Should Risk Managers Get Into Strategic Risk Management?

As we look at Strategic Risk Management (SRM) from different lenses, the one key question which risk managers would be thinking  is – whether they should bite the bullet or sit on fence and watch the events unfolding before making a decision. The general hesitation on entering into a new field, reframing strategy or re-engineering processes is that one isn’t certain of what one will reap. The second aspect is that risk managers already have a lot on their plate, so does it make sense to add on more. Lastly, not much information is available on SRM and a little learning can be a dangerous thing. Risk managers’ interventions and assistance may cause more problems than provide solutions. My opinion is jump into the fray and here are the reasons for it.

The first aspect to analyze is the value-add risk managers can give by taking up SRM. Would a fresh pair of eyes looking at business strategy benefit the organization? I read “The McKinsey 2010 Strategy Survey” results to understand the status of business strategy within organizations. The results show that most organizations are doing a pathetic job in forming business strategies, the processes are woefully inadequate and a big push is required in the direction. Here are some details of the survey:

1.    Status of Corporate Strategy Development Process

As per the survey results only a minuscule 6.5% of the participating organizations were “effective developers of strategy”. These 6.5% respondents say that their companies follows a consistent strategy development process, management spends time in developing strategy, frequently reviews strategies and successfully implements them.

The challenges mentioned are:

–       20% of organizations view corporate strategy development as an aggregation of business unit strategies. Management does not make any exclusive effort on building a corporate strategy.

–       Just 8% of the respondents stated that their organizations review strategies on an ongoing basis. In 42% cases, the organizations were not conducting annual reviews of strategy.

–       Approximately 14% respondents said that their senior management spent 15% or more of their time in strategy development. In the balance, the time spent was much lesser.

I had mentioned in my earlier post that there is a huge opportunity for risk managers to form processes for strategy development in an organization. Across the board, this looks like corporate worlds Achilles heels.  Risk managers can put their organization ahead of the curve by leading the initiative.

2.    Components of Business Strategy

 One of my grouses is that whenever “business strategy” is mentioned, normally corporate world inhabitants think of financial projections and numbers. Business strategy drivers are customers, suppliers, new competitors and new products and these four can make or break the organization however organizations don’t focus on these. McKinsey survey results show the same. Here are some of the issues:

–       Interestingly respondents coming in “effective development strategy” group consider macro level trends the most important, followed by performance of overall portfolio and industry dynamics,  and rank financial projections fourth. However, other respondents consider financial projections the most important.

–       Competitors strategy, operational benchmarking, human resources and legal compliance still are not considered of significant importance by both category of respondents

It looks simple, to get ahead of the pack in strategy development, organizations can start focusing on business aspects of the strategy besides the financial numbers. Risk managers can contribute by doing knowledge management on these aspects. They can do market surveys, business impact analysis, test marketing, market research etc. to identify areas for exploiting risks to add business value.

3.    Implementation of Strategy

 Strategic failures are largely of two kinds – either the strategy was poor or the implementation was poor. A significant number of strategies fail because senior management did not remove the roadblocks for implementation. The organization structure, processes, resources remained the same while strategy changed drastically. Hence, the gap in strategy and operational execution widened.

Larry Bossidy in the book “Execution – The discipline of getting things done” in introduction says, “My job at Honeywell International these days is to restore the discipline of execution to a company that had lost it. Many people regard execution as detail work that’s beneath the dignity of a business leader. That’s wrong. To the contrary, it’s a leader’s most important job.”

Just to highlight the dismal situation I am going back to McKinsey Survey results. According to it, 32% of effective development strategy group states that they have no barriers to implementing strategy. That means, even in effective development strategy group, around 68% do face problems. The situation is far worse for other respondent group. A minuscule 11% states that they have no barriers.

Secondly, 32% in effective group and 51% in other group state that decision makers are averse to taking risks and see emerging business opportunities as riskier. Now this is a clincher for risk managers to participate in SRM. First, risk managers can offer better information and analysis to the decision makers on implementation challenges. Second, they can do continuous monitoring of risks during implementation. The decision makers will be more confident to exploit opportunities.

Closing thoughts

It appears that organizations are failing the acid test of building robust corporate strategies. On a lighter note, their strategy seems to not have a strategy. It is huge opportunity for risk managers to add business value, and turn themselves to profit adding resources from cost centers. The next big question is the knowledge and skills required for strategic risk management. I hope that in the next few posts I can shed some light on these aspects.

References

 McKinsey Survey: Creating more value with corporate strategy

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