Risk Managers Must Adapt To Emerging Risks and Create Value

The global economic environment is increasingly becoming volatile and high risk for businesses to operate in. A wide array of new enterprise risks are constantly emerging and threatening the survival and growth of their organizations.

These wide-ranging risks include financial risks, strategic risks, operational risks, regulatory or compliance risks, value and supply chain risks, human capital risks, political risks, technology risks, environmental risks, reputational risks etc.

In these challenging times, risk leaders need to see through their organizations, move with speed and adapt to the new world of risk management.

They must make significant changes to their risk management approaches.

To effectively connect the dots of risk across the enterprise, senior executives and their boards need to take a holistic view of enterprise risks and continuously monitor these risks.

Enterprise Risk Management (ERM) gives senior management that required holistic view of organizational risks. It is no longer advisable for management and boards to consider risk management as a review process that is conducted once or twice a year.

Instead, management need to monitor and address risks on a continuous ongoing basis.

The increased use of internet by organizations to communicate and carry out business has both its perils and benefits. As more and more organizations increase their online presence via social media usage, this presents new challenges.

For most companies, they now have an online presence on Twitter, Facebook or LinkedIn.

These platforms are making it easier for various companies to market their products or services, reach a wider audience, tap into existing and potential customer’s conversations and devise winning strategies that create and add value.

Social media has the potential to magnify the threats from an array of risks. For example, some companies have suffered severe financial losses as a result of confidentiality breaches and malicious rumours spreading.

Social media conversations spread like a wildfire, especially negative company news, and this has a crippling effect on the organizations.

It is therefore critical for business leaders to have an effective social media strategy and know what is being said about their products, services, markets and employees on these platforms.

Adapting to the new world of risk management requires senior management teams to stop paying lip service to risk management and instead elevate risk profile throughout the organization.

There is need to close the fundamental gap between thought, talk and action among risk managers across all industries. This means creating risk awareness where everyone is accountable or takes ownership of risk.

An individual’s ownership of risk depends on awareness which in turn predicts the effectiveness of the organization’s ERM program.

Unfortunately, for the majority of organizations, people are unaware of what they need to do concerning risk.

The starting point in successfully creating a risk aware culture involves the management team changing their risk philosophy and making sure that everyone within the organization clearly understands the true meaning of ERM.

Enterprise risk management is not just about risk mitigation or value protection but also a value creation process.

With regards to risk conversations, these should not only happen in hallways, canteens or at photocopy machines but should be presented on the table.

We now live and conduct business in a more complex and connected world. As such, discussions on risk management must lead to the identification of opportunities that actually turn into business improvements.

Providing additional training for staff also help create risk awareness within the organization.

Having a formal risk management process allows senior executives to take ownership and accountability of risk management. In today’s uncertain environment, risks should not be managed on an ad-hoc basis.

A centralized risk management model adds more value than a decentralized one. Centralization helps management identify key organizational risks through both a top-down and bottom-up process.

When risk management is provided from top-down, individual managers become more responsible of managing, monitoring and measuring specific risks.

In such companies, they have formed a risk analysis team that is dedicated to analyzing risks as they start emerging and this team regularly interacts with a cross-functional team of senior leaders that provide feedback and test assumptions.

Because the risk environment is constantly evolving, it is imperative that risk leaders re-evaluate their current risk management or ERM programs and benchmark these against leading practices.

It could be that your current practices are outdated and need incorporating new analytical technologies. A more holistic view is required to manage risks effectively across the enterprise.

It is important to intelligently assess and identify emerging risks and choose the focus of the ERM program.

Being complacent about your ERM program will not help you drive your enterprise’s performance. Continuous improvement is critical. An effective ERM program identifies and prioritizes risks based on the organization’s strategic goals.

As the economic climate continues to change and volatility increases, risk monitoring should shift from a backward-looking approach to a more predictive continuous ongoing process.

Key Risk Indicators (KRIs) can be used to identify potential changes in the organization’s or business’s risk profile.

By investing in analytics that can leverage vast amounts of data, the organization will be able to gain better business insights and improve its risk management.

It is also important to note that automation alone will not answer all your risk related questions.

There is still the need for social interaction and oversight. Interpersonal conversations are more meaningful and productive.

Some companies have benefited by participating in more networking and peer discussion opportunities that discuss leading risk management practices.

When adapting to the new risk management world, it is important for management to remember that risk management approaches vary considerably by industry.

Because of different perceptions of risk, different allocation of resources and different organization of the ERM process, there is no “one size fits all” risk management model.

The accepted practice and program must align with the organization’s management system and rooted in the DNA of the business.

Investing in ERM may look like a losing proposition but in actual fact, it is not. Taking swift action can help your organization stay in the headlines for only the right reasons.

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The Art of Risk Management

This is the title of the article by BCG published a few years ago. The article discusses the principles that should govern the approach to risk management by companies of all shapes and sizes.

The authors make several points with which I agree. Here are some excerpts:

  • Risk management is essential in today’s volatile economy. In a continuously changing economic environment, companies cannot assume a stable risk landscape.
  • Stop thinking of risk management as primarily a regulatory issue. Embed risk management in the mindset of the broader organization.
  • Risk management is a value-creating activity that is an essential part of the strategic conversation inside the company. The goal of that discussion should not be to eliminate or minimize risk but to use it to create a competitive advantage.
  • Risk management starts at the top. The organization needs to demonstrate that it has made risk management a high priority and an integral part of the decision-making process by appointing a dedicated risk leader who reports back frequently to the CEO and the board to discuss the latest trends and any changes in the company’s risk scenarios.
  • Risk cannot be managed from an ivory tower. Risk Management should not exist in isolation from the rest of the organization, with an insufficiently granular understanding of the actual business-specific risks the company faces. To avoid this outcome, integrate risk management into the company’s entire routine management processes, including planning, capital allocation, controlling, and reporting.
    • Understand the scope of the risks the company faces.
    • Plan for how the company will manage those risks.
    • Act to mitigate the risks or take advantage of strategic opportunities.
  • Avoid relying on black boxes. Although sometimes appropriate, over-reliance on complex metrics or models can muddy the risk management process, turning it from a transparent management activity into a frustrating black box. The appropriate level of complexity is company-specific and depends on the industry, business model, availability of data, level of experience, and mandatory legal requirements.
  • Align risk management with a company’s overall business strategy. Companies need to identify all relevant risks – not just those that can be easily quantified. Some of the relevant risks for a company may be those that are qualitative and especially difficult to quantify.
  • Risk management is more than a policy; it is a culture. The objective of a company’s risk-management system should be not only to enforce new policies but also to create a risk-aware culture that addresses risks proactively, not reactively, and manages them to create new sources of competitive advantage.
  • Effective risk management depends on the free flow of information throughout the organization. Unless employees at all levels of the organization are actively involved in the risk management process, it will be difficult to maintain the unrestricted flow of information. This can result in the most important data getting buried in one part of the organization unavailable to other parts of the business.
  • Risk management deals with uncertain futures. As a result, the goal should not be to develop precise metrics or future outcomes but to strive for a general understanding of the probabilities and potential impact of various trends or scenarios on business performance and enable decision-makers to confront the uncertain nature of risk and act accordingly.
  • Risk management is never about finding “the answer.” Rather, it is about continually refining the organization’s assumptions about the future and its understanding of the implications of those assumptions for the company’s business. Assumptions about risk often change quickly, so the relevant parameters, probabilities, impacts, and correlations should be revisited frequently.
  • It is possible to prepare for unknown risks by building an organization that so excels at crisis management that it is resilient even in situations in which it is blindsided by unprecedented challenges. For example, through developing the ability to detect, capture, and exploit information patterns as well as to think outside existing frameworks and risk landscapes.
  • Avoid the downside, but don’t forget the upside. Companies should use risk management also to identify new opportunities and to exploit them systematically. For example, scenario planning should be used to define not only worst-case scenarios but also best-case scenarios. Think in advance about how a company can make the best use of the latest market developments and trends and ultimately make the right decisions.

I enjoyed reading the article and highly recommend it.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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