interesting business model. From the outset, you might think that their business is all about having the best shows to get all the customers, but they’ve found a more profitable way. They make shows, run them for a bit to prove their success, make money on them, then sell them to other providers.

This seems counter-intuitive at first, because why sell the golden goose and give a competitor a chance? Well, the answer to that lies in the sale price. If they can sell the shows for (say) 10 times the annual revenue the show would generate, then they can use that money to make more shows and end up with more money than they otherwise would have earned from just running the show themselves. This way both the competitor (who invests free cash into an asset that returns 10% ROCE) and Netflix who end up earning more money.

This model is not dissimilar from business owners selling their business. If you’ve built up a successful business, you should probably consider selling it and trying something new. Alternatively, perhaps you can sell part of your business (or shares in your business) like Netflix are doing by selling their shows and listing on the stock exchange, so you can use funds to invest in growth and make your business more successful.

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Business

Market Research

Market research is important when launching new products and as part of the pre-sales process to ensure that:

  • You are able to target your advertising
  • Markets you are targeting like your products
  • Markets are big enough to be worthwhile

When doing market research you should be open minded because you may in fact discover that there are more markets than you realised.

Clearly from the above, you will see that market research is about more than just interviewing potential customers. To do market research you should interview customers, explore existing products including any value-add things being provided, try to discover the barriers to entry, etc.

The Pitfalls In Market Research

Market research is hard. Data is unavailable and any data you collect is likely to be unreliable. Be mindful of this and try to guide people to give you the information you want without influencing their answers. For example, try loading questions to encourage an answer in one direction, then loading them the other way for a different person. This might give a clue if people have a strong opinion about the subject or if they’re just making noise from their face holes.

Be aware that people will often give their opinion about what your business should do without having any idea about the business or industry. For example, they might make a suggestion of a new feature or product that they might like but no one else would, or they might make a suggestion for something that they think others would like but actually is unimportant. This is more common that not.

Watch out for cultural differences when exploring markets afar. For example, in some countries it may be considered rude to give negative feedback, so any neutral or overly verbose response should be considered extremely negative.

Finally, people generally talk rubbish when quizzed for feedback on products and services. For example, if you ask people what they would pay for a widget, they might answer with a number that they think others would pay, what they could afford to pay but never would, or a number they think you might like to hear. A better way to work out what they might pay for a widget is try to sell them a widget.

To conclude, market research is very important and is an activity that goes beyond simply gathering information from potential or existing customers with questionnaires. Be innovative in the way you collect data and be aware that most of what people say is rubbish. Try to find ways to measure peoples actions and reactions where possible.

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Business

Finding An Investor

Whether you’re trying to find an Angel Investor or applying for a business loan, the first thing to do when raising capital is to work out how much money you need. I realise that sounds obvious, but it’s not as simple as you might first think.

To work out how much capital you need to raise, you’ll need to do a business plan to work out where you want the business to go and to justify the strategy.

You’ll then need to do some financial modeling to work out the strategy to get there. Initially this will be a basic cash flow projection, but you’ll need to model several scenarios with different levels of funding at each stage. You should also model how different types of funding will effect your strategy.

For example, if you run a farm and want to raise money to grow the business, you might initially think you just need money for a tractor. You might later want money for more land, working capital to hire people and more machinery.

After outlining the end goal in a business plan, forecasting growth (including costs, risk mitigation costs, market analysis, SWOT analysis, etc.), you’ll need to work out a plan for the money.

You’ll need to do financial modeling to show how cashflow is effected if you borrow in stages vs all at once, and various other strategies in between. It might be that raising more money up front means that you can be more profitable and cover costs more easily and reach your goals faster. It might be that smaller tranches work better for you.

You’ll need to model different strategies with different types of funding. If you get a loan, can you cover the costs? Can you get a big enough loan to reach your goals? If you get an Angel Investor, will the freedom of having no debt mean that the business grows faster? If so, will your 80% shareholding in the larger company be greater than your 100% shareholding in the smaller company? Can you model a strategy that enables you to increase the value of your shareholding after X years? What does the model look like if you mix loans and investors? Can a smaller round of fund raising get you the money you need to grow the value of the business so that you don’t have to sell such a large part of the business to get the rest of the funds you need?

Once you’ve modelled this, you could optionally get any business valuation you used in your modeling checked by a professional (this can be done later, but may save time doing it now to avoid reiteration of the financial modeling stage). The valuation can be checked by:

  • An accountant with valuation experience (less preferable because they don’t have access to market data so valuations tend to be out of line with reality a bit).
  • A business valuer.
  • A business broker (be aware that many brokers dont have the skill to do this for business where only shares are being sold instead of the whole business). I recommend Snowball Effect if you want a 3rd party opinion.
  • The discovery process when pitching to investors.

Once you’ve worked out your strategy and how much capital you need to raise, you need to seek a loan (which could be via an institution or private individual) or an investor. If you’re going with an institution, you can stop reading at this point because the institution will have their own process they will guide you through.

However, if you are looking for an investor, you’ll need a Pitch Deck or Information Memorandum (IM). This is basically just a document that presents your pitch to the investor. Accompanying the pitch will be a number of documents, such as the business plan you made earlier, and some basic financial information.

Once an investor is engaged, you should research them to make sure they’re a good fit for you. Are they a silent investor or do they want a position on the board, or something in between? Do they have skills, experience or contacts that will help? Do they have a conflict of interest / are they a competitor? Are they happy with the exit plan?

Once you’re happy the investor is someone you want to work with, you’ll have to disclose more information about the business. You may wish to ask the investor to sign a Non Disclosure Agreement (NDA) before proceeding. At this point an investor will want to see financial information, evidence of things disclosed in the IM, financial modeling, etc.

If both parties are happy to proceed, you’ll want to start negotiating terms and you’ll need some legal documents. Specifically you’ll need a Company Constitution and a Shareholder Agreement.

You’ll want to have a commercial lawyer create this. Getting a good lawyer is very important. All lawyers say that they do commercial law, but the fact is most are only good at family law. It’s very important that you get a lawyer that specializes in commercial law – which usually means hiring a big law firm. This is expensive, but will save you money in the long run because there will be fewer rewrites.

I hope this brief outline helps start your journey to success. Please feel free to ask questions or share your experiences & learnings below in the comments. Also, don’t forget that I am an Angel Investor, myself, so please contact me in the comments below if you are looking to raise capital (I won’t publish comments aimed at contacting me, so your message will stay private).

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Business Investing

Why Do Private Companies Sell For Less Than Listed Companies?

As an Angel Investor one of the most common hurdles I see private companies struggling with when trying to raise capital is valuing their business. Specifically, company owners tend to have a disconnect between what they think the company is worth verses what investors are willing to pay.

Too many times I see the valuation set at what the value of the company will be after growth, which leaves no profit in the future for any investor with the risk of losses if the company doesn’t succeed.

I also see valuations being set based on what the owner feels like it’s worth, with no financial justification.

I also see valuations from accountants which are typically based on a DCF methodology. While a DCF is a valid way to calculate a business’s worth, it’s more used to calculate the value in a business rather than the market value, or what somebody would actually pay for a company. This is because it doesn’t leave any room for profit for the investor in the short / medium term, and the discounted rate doesn’t reflect the opportunity cost from an investor’s perspective. An accountant would typically not be in a position to negotiate the level of risk and will typically accept the level of risk given to them by the company owner, giving a more minor discount value.

Finally this brings me to the last type of valuation I see, which is a comparables market valuation. As company owners typically don’t have access to sale data of private companies, they often compare their business to those listed on the stock market. Which brings me to the subject of the article…

Why Do Private Companies Sell For Less Than Publicly Listed Companies?

It seems fair that similar companies should be priced similarly, right? Yet you’ll never get the same price for your company selling it privately than you would selling it publically. The answer to the titular question lies not just in the benefit of liquidity of listing a company, but also in the public nature of listed companies.

When buying a private company, there is a much larger risk premium to overcome due to the fact that there is less data available about the company, that data has not been held to the same public rigor (or sometimes laws) that a public company has. There are also years of documented performance forecasts that can be contrasted against their following year’s results to determine their accuracy, and of course a bunch of laws that must be adhered to in order to fit with the bourse’s requirements, which are perpetually scrutinized by large institutional investors with a copacetic interest to any smaller investor – safeguarding demand. All of which contributes to a lower risk premium for public companies.

There are also aspects of demand that push up the share price of public companies, as not only are such companies easier to buy into, but some institutions may have to buy those stocks to fit allocation requirements.

The benefit of liquidity is also seen in the opportunity for exit. In other words, as public companies are easy to sell, investors don’t need to worry about finding a buyer. This brings supply side pressure on the price of non-listed companies, pushing the share price down.

The nature of sale of private companies also comes with problems, in that any buyer is likely to buy the company in its entirety. This changes the calculation on how much a company is worth, because it’s no longer a silent investment that pays you regular dividends, it’s a job for someone to get their money from the company. Consequently, an investor of a public company might be happy with a 5% dividend because it’s better than the return from the bank, but an owner operator doesn’t want to buy a business, then work all day for the same amount of money they would get from putting their money in the bank.

Finally, there are additional risks and costs related to investing in private companies. For example, one might spend anything from 2 to 30 days researching the company and going through legal processes, incurring costs of thousands of dollars just to make the purchase of the shares.

All of the above make angel investing and owner-operator company purchases less attractive, which makes private companies sell for less than publicly listed companies.

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Business

Changing Your Company’s Website

Coming from an IT background and having done a lot of research on search engine ranking techniques (including building my own testing platform for SEO) and having been the sole creator of a website that garnered thousands of visitors a day, I would like to share my views on changing your company’s website.

Often when people start out in business, the website is one of the first things they get for their new company. Typically this website will be relatively simple, built from a templated design, and be an adequate front face for the company.

After a few years your business has matured and possibly developed into something that you had not anticipated or intended – and that’s a good thing, you’ve recognised that you need to do what people want and take the opportunities that come to you. Your cake shop has become more of a wholesaler; your flower shop has become an online shop and is basically a delivery business; your computer shop makes more money from IT service than selling computers and you now spend most of your time doing HR tasks; or you bottle shop has transformed into a franchise model. Your website is now irrelevant to your business and is looking tired; you’ve decided that it’s time to change your website.

Planning Your New Website

The first step in deciding how your new website should look is to build a list of functional and aesthetic requirements.

Aesthetic Requirements

I won’t go into the aesthetic requirements too much, other than to say that those should reflect the message you want to convey and your brand, and to say that they should draw the viewer to the correct parts of the page, and encourage the viewer on a subconscious level to do what you want them to do.

There are several tricks to this, such as using pages in which the layout changes so users don’t become blind to adverts (Have you seen the mobile pop up ads on some websites? You can find the button to close the pop up before you’ve even read what the ad was! This trains the brain to block out the advert), or placing important text in positions where people’s eyes tend to go to.

If you operate an online shop (without making it difficult for people to find what they’re looking for) it’s a good idea to have some sort of dynamic nature to your website so it doesn’t appear stale and people are forced to look at other products. A common approach is to have some products advertised on the front page, which shuffle around a bit with every view. Another approach might be to visually change how some products are presented. Your web designer may be able to advise you on these things.

Functional Requirements

In terms of determining the functional requirements of your website, you first need to have a think about what your website is for. Is your website a elaborate business card? Is your website a community? Is your website a shop? Is your website aiming to convince people of something? Is the aim of your website to get people’s contact details? The aim of your website should be to support your business operations or strategy.

Part of this is deciding who the website is for. Is it to convince distributors that you have a lot of fanatical customers? Is it to convince customers to come to your brick and mortar shop? Is it to convince businesses that you are bigger than you are so you can go after bigger fish? Is it to sell your brand or ethos? You need to outline the goals of your website, then think about how you might achieve those goals before you ask a web designer to build your website.

I believe that a very important part of any business is how you advertise it. I also believe that it’s very important critical to measure the successfulness of all advertising you do, which includes radio ads, gorrilla marketing, pamplets, etc. Correspondingly, your new website will need the ability to measure that success. I recommend setting up something in your new website that enables you to set up new pages (or even single page websites that instantly redirect to your website), which count the number of people landing on those pages. This can then be used to measure the effectiveness and value of specific marketing campaigns which direct customers to those pages, in turn helping you do cost-benefit analysis of different advertising methods. This will help you funnel money into the right advertising channels and know how much money to spend on advertising. This will make you more efficient, grow faster and be more survivable and competitive than others in your industry.

On the subject of measuring success, it’s wise (and also very cheap – it’s just a few lines of code) to measure the success of your old and new website before switching over. Signing up to a Google Analystics account and Google Webmasters account is a great, simple, and free way to monitor the performance of your new website vs. your old one. From here you can also see what people are searching for, and how well your website performs in those search rankings. You can then use this information to apply focus to fixing those problems, such as writing articles about particular subjects, changing the structure of your website or page, or generating external links to existing articles, etc. This data is also useful as honest market research.

Implementing Your New Website

There are a few things to think about when making your new website go-live, and the associated risks should be managed the same as they are in any project. Part of this should be considering how you manage the change over (reducing any outages, ensuring that there is support during and after go-live), maintain any existing IP in the old website, such as subscription lists, usage data, text on sucessful pages, etc.

Another important thing is to ensure that all the pages in the old website have a 301 redirect set up, so that any links on the internet to those pages, are correctly redirected to the new relevant page, if that page location has changed. This is not only important for people clicking on links to your website from other websites, but also for the credibility (and therefore ranking) of your website in search engines.

Choosing The Right Web Developer

Finally I’d like to talk about choosing the right web developer. This is a tough task, because it’s really hard to know what you’re getting, especially if you don’t have an IT background. It’s also hard because web design businesses are actually a mix of several diametrically opposed skills: A web designer must be technically savvy at IT, but also artistic, and also good at talking to people in order to get the business and articulate the requirements. On top of this, a web designer should be business savvy to be able to understand your business, so they can advise you, and be proficient at each aspect of their trade and have fringe knowledge in things such as SEO and security. Honestly, I don’t think I’ve ever met anyone in my whole life that fits all that criteria perfectly, which is why the best thing is to go for a large web design company that has a multitude of skills to get the job done. Let’s talk about the sort of web designers that are out there, that might suit your needs.

There are a lot of very cheap web designers out there who have very little skill, and simply use and modify templates to give you something unique and pretty. These cheap developers come in two forms: local and foreign.

The advantage of hiring a foreigner is that they will be very cheap. You can get a website done for about USD$200 – USD$2,000. No matter what you pay these guys, you will get exactly the same thing (and they will probably lie to try to make you think differently so they can put the cost up). You’ll get a website that is OK but not quite unique and you won’t get anything other than basic functionality or existing out-of-the-box templates, shopping carts, etc. The support will be almost non-existent after they have the money and they will be terrible to deal with as the project takes more time. They may lie about what they will give you. Usually what they do is only a few hours work, configuring an existing website system that is freely available. If you want more customisation, they often don’t have the skill and will lie about the deliverables, then argue with you. All that said, this might be fine for a small business with basic requirements.

The advantage of a local is that it will be done with more care, you’ll get better support and it might be a little more unique. You still won’t get much beyond out of the box stuff, but they will have a more honest way of working. You will pay about NZD$1,000 – NZD$2,000.

Finally, there are more skilled web developers. These folk tend not to use out of the box systems and code the website from scratch. They may use out of the box systems, but they will have the skill and knowledge to integrate their own work into it and make it do things that the cheap web developer can’t. If you can afford to spend more on your website, it’s worth doing this, but it will cost you a lot more money but you will get a completely unique website that is fully customised to your requirements. You may end up spending upwards of $10,000.

Web design is a very big subject, and often very business specific. If you would like to know more or discuss any of this, please leave a comment below.

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Business

Measure Everything: Digital Advertising

Today I’d like to talk about what I see as one of the biggest advantages of digital advertising: it’s efficiency as a form of advertising.

By digital advertising, I mean advertising that is delivered by a computer or other such electronic device, such as Google Adwords or Facebook. By efficiency, I am talking about getting the most increase in revenue for the least cost of advertising.

While digital advertising isn’t for every business, it’s probably the most efficient type of advertising you can buy for businesses selling online. Not because it’s the best way to advertise or has the highest sales conversion rate, but because it’s the most measurable. Here’s why:

When you use digital advertising, you can drive customers directly to a page on your website, which means you can store a cookie on their machine to record that they arrived at your website from a specific advertising campaign. Coupled with the information from the advertising broker (Google, Facebook, etc.) you can work out how much profit your advertising campaign generated per click that you paid for. For example, you pay for 100 clicks (adverts that people click on, priced per click), which generates 5 sales, giving you $100 profit ($20 per sale). You can then work out in a very exact way, the value of an advert. In this example, you know that if you pay less than $1 per advert / click, your advertising is worthwhile. If you pay more, it’s not worthwhile.

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Business

Do I Need To Repay The Wage Subsidy?

A few weeks ago I wrote an article about the economic future of NZ, in which I praised the government’s reaction to COVID19 and the associated financial policies arising from it. Specifically I said that I liked the wage subsidy as an implementation of Helicopter Money.

Why I liked it so much, is because it directed money straight to all businesses (small and large), and forced those businesses to ensure their staff were looked after. Trickle- Down Economics, anybody? I think this is better than Quantitative Easing because the money goes straight where it’s needed (though arguably there are better ways to implement Helicopter Money).

Every business owner I talked to, had applied for and got the wage subsidy. Comments on the no-questions-asked ease of acquiring the subsidy, along with the soft eligibility requirements of “…a 30% decline in predicted revenue…” and soft wording on repaying it, stating that you can repay it if you become no longer eligible, all suggested that the wage subsidy was actually Helicopter Money.

Now it seems that numerous large law firms are repaying the wage subsidy and the wage subsidy page on the Work and Income website is dominated by large red text talking about repayments.

So the question for employers is do i need to repay the wage subsidy? I don’t have the answer to this, but I suspect that the fact that the law firms are repaying it might be a clue.

In some ways it’s no surprise that the government is asking for the money back. In fact, I stated that there would be a need to replenish the coffers in the very same article in which I praised the wage subsidy policy. I’m just a little disappointed in the way the Work and Income website phrased the repayment, because for me, to say that you are eligible if you predict a 30% drop, then say that it has to be paid back if you are no longer eligible, I would have thought that having had predicted the 30% drop made you eligible.

Additionally I think that in the case of a growing company (especially those who have recently done capital raises or increased investment to fund growth), it’s quite possible that revenue could be up from last year, but 30% less than predicted. This could validly cause an increase in staffing costs that is not sustainable as returns didn’t fit the anticipated financial modeling, and such a company could be in need of the wage subsidy.

I think there’s scope for arguing a position here, but I suspect that increased need to replenish the coffers in the coming year may result in the IRD comparing past and present returns for those who kept the subsidy, and correspondingly auditing those who didn’t report at least a 30% drop. I expect that this will result in a lot of unpleasant words like “fraud” being thrown around.

It is my understanding that in cases where tax law is based on your opinion (such as whether you’re a share trader or share investor), the opinion of the taxman overrides any thoughts the business owner may have had on their intentions.

To leave on a positive note, while we may not have got any Helicopter Money, the alternative methods of replenishing the coffers are less attractive.

If you are wondering whether you need to repay the wage subsidy, you may wish to talk to your lawyer, accountant or ring the number on the Work and Income wage subsidy page that offers advice on whether you need to repay (though I expect in the case of any ambiguity, a ruling would not be in favor of these business).

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Business

Managing Risks In A Project Implementation

Managing risks in a project is very different to managing risks in a business. This article covers some of the ideas around managing risks in a project, more specifically, with a view to managing the implementation aspect of the project, rather than the project as a whole – because this is a large subject. I’ll try to keep this a little generalized so it’s relevant to all types of project implementation in business.

Managing risks is not about avoiding failure in a project implementation, but instead, accepting that things can go wrong and being prepared with a plan if that happens.

The first step in managing risks in a project implementation is to come up with an implementation plan. You’ll want this to be very clear so there’s no ambiguity about the steps. It should be written in such a way that someone else (with the appropriate skills) can implement your plan. This doesn’t mean that it should be so basic that a monkey could do it, but you need to be able to know exactly what was done if you or another suitably skilled person were to read the plan 5 years later.

The reason for this is because you (or someone else) may need to find out exactly what was changed after the project has been implemented. An example of why this is necessary is that there could be a problem that wasn’t considered which pops up a few weeks after implementation, and you’ll need to know exactly what was done. Another example might be that you need to rebuild your whole system (exactly) years later, and you’ll need to know what was done to replicate the whole thing.

Next you’ll need to identify the stakeholders. The stakeholders are the people who will be affected by the implementation of your project. This is so you can keep people informed, schedule work and communicate outages.

The next step is to list all the risks around your project implementation. Once you have this list, you should decide which risks you are going to have a plan to mitigate, and which risks you (and relevant stakeholders) are going to accept. You’ll need a rollback plan as a catch all in case your project implementation and risk mitigation plans fail, and to catch any risks you have not considered. Your risk mitigation and roll back plans should be at least as detailed as your implementation plan, because when it hits the fan, stress will make implementing your roll back plan harder and you’ll be more prone to mistakes. You should also plan what triggers cause your mitigation plans to be implemented (for example, the rollback plan might be triggered if the implementation is not completed and continuing with the implementation would not leave enough time for the rollback plan if the implementation were to drag out any longer).

The next task is around resource allocation. As part of your planning, you need to ensure that you have resources (human or otherwise) to implement your project, including those required to cover any risks you have chosen to mitigate.

Finally, you’ll need to make a plan to support the project post implementation. This means planning for future usage of resources (human or otherwise), and considerations for supporting the project after it’s implementation.

If you’ve worked in risk management before, you might recognize that this article is quite general. That’s because (coming from an IT background, where risk management is detailed and specific) I’ve tried to keep it as generic as possible so it can spur thoughts of approaching risk management for projects in all aspects of business. This same line of thought can be applied to implementing a server replacement project, the deployment of new PPE in a factory, or the deployment of a new office in another region (though this would obviously touch on the issue of risk management at a business level).

I hope this helps start the conversation about risk management and gives you some thoughts about how to go about managing risk in whatever line of business you are in.