Risk management - Demystifying the concept
Everyone around the world has been managing risks all their lives. The only difference is in the complexity of the risk managed, and the tools and techniques used to do it. In day-to-day life, people manage a variety of risks like buying the right items, selecting the right education options, selecting the right job profiles, managing relationships, etc. Thus risk management is an essential and integral part of our lives. However, as most people haven’t gone through a formal education process to learn risk management techniques, it seems like an alien concept.
In the same way, all organisations around the world, irrespective of their product, market, tenure in the industry etc., need to manage their risk effectively to ensure successful business. The scale and complexity of risks being managed change drastically in a commercial setup due to the potentially high financial impact arising from an inability to manage business risks effectively. Today the risk management market is evaluated at over $40 billion, with large corporates spending ~ $25 million per year to manage their risks effectively. With growing economic instability and cutthroat competition, the need for efficient risk managers is going up significantly, and it is a skill set that is becoming extremely marketable due to high demand and limited supply. The reason for limited supply is the absence of a global curriculum which trains people on risk management techniques and equips them to help organisations save millions of dollars. Currently, this market is being served by leveraging the experience of tenured risk professionals who themselves have probably learnt it on the job. However, this is not a sustainable model, and its impact is being felt across the corporate world, with so many large organisations falling short of their targets or scaling down to due to ineffective management of their business risks.
It’s important to understand that risk management is not limited to only managing financial/credit risks. Effective risk management cuts across all business processes of an organisation like manufacturing, HR, inventory, procurement, marketing, IT etc. and helps an organisation in managing operational, regulatory, and compliance risks in addition to financial risks.
Role of risk management in growing economic instability
In today’s day and age, businesses need to be equipped to ride the strong economy and also to manage the challenges of a slow-down which in turn hurts the business. With current stock market fluctuations, credit market crashes, currency fluctuations etc., economic instability is a concern for all businesses - small, large, and start-ups - as it reduces the flow of money in the economy and starts impacting the business operations. Robust risk management frameworks help to build a strong governance environment in an organisation, which in turn helps the management take risk-intelligent business decisions, thus helping organisations navigate through difficult times.
In a strong economy, businesses usually go for aggressive expansion plans, invest capital to expand, recruit more manpower to deliver, add product lines, expand retail space, add more geographies etc. However, in a slow economy, most of these businesses are in the news for scaling down operations, down-sizing teams, closing regional offices etc., as effective risk management was probably not implemented while riding the strong economy. We have recently heard similar things for large Food Tech aggregators, large car manufacturing companies, large office stationery retail chains in the US, and many more. A smart risk manager designs and implements a risk management framework which crosschecks and validates all business information through extensive business process analysis and data analytics to ensure that risk intelligent decisions are taken. Risk managers effectively become a critical business information line to top management, which helps them take decisions that help the organisation navigate and grow through economic instability.
A risk manager does the following key activities on a regular basis to ensure that the business has strong operating fundamentals to navigate through the economic instability:
- Develops a risk library of all risks an organisation is exposed to - strategic, operational, regulatory, compliance, and financial
- Designs robust control frameworks to avoid business breakdowns, pilferage, inefficiencies, etc.
- Analyses business processes and related data to ensure critical business matrices are catered to
- Supports management in taking risk intelligent decisions to ensure business value maximisation
- Conducts periodic reviews to ensure all processes like manufacturing, procurement, finance, human resources, payroll, sales, and marketing etc. are working as desired
In fact, the risk management industry grows well during economic instability as everyone tries to engage them to help them sail through the difficult phase.
Risk managers are able to deliver time and again for the business as they are equipped with specific skill sets like:
- In-depth knowledge of business value chain - the ability to understand and identify improvement opportunities to drive efficiencies across business processes
- Enterprise risk management - the ability to understand and analyse risk, velocity of risk etc. at an enterprise level
- Analyze and interpret big data - the ability to analyze data across business value chains like procurement, manufacturing, finance, etc. All these analyses are used as critical inputs by management for taking key strategic decisions.
- Manage cyber risk - the ability to design controls to avoid cyber attack in the day and age of rapidly growing online businesses
- Manage technology risk - to ensure confidentiality and integrity of critical business information
- Regulatory and compliance risk management - with rapid growth and far-flung, multiple geographical operations, ensuring compliance with regulatory across locations