Risks and rewards

It's time to start talking about risk, because as business people, risk is essential to making sense of the trends we see developing in our economy. Too often nowadays, discussions about the health of this region's economies and its future revolve around binary debates over "will it or won't it?" Will oil prices rise or will they fall? Will property prices continue rising or will they crash? Will the region manage to diversify its sources of economic growth before the oil boom ends, or won't it?

No one knows the answers to these questions. To make informed decisions, we need to understand the risks that either outcome imposes on us, and try to position ourselves to maximise how we can benefit from them - or minimise the extent to which we'll be hurt. In fact, it is the perception of relative risk that defines price movements more often than any actual event. Iran doesn't need to blockade the Strait of Hormuz to send markets reeling; people just have to believe that the risk stemming from that happening has risen.

There are two factors contributing to riskiness: probability and impact. It may be highly improbable that the Gulf will be convulsed in a bird flu pandemic, but the impact would be cataclysmic. The risk is therefore relatively high, and we should take steps to mitigate it. The relative impact of lower oil prices on the region was low, but the likelihood that they would fall back at some point was high. The risk was also high, therefore, and smart governments, companies and investors in the region would have hedged themselves against it.

Risk also depends on how much is at stake. The higher prices go, the more there is to lose, and therefore the higher the risk. This is why investors often sell assets that are still rising, merely to lower their overall exposure to the risk that it falls. In the past year, the same principle has worked in reverse: falling asset prices in some markets have forced investors to sell seemingly strong assets merely to reduce their overall exposure to the likelihood that they, too, might tumble.

The same kind of risk decisions apply to business, whether it's deciding where to start a business, or where to take your business as a customer or employee. There is a common misperception one hears repeated in the Gulf that, with economies slowing elsewhere and growing strongly here, this region will automatically remain a magnet for investment and talent. This represents a fundamental misunderstanding of risk. In the global economy, companies and even countries now compete for investment, for contracts and for labour. When times are good everywhere, as they were until last year, investors can afford to take on more risk by investing in relatively risky markets. When times are bad, as they have become, investors lose much of their appetite for risk because they are less able to absorb any potential losses. They simply can't afford to lose.

Companies in this region are already finding out that they have to pay higher interest rates to borrow money, even though the region's economies are booming and oil prices are high. The same goes for entrepreneurs and workers: if the returns don't compensate for the risk, they will stay in markets with more definite returns, even if they stand to earn lower amounts. It may seem wiser to cling to the job you have in a recession, for example, than to move hearth and home halfway across the world to take a higher-paying job in a risky environment.

And this is, like it or not, a risky region. Leave aside the political risks. It bodes ill for the region that it remains a difficult business environment. The UAE, for all its vaunted growth and glittering skyscrapers, remains 68th on the World Bank's rankings of countries by ease of doing business, behind Panama and Colombia. A recent study by the Gulf Investment Corporation and the Conference Board found that productivity in the GCC overall has been declining since 2000.

Why? Economists typically point to technology, which enables workers to produce more in less time and at a lower cost. But consultants know that technology's productivity gains are as much about process as they are about teraflops. Poor processes raise the risk that doing business here will cost more and take longer than is profitable. Here are key areas for improvement: ? Settlement: Gulf companies have a reputation for being cash-rich but tight-fisted, so much so that the Government recently decided to force construction companies to pay workers' wages into escrow accounts to ensure they were paid in a timely fashion. Workers are service providers, not property. Delaying payment of wages or reimbursing their work-related expenses represents a zero-interest loan, a de facto pay cut. For service providers, it is the financial equivalent of a terrorist attack. It forces them to raise their prices or curtail service. It encourages employees to slack off, cut corners, and if they're talented, pursue opportunities elsewhere.

? Automation: Some of this payment problem stems from an irrational mistrust of employees (hint - if your employees are really stealing from you, you need a new human relations department, not more accountants), but much of this problem is due to a lack of automation. Too many companies spend thousands of dirhams in accounting hours hunting for a few fils worth of discrepancies. In a study last year, the consultancy, Aberdeen Group, found that adopting an automated system halved the cost of calculating and reimbursing expenses manually and boosts employee morale. Intranets: 1; Pencil pushers: 0.

? Mission critical: Businesses can no longer afford to tell customers to come back later. It is inexcusable, for example, that the nation's largest airline watched its website and online reservation system disappear because someone forgot to renew the domain registration. The keyword here is redundancy: if the failure of one system will put you out of business, invest in a backup. Singapore companies learned this during the Sars outbreak of 2003. Some now keep their workforce segregated - if infection breaks out among one group, it can be quarantined without shutting the company down.

? Quality of service: Too often, companies use their customers as canaries. Products and services need to be tested before they're sold, not after. If you're a hotel operator, you won't know that a bathroom's water damage is caused by a faulty showerhead unless you shower there. If you're the country's only company able to offer wireless internet access "anywhere and everywhere", make sure it's true or your customers may find it necessary to take their business elsewhere.