Strategy For Funding Risk Management Departments

Organizations want risk managers to focus on reducing costs of doing business, especially the regulatory costs. However, when risk managers ask for resources and budgets for running the department, they have to compromise. Lack of budget is generally the main cause for not implementing enterprise risk management, doing strategic risk management, building a risk management culture and providing consulting.

Generally, the budgeting process starts in the last quarter of the year. When the budget committee is approving other revenue earning departments budgets, risk management department heads present a cost budget. This does not go down well with the budget approval committee. They cut ten to thirty per cent of the budget despite risk managers giving valid justifications.

After budget approval, risk managers spend the year trying to squeeze in as much as they can. Sometimes it results in limited coverage and high stress levels for risk managers. With the increasing focus on risk management, the heads of risk management departments need to form a strategy to obtain the required funding. Look at the tips below to navigate the tricky budget approval process.

1. Start at beginning of current year

Start preparing for next year at the beginning of the current year. Identify the long-term and short-term projects. Commence influencing the key stakeholders of the long-term projects from the first quarter of the current year. If risk managers are the last one to submit their budget, they are unlikely to get heard.

2. Analyse the reasons for past failures

Assess the reasons for non-approval of the budget in previous years. Was it because the management thinks risk management is unimportant, is concerned about costs or it harms the interests of the key political players in the organization. After determining the reason, formulate strategies to change the mind-set for next year’s project approval.

3. Build relationships with key political players

Chances are that risk managers focus on the budget committee members for approval. Instead, identify the key power holders within the organization. Identify their relationships with the budget committee members. Before influencing the budget committee members, build relationships with key power holders. Get their support for the risk management function by understanding their drivers and motives.

4. Participate in business strategy formation

Involve yourself with the business strategy group. Identify various risks of the changes in business strategy and recommend the mitigation costs for the same. Attempt to incorporate the risk management budget in the strategy implementation costs. Align risk management budget with corporate goals and strategy.

5. Calculate the Return on Investment (ROI) for various projects.

Robert Biskup wrote an excellent article on Corporate Compliance Insights – “Making the Bottom Line Case for Compliance: The ROI of a Robust Compliance Department”. The nine points give superb ways of calculating ROI. Use the methods to negotiate with the business teams as the department can give a clear demonstration of cost savings or profit earnings. Do ROI calculations for previous years’ projects to demonstrate the value that risk management departments brought to the table.

6. Make business teams bear the cost of the project

For the projects, identify the stakeholders in the business teams. Categorize the projects as critical, necessary and optional from risk management perspective. Sometimes, risk managers spend time doing optional projects at the expense of critical projects, as they cannot refuse powerful business heads. In such cases, present the advantages of getting the assignment done. If possible, check whether business team will merge the cost of desirable projects in its budget next year rather than have it in risk management budget.

7. Build flexibility in budgets

The budgets go haywire when unexpected risks arise or regulations change. Suddenly risk management departments are in fire fighting mode and regular work is ignored. That is bad for business, since other critical risks remain un-monitored. Hence, estimate different cost budgets with probability of various risks and disasters occurring. Present these as contingency budgets to the management and take advance approval for the same. Risk mitigation efforts are delayed when risk managers take approval after a disaster has occurred. Revise the budgets quarterly as the business budget changes.

Closing thoughts

 Generally, risk managers have a financial background so they are outstanding at preparing the budgets. However, problem occurs when they do not have the negotiation skills and political strategy in place. Last quarter efforts do not work because everyone is on the same bandwagon. Gain a head start by starting in the first quarter itself. Be the first one to get the required approvals, so that the function gets what it wants.

Related article: Political Strategy for Risk Management



2 comments on “Strategy For Funding Risk Management Departments

  1. Key point: The “Risk Management Budget” should not be just yours. In fact the thinnest at the top organization works the best. Every business leader who manages a net profit line should have a rosk management line to allow for INVESTMENTS in processes that will protect and perhaps enhance his net profit. This line aould include contingency planning, business risk manegemnt, and regulatory compliance. This enforces the decision to fund rosk management down to the manager who is going to feel thepain if they did not prepare.

    Jeff Stern
    Eagle Business Solutions

    • Thanks Jeff. I agree with you, that as risk management is the primary responsibility of the business teams, they should include it in their budgets.


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