"Businesses benefit from harnessing the opportunity in risk" - Originally posted HERE by Patricia O'Connell.
Risk has evolved over the last decade from “an exercise in ticking boxes” to an area of strategic focus that is an engine for corporate growth and profit as well as a force for societal change.
And corporations are directly profiting from changing their treatment of risk in their organizations. Linda Conrad, director of strategic business risk at Zurich North America told Advisen that two of its divisions saved 27 percent and 29 percent respectively on their risk-based capital (RBC) consumption as a result of reviewing the way it treated risk.
Conrad described the results of the insurer’s internal approach to risk with its focus on Enterprise Cost of Risk, which includes the risk expenses that derive from other business activities considered “less insurable.”
Using what it calls Total Risk Profiling, Zurich moved from an asset-based approach to a risk-based approach for operational risk quantification and capital allocation, Conrad said at the RIMS conference in Denver in April.
On a smaller but no less dramatic scale, a 2013 World Bank report describes how farmers manage risk profitably. Access to such tools as rainfall insurance means that they can invest in such necessities as fertilizer and seed rather than having to save their capital as a hedge against weather-related calamity.
On a more holistic level, Mangient CEO and author Andrew Smart notes that companies are increasingly looking at the relationship between risk and strategy.
One driver of this development was the global financial crisis of 2008-2009. “It was a failure of strategy and risk,” notes Smart, CEO of London-based Manigent and co-author of Risk-Based Performance Management: Integrating Strategy and Risk.
The nature of the crisis forced companies of all kinds around the world to look at the relationship between risk and strategy. Eventually, it escalated the movement from risk as loss prevention and mitigation to being seen, by necessity, as something that could enable growth.
And in turn, the increased scrutiny of risk led to regulation that aided the aggregation and harnessing of data that could be used in a different way. “Informed decisions impact the bottom line,” says Scott Addis, president and CEO of The Addis Group and Addis Intellectual Capital. “People typically tell a business leader what they want to hear rather than what they know to be true. Risk management based on knowledge leads to better decisions, which drives profit growth.”
Michael Christian, CEO of Risk Strategies Company observed that “organizations have more data at their fingertips than they did 10 years ago, as well as more tools to help risk managers and now CFOs analyze them and understand where risks are and how to address them.” The aggregation of the data puts risk more squarely in the C-Suite, he says. “The CFO will be looking at it more deeply, and the CFO should have a direct line to the CEO, making them more aware of risk’s impact on the bottom line.
“For smart companies, the establishment of minimum frameworks and ISO, COSO, and SOX have helped them identify the right path.”
The need for discipline and focus around data was “an unintended consequence” – a positive one — of the financial crisis, according to Todd Macumber, president of the risk services division of brokerage Hub International. “Some [companies] still take a ‘check the box approach’ to the requirements of regulation and others use it to their advantage to perform better.”
Michael Christian said: “Companies have been forced to focus on risk because you can’t afford to make a mistake. You can’t sweep it under a carpet. A positive byproduct of this, he believes, is a greater focus on product quality. “You don’t want it to come out in the news that you’ve had a major product or cyber failure or production problems.”
He cites the automobile manufacturers as a prime example of the dangers of not managing risk. “They’ve hidden some of their issues. And that hurts their brand, the whole enterprise, and their reputation.”
Finally, there needs to be alignment between risk and strategy, and according to Smart, that’s best achieved by assessing risk appetite.
“Companies need to decide how much risk they’re willing to take on to achieve their goals,” he said. “And often the most challenging conversations is ‘where are we not taking enough risk?’”
While risk has evolved to a strategic tool for some companies, its role will continue to grow as new risks emerge along with tools and techniques for management.
Yet both the greatest risk and the ability to overcome it is within the purview of any company, says Hub’s Macumber. “Whether you’re using Word and Excel or sophisticated risk-assessment tools, culture has to be part of the toolbox,” he said. “Without management and executive commitment and support, you won’t have the resources, the expertise, and the attitude to achieve the necessary results. Whether it’s risk prevention, risk management, or competitive advantage, it all begins with executive buy-in.”