Enterprise Risk Management: A perspective
Although its basic value has been acknowledged for some time, Enterprise Risk Management (ERM) is emerging as a vital focus area for today’s senior management teams. Corporations are seeking a new perspective on managing risk to gain competitive advantage rather than to just think of it as a matter of compliance, which most corporations already understand well. However, it is now essential for corporations to expand their existing risk management perspective to embed it more fully into downstream operations and execution level decision-making.
The complexity and velocity of change in an increasingly interdependent world are the key drivers for this new way of thinking. The context for decision-making has evolved and in many cases has been altered in revolutionary ways. In the decade ahead several known and unknown transformative forces of environmental, geopolitical, societal and technological shifts will be more rapidly and intensively shaping the business world. The more complex and interlinked the economic systems are, the greater the risk of systemic breakdown, but also the greater the potential for businesses to take advantage of growth opportunities. So, what should organizations do?
These shifts force organizations to think about risk at the enterprise level, rather than just as executive level responsibility. A forward looking and value-oriented analytical framework is the key to success. Organizations amass significant amount of data and insight from their operations and markets which they can use to discover emerging trends and opportunities for future growth or threat. This challenge requires risk management to become part of day-to-day operations.
Organizations need a different way to benchmark their risk management capabilities. This new benchmark approach should consider the organization as an organic system and pay more attention to relations between its innovation, supply chain, and other critical capabilities as well as the development of talent. All the core capabilities necessary for business success now need to be more dynamic, as they are more exposed to global threats. Competition has become more global, rapid, and adaptive. As a result, innovation is no longer a sole safe haven by itself, because new business models quickly render recent innovations obsolete. More than ever, complacency is a much bigger threat to long-term sustainability.
Organizations must become truly value-oriented from the top to the bottom and leverage more analytical tools and frameworks to identify, understand and choose the right type of risks, risks that are in line with the organization’s capacity and capabilities. As organizations make such choices, another critical part of the analysis is the talent. The business must ensure the preparedness of its key talent to respond to challenges ahead by providing the right tools and opportunities for learning new skills. A good example of this is the popular domain of Big Data. Typically the challenge is not about lack of data, but centers more around lack of skills and limited or no access to the appropriate tools needed to draw insight from the sea of information that each business has. Another important aspect is the streaming or moving nature of data as opposed to static status that most professionals think about it. As such old methods for data governance such as compliance, audit, privacy, security have to be revised. Also streaming data will bring forward new potential risks which can be very costly to the business.
Finally, a typically unnoticed issue is the problem of consistency. Businesses are usually not patient enough to follow ERM processes to maturity to see whether an approach is fruitful typically stemmed from the “cost center” label associated with ERM teams rather than a “core capability”. Another issue with consistency is the application of tools and frameworks across the organization and learning. Here, a lack of consistency not only limits understanding of opportunities but also hampers wise opportunity selection. Making a wise choice is particularly important in selecting the organization’s risk appetite. Organizations should not ignore the opportunities that are initially difficult to analyze, but they should keep aware of trends in these areas and adopt an options-based approach to it. Curveballs are not uncommon in business, and history is rich with corporate failures as a result of unexpected events, rather than incompetent management. Managers do know that no matter how well they manage typical categories of risk, a “black-swan” event can test the resilience of an organization. However, a business can use ERM to increase its capacity of resilience, increasing the chance that they can remain a going concern after competitors have failed.
Please join our Executive Dialogue series to find out how senior executives and industry leaders are approaching to this strategic opportunity. Our next series is on “Big Data and Cybersecurity”, scheduled on October 14, 2014.