The work of a political risk consultant is no mean feat – and here is why!
A political risk is a risk that could have a negative impact on the work of investors, businesses, organisations or governments due to a political decision or change. This risk could be as a result of a political change or a political decision which alters the outcome of an economic action. It could be regarding non-market factors, i.e. social issues or due to political instability, i.e. change of government or war or even the risk that governments may be unable to make decisions or pass new laws. However, with effective analysis and speculation, these risks can be monitored and understood. This is where the work of the political risk consultant comes in.
In order to aid the company or organisation, businesses often commission a political risk consultancy to analyse the market in which the business is situated, to establish the many different political risks which face the business and put in place a system to prevent the effect the risk would have on the business. Many political risk consulting firms follow the same format in order to observe risks and create a political risk assessment:
- Visit the client and discuss their business processes to establish what risks they’re facing.
- Analyse the potential risks.
- Create a strategy in order to diminish the impact the established risks might have.
- Test the strategy to allow any weaknesses to be found.
- Allow a time period to pass before returning to the client to ensure that these strategies have improved the businesses performance.
As mentioned above, political risk consultants use a combination of experience and market skills to minimise and manage the exposure to political risks.
Political risk consulting is extremely important to businesses, as failure to minimise the impact of a political risk can have devastating consequences. A political risk must be understood as a probability and also as the impact a risk could have on the business. From penalties imposed by the government, to loss of profit, to goods not being delivered, to termination of contracts or even in worst case situations the closure of the business. Therefore, the level of political risk which the company faces is split into two categories:
- Macro-level political risk
- Micro-level political risk
Macro-level political risks refers to the risks which could affect all businesses located anywhere within a country. It is important to ensure that political risks from local, regional and national events are considered as these often have a domino effect on companies.
Mirco-level political risk refers to the specific sector or project which a business may be planning to carry out. The analysis of these political risks may focus more closely on the effects which local events may have on a specific project and are often used to analyse local businesses.
So as you can see, the work of a political risk consultancy is extremely important. Without these risks being closely monitored and analysed by experts, businesses could find themselves having to deal with catastrophic outcomes.
