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| Although risk management in Ireland is treated more seriously and at a more senior level than other countries, according to a new survey by Marsh, only a small group of progressive organisations see risk strategically, or as an opportunity. Growth means taking risks and the better the understanding and management of risk within an organisation, the greater can be the return, Kieran McHugh writes. |
AA newly quoted European chemicals company recently saved €2.2 million in risk-related costs, and a European food manufacturer reduced its staff absentee rate from 9 per cent down to 4 per cent thus reducing the related costs from €13 million per annum to €7 million in one year. How did they do this?
The answer, while not simple, only required a change in attitudes. The leaders behind these organisations simply joined a small but expanding group of leaders who no longer view risk as a negative and instead view progressive risk management as a tool to deliver competitive advantage.
These findings result from the Marsh Risk Survey 2004. The survey, the most comprehensive of its kind, solicited responses in 11 countries across Europe from 950 leaders, mainly at CEO or CFO level who run businesses or public utilities with turnover between €30 million and €300 million. Overall the key result of the survey is that businesses can improve competitiveness and achieve business goals by rethinking their approach to risk management.
While the survey shows that risk management in Ireland is treated more seriously and at a more senior level than other countries, it is clear that the European business landscape is as unpredictable as ever. With an enlarged EU, a recent history of severe and destructive weather, tough economic conditions and the spectre of terrorism ever present, today’s business leaders must be able to manage a great deal of uncertainty to maintain growth.
But in the survey fewer than half of respondents feel confident in the robustness of their response to risks that are most threatening to their business. The majority still focus risk management on traditional areas of hazard and financial risk that are already well managed and as such are no longer of such significant concern. For example:
• Seventy-five per cent of organisations have invested in robustly managing the risk of serious employee injury and only 35 per cent of organisations believe this presents a significant risk
• Fifty-four per cent of organisations have invested in robustly managing the risk of non-compliance with tax laws and only 23 per cent believe this presents a significant risk.
In graphic terms the risks of most concern, which senior executives feel are not being managed robustly are:
• While 60 per cent of organisations are reviewing risk more frequently now than they did two years ago, they are not necessarily focusing on risks of greatest threat to their future success.
• The significant financial impact of these threats is clearly evident. In the Fortune 1000 in 2001 of 100 firms who suffered a 25 per cent drop in their share price, over a third of these stock drops were attributable to changes in customer demand and increased competition. Only six per cent were attributable to either financial or hazard risks.1
Attitudes to risk are changing
The survey shows that it is possible to classify organisations by their attitude to risk in two broad groupings - the conservative majority, and the progressive few.
The conservative majority
The majority of organisations across Europe still consider risk a barrier to business success. In essence, risk is seen as:
• Buying insurance or other financial instruments to hedge risk
• Controlling creditors and managing debtors
• Meeting technical regulations
• Protecting assets
Typically in these organisations:
• The finance director reviews risk annually or on an ad hoc basis post loss
• Hazard risk is devolved to a lower level of administration or financial management
• Risk management is not integral to the running of the organisation and is to be reduced or eliminated so as to stabilise the business rather than enable it to grow
• Risk is not addressed in a systematic manner by the organisation.
It is worrying that as many as one in four European organisations only reviews risk on an ad hoc basis, either ‘as and when’ or after something has gone wrong.
Furthermore, of the 15 per cent of organisations who declared in the survey they have suffered a loss of high financial impact in the last three years, nearly a third still have no crisis management plan.
One in four European companies suffering a high impact financial loss in the past three years still have no crisis management plan.
The progressive few
The survey indicates that only a small group of progressive organisations see risk strategically, or as an opportunity. Companies who demonstrate sound risk management understand that a structured approach to diagnosing and treating risk can be a means of securing competitive advantage. Given the benefits, more companies need to follow their lead.
Progressive organisations regularly review risk at board level and risk management is embedded in the business decision-making process. Examples of best practice include: multiple business leaders being involved in risk management, with a single individual usually the finance director or chief executive accountable for risk overall risk management receives as much senior management attention as all other business functions risk is considered not merely a means of avoiding disaster, it is a process that allows opportunity to be grasped.
Opportunities for competitive advantage
The progressive organisations realise that they can use a strategic approach to risk management to manage three critical pressure points:
• Customers
• Investors
• Growth
Customers
Increasingly, reliability of supply is a pre-requisite to securing and sustaining contracts. Being able to provide evidence that risks to supply are actively and effectively managed means organisations gain a new source of competitive advantage.
For instance, a shoe manufacturer used a structured risk management process to come to a decision about revising its outsourced international distribution strategy. The approach enabled gaps in the current distribution process that were resulting in unfulfilled orders and compromised reputation, to be identified and factored into an overall change in strategy. The decision was taken to bring back in-house all international distribution.
Investors
Shareholders, banks and other financial institutions require proof that their investments are secure. Hardly surprising, when even some of the world’s largest businesses can be found to be insolvent.
For quoted companies, there is an onus on the board to prove to investors that every risk has been addressed and that risk is factored into all business decisions. Once this level of risk management has been undertaken, it is obviously important to communicate this approach in financial documents for shareholders and stakeholders.
Growth
Risk is inherent in decisions to launch new products, enter new markets or chase market share. Broadly speaking risk is about not missing opportunities. The old adage of never taking a risk means never growing the business holds true. But it is important to remember that risk can be managed to reduce the potential downside of business decisions and increase the upside.
As the environments in which organisations operate become increasingly volatile, attitudes to risk are changing. Strategic risks, such as changes in customer demand and increasing competition, are now of far greater concern to executives than financial and hazard-based risks. Evidence from analysis of stock drops in the Fortune 1000 shows this concern is justified.
The majority have, however, yet to put in place robust risk management solutions to address these risks. Only a progressive few have grasped the strategic importance of risk management in both securing the future of their organisations and in facilitating growth.
The 2004 Marsh survey of risk concludes that the five greatest risks perceived by senior executives are:
• Increased competition
• Adverse changes in customer demand
• Reduced productivity due to staff absenteeism and turnover
• Losing key staff to competitors
• Changing demographics
Yet in each case, less than half of those surveyed are adequately prepared to deal with them. While so many organisations still consider risk management in the narrow confines of mitigating financial and hazard-based risk, opportunities abound for more progressive organisations to exploit this lack of action by their less progressive peers and competitors.
Growth means taking risks and the better the understanding and management of risk within an organisation, the greater can be the return.
1Source: Compustat/ Mercer Management Consulting analysis 2001. |
Kieran McHugh is deputy chief executive of risk and insurance specialists at Marsh Ireland.
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| Article appeared in the September 2004 issue.
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