Embracing Risk for Improved Business Performance

Barings Bank rogue trader (1995), LTCM hedge fund failure (1998), Enron bankruptcy (2001), Parmalat accounting fraud (2003), AIG accounting scandal (2005), Lehman Brothers bankruptcy(2008), Bennie Madoff ponzi scheme (2008), Toyota unintended acceleration recalls (2009) , BP Deepwater Horizon oil spill (2010), Fukushima tsunami and nuclear accident (2011), Libor-fixing scandal (2012), JP Morgan $14.6 billion regulatory fines (2013), Rana Plaza collapse (2013) and General Motors recalls (2014) are a few examples of risk management failures we have witnessed over the years.

Although the number of risks affecting the business and list of risk management failures continue to grow year-on- year, organizations are not doing enough to reduce exposure to negative events. This fact has also been highlighted in a recent 2015 Report on the Current Sate of Enterprise Risk Oversight: Update on Trends and Opportunities published by the ERM Initiative at North Carolina State University. Of the surveyed respondents, only 25 percent have mature enterprise-wide risk management process in place, 30 percent have only a partial process, addressing some but not all risk areas and 45 percent have no enterprise-wide risk management process in place. These findings are worrying, especially in today’s volatile, uncertain, complex and ambiguous business environment.

Management of risk is a fundamental and essential element in decision-making at all levels across the organization. Organizations need to rethink the way they look at risk. Instead of only looking at the downside of risks, there is also need to look at the upside of risks. This means moving beyond financial controls and regulatory compliance and spending time assessing, managing and monitoring operational and strategic risks for improved business performance. Risk management is not only about protecting the business but also about enabling business performance. Risk management must therefore be integrated with organization’s performance management activities. There is a positive correlation between financial performance, risk management and performance management. For example, a study by EY found out that companies with more mature risk management practices integrated with strategic planning processes outperform their peers financially.

Implemented properly, enterprise risk management (ERM) helps organizations create value and reduce costs. Today’s volatile economic environment is not making it easy for CFOs. They are being challenged by the board to do more with less, help the business survive and achieve targets. Faced with this challenge, the CFO has no other option but to find cost efficiencies. By implementing robust risk management practices, CFOs will be able to improve the organization’s cost structure. For example, ERM helps management to assess, manage and monitor enterprise risks holistically. Such an approach in turn helps reduce costs by eliminating duplicate risk activities and the savings gained from risk management activities can be used to fund strategic corporate initiatives and create value.

In order to embrace risk for better business performance, organizations must:

  1. Strengthen the Organization’s Risk Governance and Oversight

Enhancing risk strategy enables organizations to more effectively anticipate and manage risks proactively. In order to enhance the organization’s risk strategy, the board or the management committee must strengthen its risk governance and oversight and increase transparency and communication with stakeholders. Developing a risk governance structure includes establishing the organization’s risk appetite, defining the risk universe, determining how the business would measure risk and establishing enabling technology to help manage risk. If the board or management committee is unable to clearly define risk management objectives, this will automatically make it difficult to adopt and implement a common risk framework across the organization. Risk must be aligned to strategy. This helps identify and understand the risks that matter, invest in the risks that are mission-critical to the organization and effectively assess risks across the business and drive accountability and ownership.

  1. Make Risk Management an Everyday Part of the Business

To successfully achieve strategic and operational objectives, organizations must embed risk management practices into their business planning and performance management processes. Current information about risk issues must be included into the organization’s business planning and strategic planning cycles. By linking risk to the business planning and strategic planning cycle, the organization is able to prioritize and link the key risks to its operations and performance indicators.

  • Do you understand how the different parts of your organization fit together and the risks inherent? Risk is everywhere within the organization. You must be able to identify the connection between business, technology, processes, people and risk strategies and coordinate all the risk functions.
  • Is there a formal method of defining acceptable risk limits within the organization? Stress tests must be used to validate risk tolerances
  • How committed to embedding risk management is the organization’s leadership team? Leadership must drive the adoption of the risk management program across the organization and ensure it is effective.

Unfortunately in some organizations risk conversations are done once in a while. Risk is not embedded as part of the organization’s DNA. This must change if the organization is to become agile and respond effectively and efficiently to materialized risks.

  1. Coordinate Risk Activities Across All Risk Functions

Organizations go through various changes during their lifecycle. Some grow and diminish at an alarming rate and others remain stagnant for considerable periods. During the growth phase, various activities (risk, control and compliance) often become fragmented, siloed, independent and misaligned. The result is a negative impact on both the governance oversight and the business itself. Very often, because of this lack of coordination, costs spiral out of control and there is duplication and overlap of risk activities. When this happens, management must act promptly and address these problems to reduce risk burden, lower total costs, expand coverage and drive efficiency.

  • Monitoring and control functions must be aligned to the risks that are mission-critical to the organization.
  • Risk technology must be integrated to create visibility to risk management activities across the organization and eliminate or prevent redundancy.
  • Individuals must receive risk-related training in order to enhance their skills and promote efficiency. You need to continuously evaluate the skills gap in your organization and invest in skills development.
  • Risk consistent monitoring and reporting methods and practices must be applied across the organization to ensure all the risk functions are speaking the same language.
  1. Improve Financial Controls and Processes

Management must build optimal controls and processes that that balance cost with risk. These controls must be optimized to improve effectiveness, reduce costs and support increased business performance. If the environment is over-controlled (costs of control are too high) this hinders finance’s ability to effectively respond to changes in the competitive landscape. In this case, a review of current controls is necessary. This helps highlight duplicate and ineffective legacy controls. Investing in technology is also assisting organizations minimize the use of manual detect controls, automate controls and drive a more efficient, effective and paperless controls environment.

  1. Change the Organization’s Risk Culture

Effective risk management requires the right tone from the top. If there is no commitment or drive from the executives to create a risk aware culture, the program is bound to fail. A risk champion is required to change the way people view risks – from business protection to business support. The chosen individual must have great people and influential skills to ensure successful buy-in. During the change process, a decision might arise to invest in new technology for maximum benefits. Care must be taken that the change process or risk initiative is not technology-driven. The chosen technology must act as an enabler of change and the IT strategy must be aligned with the broader risk and business strategies.

It is critical that executives operating in today’s volatile economic environment periodically evaluate existing risk investments, move beyond compliance and focus more on strategic issues that will increase or decrease the value and performance of the business.

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Finance Analytics: It’s Not About the Size of The Data

As the need to make impactful operational and strategic decisions in real time increases, CFOs are playing a greater role in the adoption and integration of data analytics in their organizations to support data-driven decision making.

Executives and business unit leaders are increasingly relying on insights produced by Finance to better understand enterprise performance. That is, what has happened, why it has happened, what is most likely to happen in the future, and the appropriate course of action to take.

In an era where data is proliferating in volume and variety, decision makers have realized it’s no longer enough to base key enterprise performance and risk decisions on experience and intuition alone.

Rather, this must be combined with a facts-based approach. Which means CFOs must set up modernized reporting and analytics capabilities with one of the main goals being the use of data as a tool for business decision making.

Appropriately analyzed and interpreted, data always has a story, and there’s always something to discover from it. However, many finance functions are failing to deliver value from their existing data analytics capabilities.

There is a misconception that to deliver actionable insights, the function needs more data for analysis. As a result, the supply of data keeps rising, while the ability to use it to generate informed insights lags badly.

Yet it’s not about the size of the data. It’s about translating available data and making it understandable and useful.

In other words, it’s about context and understanding that numbers alone do not tell the whole story. Finance leaders should connect the dots in ways that produce valuable insights or discoveries, and determine for example:

  • What is being measured, why, and how is it measured?
  • How extensive the exploration for such discoveries was?
  • How many additional factors were also reviewed for a correlation?

Further, to use data intelligently and influence better decision making, CFOs and their teams should recognize that most enterprise data is accumulated not to serve analytics, but as the by-product of routine tasks and activities.

Consider customer online and offline purchases data. Social media posts. Logs of customer communications for billing and other transactional purposes.

Such data is not produced for the purpose of prediction yet when analyzed, this data can reveal valuable insights that can be translated into action which delivers measurable benefits.

Often the company already has the data that it needs to answer its critical business performance questions, but little of it is being aggregated, cleaned, analyzed, and linked to decision making activities in a coherent way.

Exacerbating the issue is the mere fact that the company has a mishmash of incompatible computer systems and data formats added over the years ultimately making it difficult to perform granular analysis at a product, supplier, geographic, customer, and channel level, and many other variables.

There is nothing grand about data itself. What matters most is how you are handling the flood of data your systems are collecting daily. Yes, data can always be accumulated but as a finance leader:

  • Are you taking time to dig down into the data and observing patterns?
  • Are the observed patterns significant to altering the strategic direction of the organization?
  • Are you measuring what you really want to know, what matters for the success of the business?
  • Or you are just measuring what is easy to measure rather than what is most relevant?

CFOs do not need more data. What they need right now is the ability to aggregate, clean and analyze the existing data sitting in the company’s computer systems and understand what story it is telling them.

Before they can focus on prediction, they first need to observe what is happening and why. Bear in mind correlation does not imply causation.

Yes, you might have discovered a predictive relationship between X and Y but this does not mean one causes the other, not even indirectly.

For instance, employee training hours and sales revenue. Just because there is a high correlation between the two does not mean increase in training hours is causing a corresponding increase in sales revenue. A third variable might be driving the revenue the increase.

Jumping to conclusions too soon about causality for a correlation observed in data can lead to bad decisions and far-reaching consequences, hence finance leaders should validate whether an observed trend is real rather than misleading noise before providing any causal explanation.

Certainly, big data can be a powerful tool, but it has its limits. Not all data is created equal, or evenly valuable. There are situations where big data sets play a pivotal role, and others where small, rich data sets trump big data sets.

Before they decide to collect more data, CFOs should always remember data is comparable to an unexploited resource.

Even though data is now considered an important strategic asset for the organization, raw data is like oil that has been drilled and pulled out of the ground but not yet refined to its finer version of kerosene and gasoline.

The data oil has not yet been converted into insights that can be translated into action to cut costs, boost revenues, streamline operations, and guide the company’s strategic direction.

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Doing The Right Thing For Too Long

Markets and business models are shifting, and so should you keep up with these market changes if your business is to survive and succeed. Compared with the past, the current era of digitization represents an inflection point.

Consider individual trends such as artificial intelligence, virtual reality, Big Data, cybersecurity threats, drones, the Internet of Things, driverless cars, blockchain technologies, and more.

These new technologies have significantly changed the way we connect and interact as individuals, including how businesses deliver products and services to their customers.

Reinventing your business will determine whether you succeed or fail in the digital age. As the saying goes, disrupt or be disrupted. No company, business, or industry is safe from disruption. Today, individual businesses have the potential to compete against multinational companies and win.

These businesses are quick to anticipate market changes and flexible to get ahead of the curve. Sadly, many companies are blinded by their successes and aren’t willing to disrupt themselves. They are not experiencing their desired growth trajectory because they are stuck doing the right thing for too long.

Don’t get comfortable with the status quo and allow your business to get stuck on a strategy and mindset that no longer fit the market.

Here are a few questions to ponder, the answers to which will determine the future of your business:

  • What is at the core of your strategy?
  • Are you in touch with the customers you want to serve? When customers give you negative feedback, how often do you listen and act on it?
  • Are you operating your business on the premise that you know what is best for your customers therefore they are supposed to buy whatever product or service you offer them?
  • Are you keeping up with market shifts or you only know how to grow under one set of conditions or products and services, but not how to survive and strive under another?
  • How robust and flexible is your IT infrastructure to help you innovate, perform your company’s Jobs To Be Done, and scale your business?
  • Are you creating a strong culture that is focused on customers, including a culture that not only embraces change but seeks it out?

Given our world is changing faster, it’s imperative to continuously look for signs that things are changing and think about how those shifts would play out in the short-term, medium-term, and long-term, not forgetting the impact on the execution of your strategy and enterprise performance.

The signs can reveal individually. At times, they are part of a wider trend.

Nonetheless, how you adapt will determine whether you succeed or fail. Keep learning. Learn about innovations in your industry and beyond. Try out new business models and technologies and embrace a philosophy of constant change.

Once you understand how the market is changing and evolving, you can develop the right product or service and strategy that will help you achieve your desired outcomes.

We often talk of the ability to “connect the dots” and “take a helicopter view of the business” as key ingredients for success. But how often are business leaders and their teams doing this?

Across the organization, a culture of “them versus us” prevails. Important decisions are made at a functional level with little or no consideration of their impact at the enterprise level.

Having the ability to grasp the big picture and see how different trends intersect is essential for determining the right path or course of action to pursue.

So, how do you spot market transitions and develop a clear sense of where the market is going?

  • Be curious and hungry for new ideas. Continuously ask tons of key performance questions and pay attention to what’s around you.
  • From time to time, challenge conventional wisdom. It’s easy to stick with what you know about your business model, customers, competitors, markets, or industry but dare to pivot when conditions change.
  • Don’t be nostalgic about the past or worried about protecting what you’ve built in the present. Always be curious about the future and develop a willingness to take calculated risks.
  • Ask existing and would-be customers how they feel about your company’s products, services, and strategy. Instead of turning to sources that reinforce your existing point of view, seek multiple perspectives and cross-reference them as new facts come in.
  • Develop an ability to handle multiple random data points at once. This will help you generate critical market, customer, and business performance insights and make smarter, informed decisions. Be careful to distinguish between the signal and the noise since data can be deceiving, especially when you’re looking for “confirmation” that protects your business model.

Data might not tell you why something is happening, but it does tell you what’s going on.

  • Look for patterns and abnormalities that might suggest something is going on, including any interdependencies.
  • Anticipate all the various scenarios of what could happen.
  • Plan your course of action in response to what’s happening in real time.

As the signals of a market shift increase, the need to act becomes more imperative. Note, monitoring and identifying market shifts, and effectively taking the appropriate course of action is a matter of timing.

If you continue doing the right thing for too long and lack the boldness to disrupt both the market and your own organization, you risk being disrupted and left behind. There is no company that is too big to fail. Neither is there a startup that is too small to succeed.

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How Feasible Are Your Strategic Objectives?

Every organization sets out its goals and objectives, to accomplish its mission and vision. The two often seem like two interchangeable phrases but there is a distinction.

A goal is a desired result you want to achieve and is typically broad and vague. An objective, on the other hand, defines the specific, measurable actions each employee must take to achieve the overall goal.

It is every leader’s job to create a coherent set of feasible objectives or what Richard Rumelt calls proximate objectives. Objectives that define targets the organization is fairly expected to achieve, even overwhelm.

This is essential for ensuring energy and resources are focused on one, or a very few, critical objectives whose accomplishment will lead to a cascade of positive outcomes.

An effective strategy defines a critical challenge or opportunity and clearly articulates how the organization is going to play to win or perform customers’ Jobs to Be Done.

Thus, the objectives an effective strategy sets should stand a good chance of being accomplished, given existing resources and competence.

On the contrary, a bad strategy results in the setting of bad strategic objectives.

Long lists of “things to be done,” are often labeled wrongly as strategies or objectives. Or the desired outcome is simply rehashed with no explanation of how this will be accomplished.

It doesn’t matter how well-thought your strategy is in response to an identified challenge or opportunity. If the resultant strategic objectives are merely a list of things to do, or just as difficult to achieve as the identified key challenge, there has been little value added by the strategy.

In today’s highly competitive, uncertain, dynamic, and complex environment in which a leader’s ability to look further ahead is diminished, it is better to focus on a few pivotal items through taking strong positions, creating options, and building advantage.

First identify the key challenges or opportunities for the business. Look very closely at the changes happening within your business, where you might get an added advantage over competition.

Next, create a list of the issues, including the actions your company should take.

Then, trim the original list to a noticeably short list of pivotal issues and proximate objectives by identifying one or two feasible objective(s), when achieved, would make the biggest difference. Remember, the identified objectives should be more like tasks and less like goals.

Now, focus on the objectives by channeling skills and available resources to accomplish the overall goal.

Once accomplished, new opportunities will open up resulting in the creation of more ambitious objectives. This cycle will help you develop a system that enables the setting of feasible strategic objectives.

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