Reading the trends to chart the future

The increasing competition and uncertainty in the marketplace put companies around the globe to revisit their strategies, business models and products. There is a surging belief that in order to keep the business running competitively, businesses must innovate. And to do that, organizations are starting to revisit their existing operations, redesign their processes and launch new products at competitive prices. Those that succeed in this competitive environment must have better risk management capabilities because as businesses innovate and compete, they are taking more risks.

The interesting point here is that as businesses reinvent their wheels, new risk management trends are being charted. Let’s take a look at some of the most interesting trends in risk management for the past two years.

Integration to strategic planning. Most Fortune 500 companies have started adopting the concept of Enterprise Risk Management or more popularly known as ERM as a regular top management agenda. ERM is a structured, disciplined, proactive and integrated approach to understanding and managing the company’s key business risks. A survey conducted by PwC during the 3rd quarter of 2012 shows that 43.8% of all industry sectors responded that risk management is poorly, if not, integrated to their strategic planning process (source: Risk in view: Coping with the unknown, August 2012):

Going beyond the BCP. Organizations are well-aware of the need to create back-up plans to ensure business continuity. This includes safety awareness campaign, earthquake drills, and having a well-crafted business continuity plans. But since the scenarios such as major disasters and pandemics are very hard to anticipate even by the most sophisticated ERM systems, many pragmatic executives focus their energy not on detection but on responding to each risk. The challenge is more on producing a well-coordinated, firm-level response and sustaining resiliency. In addition, BCPs are extending even outside the organization through the emergence of the supply chain risk management.

Technology as enabler. After the boom of ERPs in the early 2000’s, there is another boom coming into the picture – the ERM systems. The increasing complexity on forecasting uncertainties and integrating all risk management data from all over the enterprise prompted the call for ERM platforms. These platforms have the capability to identify and track risks, analyze and forecast, and even respond to the risks through its updated and interactive dashboards and tools. However, executives and risk management professionals argues that there is no one-size-fits-all ERM platform. The challenge, therefore, is not finding the perfect tools but fitting the tools to the risk management needs and requirements of the company particularly on the areas of vulnerability.

The importance of culture. The most brilliant solution, backed up by libraries of data and promising billions of extra profits, will most likely fail if the organization cannot implement it. It is therefore important to fit the solution to the culture of the organization. Risk management professionals from within the organization and external firms (which includes the top management consulting firms and the Big 4) must tailor the solutions to the circumstances. Risk management should not be a purely academic sexy concept but a pragmatic solution to the business risks facing the organization.

Understanding of emerging risks. Emerging risks are defined as risks that appear on the corporate horizon but unfold in hard-to-predict ways. With such nature, they can be hardly assessed and managed. Nevertheless, they still are risks that must be managed as far as ensuring the attainment of business goals is concerned.

Common examples of the emerging risks today are the social media threats and the ‘black swans’. Social media is surprisingly changing people’s and organizations’ ways of doing things which almost no one had predicted during the dot-com boom in 90’s. A simple click in the social media today may mean a huge impact on an organization’s in the future. Yet, most organizations have no formal policy on governing employee engagement with social media.

On the other hand, the Black Swan is a theory coined (and also the title of the book) by Nassim Nicholas Taleb which is described as a highly-unexpected events of large magnitude and may have catastrophic consequences. Examples of recent black swans are the March 11, 2011 Japanese tsunami which caused the Fukushima nuclear disaster and eruption of Iceland’s Eyjafjallajokull volcano in April 2010 which shut down transatlantic and European air travel.

As we put on our one foot on the gas pedal, we should always check if the brake is functioning well on the other. The same is true in working on our everyday activities in our organizations. Our journey towards the attainment of the organizational goals, be it short, medium or long-term, is not without a risk of failing. These risk management trends give us indications of opportunities to pursue and gaps to fill-in.