Diligence should be applied to all businesses

In this latest Xtra Series post, Roberto Simone, risk development executive at Xenia, sets out the importance of applying high levels of diligence when reviewing businesses - regardless of their size.

If you can forgive me for using another football analogy (but I guess it is rather timely), the World Cup has yet again reminded us about the capacity of diligence.

As ever, the tournament has served up some stunning underdog results where traditional giants have been shocked by “lower tier” nations. Argentina’s defeat by Saudi Arabia was one of the biggest upsets in World Cup history, and we can safely assume a lack of diligence from Argentina perhaps played a part in the outcome.

There was almost a sense of complacency - always dangerous in sport - of the players thinking they just had to turn up to win, especially after the first half performance, where even the best football analyst would have had difficulty predicting what was about to unfold (a 1-0 lead at half-time turned into a 2-1 defeat).

Now flip this analogy and apply it to the business realm. The high levels of diligence often given to reviewing a smaller business - where less information is available and therefore harder work is needed to dig deep - are not normally applied with the well-known larger brands.

This is both dangerous and understandable. Understandable because with large businesses, there is already so much information, and portrayals, in the public domain about their stances, resources, resilience and dynamics.

But it’s dangerous because without applying adequate diligence to evaluating performance and results, you can miss things: whether that’s a credit risk peril or potential opportunity for the business to capitalise on. Carrying out a forensic analysis of these larger organisations’ accounts can unravel issues that are not necessarily prevalent, but certainly bubbling under the surface.

Lessons from the Carillion collapse


A good example here is Carillion, the large construction contractor, which dramatically folded in 2018. Even some of the more seasoned analysts assumed it was too big to fail because it was wrapped up in hundreds of government contracts, representing 38% of its reported revenue in 2016. It would have been easy to assume Carillion would be good for its word, but this wasn’t the case because it had become a law unto itself, trading at unsustainable levels with those financial challenges intensifying by the year.

Anyone taking a more detailed look at Carillion’s position would have been able to see this and other issues, such as its huge pension deficit, simmering away in the background - and make suggestions as to what could potentially happen.

Treating companies with a uniform level of diligence can help guard against potential severe losses and at the same time, help facilitate devising a strategy to replace key business that may be at risk. If a contractor provides your firm with 50% of its income and there’s a chance it’s in trouble, it’s essential in this scenario to be proactive rather than reactive should the worst play out.


In uncertain times, amplified diligence is essential


As I’ve repeatedly said in this series, the more detailed and streamlined risk management processes are, the greater the ability to see risks and opportunities. You’re seeing businesses for what they are and what they’re not.

And, with the UK economy in such a volatile and fragile state having suffered a number of huge shocks to the system in the past few years, any business without an appropriate risk management strategy is exposing itself to potential trouble and challenges that could have a bearing on its own solvency and invariably its viability.

It’s key to remember we can’t go back to how it used to be, when disruptive episodes in the business world were few and far between. Now they are the norm and amplified diligence should be an essential fixture in firms’ thought processes and strategies. That way, they can manage expectations today for the benefit of tomorrow.


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