Published on: 28-May- 2012 | Comments: 0
Many companies are changing the way they view the role of risk management, increasing their expectations of what the function can and should provide. Senior leaders generally are looking to risk management to help inform their organizations' strategic planning efforts.
Whether it’s through the creation of broad-based risk committees, the effective and innovative use of risk data and analytics, or the application of a deep knowledge of the industry and the business, they want risk managers to become more strategic.
One way to advance strategic risk management is through broad-based (cross-functional) risk committees. By looking at existing and emerging risks through the wide lens of a risk committee, companies gain a deeper view of which risks are most likely to affect their success, and where they should be focusing resources.
Just over 60 percent of companies now have such a committee, according to Marsh’s recently released 2012 Excellence in Risk Management survey. And the number is likely to keep growing as more than 40 percent of those that don’t have one said they should.
Among companies that had a risk committee, fully 90 percent said they are effective, with 35 percent saying they are "very effective." We asked some respondents why their risk committees are so effective. According to the risk manager at a Fortune 500 technology firm, buy-in from top management was a key.
"People at a high level within the organization are committed to making it work. They take responsibility for the action items, and are committed to doing the activities themselves—not delegating action items to junior people. They are personally involved."
Data and Analytics
The use of data and analytics in risk management is evolving. The growth in business data and computing power challenges risk managers to filter through it all and find the risk information that may help guide the organization’s strategic planning. But first, they have to understand their company’s goals, its industry, and what its senior management is interested in pursuing in order to know what analytics to run and who to involve in the interpretation. Once the goal is understood, risk data can be used strategically.
More than a third of respondents to the Excellence survey said their firms’ risk committees could make better use of analytics—such as loss simulation, loss forecasting, and risk tolerance—to become more effective. Simply providing more data, however, is not the answer. It’s all about context and adding value.
Leaders are not looking just for raw numbers. Nearly half of the C-suite respondents to the Excellence survey said they expect risk managers to provide better quantification and analysis on risk management than was the case just three years ago. That analysis must relate to the strategic goals of the organization in order to be effective. In fact, as expectations have increased, C-suite members say they are looking for greater involvement from risk management in business strategy planning more than anything else.
A Risk Management Value Proposition
We analyzed the 2012 edition of the Excellence survey against the backdrop of a trend noticed by many in recent years: In some organizations, elements of risk management are being compressed and even marginalized. Although there are many organizations at which risk management has successfully positioned its "value proposition" and connected with organizational objectives and strategic thinking, there are many others where risk management faces a critical juncture.
Risk managers need new and improved ways to demonstrate the value of the strategic contribution they make to the organization, describing the results in a way that is better understood and sought after by senior management. C-suite members are looking for and expecting strategic thinking from risk managers, but many either are not receiving or are not understanding the critical and relevant strategic connection points.
Some risk managers seem to remain focused on "gaining permission" from senior management to be involved at a deeper strategic level. At the same time, C-suite members are moving past that stage, saying in effect that it’s time to step forward and present us with some strategic guidance. At Marsh, one way we help clients move to a more strategic platform is through the application of our Marsh 3D framework. It allows clients to maximize their return on risk management investments through a structured approach that connects risk decisions with the business priorities, and supports these decisions with applied use of data and analytics.
To create a risk management value proposition, risk managers first need to align what they are doing with their organization’s objectives, including its financial objectives. In many cases, the dots are not connected between what risk management is doing and what the organization as a whole is doing. There needs to be alignment with organizational strategy.
To learn more about how companies can measure the efficiency and effectiveness of their organization’s approach to risk management, join Marsh’s upcoming New Reality of Risk webcast, “Strategic Risk Management—Taking Action,” on Wednesday, June 20, at 11:00 a.m. (ET).
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