In my first post analyzing NC State’s latest State of Risk Oversight report, we discussed how more organizations are designating a Chief Risk Officer.
In this post, I want to take some time to discuss another significant observation from this year’s survey – the volume and complexity of risk.
The ERM Initiative in partnership with AICPA surveyed organizations across four groups (large organizations, publicly-traded companies, financial service entities, and nonprofits).
One of the main questions in the survey focused on uncertainties in the business environment, or more specifically:
To what extent has the volume and complexity of risks increased over the past five years?
Of 445 participants, 59% answered either “mostly” or “extensively.” If we add “somewhat” in the mix, the total number jumps to 91%!!!
In a way, this shouldn’t surprise us at all…
Just a quick glance at the news shows a world in turmoil. Technological change, economic uncertainty, government shutdowns, extreme weather events, terrorism, cyber-breaches, record low unemployment in the U.S. and countless other issues combine to make the path forward quite uncertain, or at least tumultuous, for most organizations.
To get a better understanding of specific risks, this year’s survey listed several potential issues and asked organizations to indicate their level of concern for each.
The top risk issue organizations are “mostly” or “extensively” concerned about is their “ability to manage leadership and talent needs” (48%). This is likely due to current low unemployment and the organization’s concerns about attracting and retaining the right leadership and workforce. In fact, in another study from late last year, succession planning and talent recruitment and retention was the second highest risk for over 800 organizations around the world.
Large organizations and nonprofits had the greatest concern about this type of risk, which is confirmed in conversations I have with clients and other ERM professionals.
Another top risk organizations are concerned about, especially financial service firms, is “the impact of the economy, interest rates, currencies,” which is surprising considering that the economy was pretty far down the list of concerns for executives heading into 2019.
I also find it interesting that “social media harming the organization’s reputation and brand” ranked pretty far down the list at only 30%. The one exception to this particular category was nonprofits who listed this as a top concern next to leadership and talent needs.
LogicManager has adopted the term “see through economy” to describe the transparency that most, if not all, organizations are subject to now due to social media and technology. They have created this infographic on the topic if you want to learn more. Based on what I have seen, I believe that organizations tend to downplay this risk until they get hit with something, like Samsung.
The increasing volume and complexity of risks are also translating into operational surprises…
Participants were asked:
To what extent has your organization faced an operational surprise in the last five years?
While a low number of organizations in the entire sample report an “extensive” impact of a surprise risk (9%), a clear majority answered “mostly” (24%) or “somewhat” (35%). Put together, this represents 68% of respondents claiming to feel the effects of a risk event, be it some sort of disruption from a competitor, a systems breach, or any number of possible scenarios.
What do results about the volume and complexity of risks suggest?
One answer, as the report explains, is that these results clearly demonstrate the need for organizations to be proactive so they can be as prepared as possible to manage a particular risk should it occur.
Despite the obvious need for effective risk management practices though, less than 25% of organizations in this year’s survey claim the level of maturity in their risk management processes is “mature” or “robust.”
In my experience though, you don’t prepare to manage risks.
Rather, you can choose to manage the risk proactively or prepare to act when the risk becomes reality.
Do you ever get tired of reacting or putting out fires?
In my initial conversations with organizations seeking help with their ERM processes, this is a common theme that I hear. The Board, executives, and middle management all get sick and tired of diverting time and energy away from pursuing their goals, and more fundamentally, the purpose(s) for which they endeavor each day.
If I could wind back the clock, I would tell each and every organization they should instead take the time now (…and fewer resources) to develop processes to identify, assess, report, and manage issues that present a risk to them achieving their objectives.
It is similar to a bow-tie analysis, in which you identify a risk, but then you backtrack and ask about the root cause (the issues) and what you are doing to reduce the chances of the risk occurring. Then you can develop post-reality action plans to address the specific consequences you anticipate for the organization.
In doing so, you may also discover opportunities along the way to either reach a goal faster or have a bigger impact.
Are you feeling the volume and complexity of risks for your organization are increasing?
How well is your organization aware of and managing potential disruptions to everyday operations and/or the pursuit of strategic goals?
I’m interested to hear your thoughts on the volume and complexity of risks facing your organization or industry. Please feel free to leave a comment below or join the conversation on LinkedIn.
And if you are concerned that your ERM processes are not sufficient to deal with an increasingly risky business environment, or you are struggling to help executives understand the value of not waiting until something happens to act, please don’t hesitate to contact me to discuss your specific situation today!
