Risk Management Version 3.0

RM tiger

The business world is changing so rapidly that companies are either not willing to publish growth predictions or they are getting it wrong. In this new world trends can’t be analysed from historical data. The best business analytic teams fail because the new business models have totally different risks. Moreover, now the risks are interconnected and can’t be addressed separately. An operations risk may have a huge impact on financial risks.  The old compasses are useless and most are walking on uncharted territory.

This is the ideal time for risk managers to shed their old avatars and  become new super heroes of business. First they have to get out of their comfort zone of addressing internal risks that are preventable. The compliance and control based approach leaves over 60% of the risks un-addressed. If we consider that Risk Management version 1.0, we need to rapidly move to Risk Management version 3.0.

So what does version 3.0 look like?

1. Focus on Strategic Risk Management

I consider Enterprise Risk Management frameworks approach as Risk Management version 2.0. Though they covered strategic risks the focus was on finance, processes and technology. Hence, in reality it has become a bottom-up approach though the initial purpose was to make it top down. Risk managers are still not involved at strategic level and it is the Chief Strategy Officers who are analyzing strategic risks.

My guess estimate is that we depute less than 10% of resources to strategic risk management. We need to put in processes and resources where approximately 25% of efforts are focused on strategic risk management. Strategy failure probability has increased in present business environment.  For managing strategic risks reduce  probability of occurrence of assumed risks and effectively manage them if they occur.

2. Focus on Human Behavioral Risks

Industrial age focused on mechanization and streamlining of processes. Products were produced on the assumption that human behavior can be straight jacketed. In the age of technology and social media, this assumption has proved false.  Social media and data analysis allows behavioral analysis of each individual.

Secondly, the bigger challenge the world is facing is of changing demographics. In the last few decades, the average age has changed from 60 years to 75-80 years. The older generation lives longer and works longer. The Gen Y is entering the workforce with different expectations. Women have not only broken ground in the corporate world, but have become main decision makers for household purchases. Emerging market customers and employees have different behavior patterns.  The leadership skill sets have changed drastically. Participative and consultative cultures are more successful now.

Therefore, whether an organization wishes to fight  war of talent or entice customers, understanding human behavior has become crucial. Each segment of employee, customer and other stakeholders present different risks which an organization needs to manage successfully. Without addressing these risks at strategic and operational level, an organization is unlikely to succeed.  Risk managers traditionally haven’t focused on people, leadership or culture risks. In this century they need to.

3. Integrate Risk Management Knowledge & Resources

The traditional approach of having different experts of financial, operational and other risks in separate departments and addressing each risk in a linear manner is redundant. Moreover, now businesses are significantly exposed to external risks, which was not the case before. The Vodafone and Nokia tax cases are prime examples of risks occurring due to change in government stance.

Risk Management version 3.0 requires integrated risk management where risk managers with diverse skills can assess inter-related risks – internal and external. Secondly, risk managers have to be available within the business and as a separate department. The risk managers operating as part of the business unit need to identify the business risks and update the risk management department. The department needs to devise holistic solutions.

The risk management tools, technology, processes and resources all need to restructured to operate in an integrated manner at all levels.

Closing Thoughts

I suspect, group think is prevailing among risk managers. No one wishes to be a bull in a china shop and say – “hey this isn’t working.” It is ironic that risk managers are not doing adequate risk management of their own role and function. Old habits die hard and getting out of the comfort zone is scary, but I think we need to do it. Else, business failures are going to increase at a high rate. In the current economic environment, we can’t afford those losses. Think about it and share your views.

Wishing all my readers a very Happy Holi.

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2 comments on “Risk Management Version 3.0

  1. One major risk not discussed enough is #3, Integrate Risk Management Knowledge & Resources. Most companies live in the world silos that exist between the management systems. I recently wrote a book entitled “Competitive Advantage: Linked Management systems” which discusses linking quality, finance, Environmental and IT.

    I’ll be happy to send files describing the book and the advantages of linking: send me an e-mail at sandfordl@msn.com. It includes case studies of companies that have linked their systems.

  2. Yes Sonia you’re so right here! Focus on what is possibily limiting the organisation to reach it’s goals. If this is missed or ill (risk) managed, a company will probably not survive.

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