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Risk management: Driving value from a long game approach
Date posted: Sep 23 '11 Posted By: Gillian Weatherill Comments: 0
Can a firm ever demonstrate the benefits from an improved approach to the management of risks?
If risk management is undertaken effectively, then proving it to an outsider is problematic because it should be invisible.
It should become part of the firm’s DNA and simply the way business is done – reflected in the effectiveness of management doing the right things. At a basic level, risk management is simply there to support decision making, allowing opportunities to be seized and value created.
Of course, better decision making will not totally prevent things going wrong.
However, a robust risk management framework provides a logical and structured means to ensure that when decisions are made, an organisation is properly cognisant of the effect of the uncertainty it faces in relation to its objectives and takes the best possible action to ensure that the risks are within the tolerance it has set.
The true output of effective risk management is a successful organisation that delivers on its strategic objectives and satisfies the needs of key stakeholders - consistently, year on year.
As such, you can only show how effective risk management is after some time.
In the short term we could consider our risk management effectiveness by our ability to adopt good practices. This can take two forms and the most prevalent is the ‘compliance’ or ‘rules-based’ approach. The recent banking crisis highlighted the flaws in this method. If tasks are undertaken for the wrong reason, it can prove a distraction to core business activities and a drain on resources.
Firms taking the rules-based approach could miss out on the benefits achieved by others who are doing it for the value-add and building sustainable competitive advantage. I believe the focus should not be “how well we comply with rules, standards and regulations”, but “what is the long-term effect?”
In 2008, HML started a journey to ingrain a new approach to risk management. In spite of the financial difficulties experienced in our market, significant benefits have been achieved which have made a difference to HML’s bottom line:
· A 94% reduction in the value of errors
· A 63% reduction in the volume of errors
Risk is an inevitable part of every organisation. By using an integrated and proactive approach to managing risk, negative consequences can be controlled and opportunities for growth and success exploited.
Risk management should be about building confidence and gaining competitive advantage by minimising unwanted process variation, controlling failures, realizing corporate objectives and improving organisational value.
And if it goes really well, no-one will ever notice.
