Still subjective, still correlation but getting closer… :: Accenture identify characteristics of "The Risk Masters"
Tuesday, 20 March, 2012 Leave a comment
So, if reports from, the likes of AIRMIC “Roads to Ruin”, World Economic Forum/Zurich, FSA (on RBS), PwC, IBM, UK Government, Zurich and Towers Watson (to name a few recent contributors) have failed to penetrate engrained – but flawed – belief systems, it may be a forlorn hope that Accenture can succeed with this report…but, we live in hope! Hence my resolve to share this kind of useful information as widely as possible.
WEALTH WARNING: all risk management is not made equal and it should not be solely about risk…but reward!
More reports into the subjects of risk management, complexity and compliance can also be found here. Of the recognised Consultancy firms it certainly appears that AT Kearney have the best understanding of the subject of complexity but, unlike Ontonix, NONE, to date, have presented a, measurable, definition or means by which an organisation can begin to explore the issue themselves.
Proactive NOT Reactive: unlike conventional risk management the unique brand of “Advanced Risk Management” or Resilience Management enabled by Ontonix is not based upon past experience[outcomes] i.e. risk, by that time damage may have been done, or opportunity [innovation] missed – because risk can have negative and positive connotations for business. For as long as a business owner/risk manager relies upon legislation or regulation to direct a firm to areas of risk requiring compliance, they can be overlooking new or unforeseen risks.
Our goal is to bring crisis anticipation, or anticipatory awareness, capabilities to organisations in order that new or emerging patterns, that are developing beyond the current risk horizon, can be recognised and appropriate [preventative or adaptive] actions taken.
Objective NOT Subjective: our [model free] technology and expertise, have been successfully deployed, globally, across business sectors. Viewing an organisation as a dynamic [living] system enables us to adopt a rigorous, scientific approach that has proven as effective with biological systems as it has with highly complex man-made systems (including Aerospace, Automotive design & Air Traffic Control at a major European Airport). Objective and quantitative.
Subjective Interpretation of quantitative and qualitative information is as reliable as an over-priced opinion from a Rating Agency!
Interdependent NOT Independent: complex systems are composed of a multiplicity of things; made up of a large number of “agents” (entities, components, or parts) – without a single equilibrium.
Non-linear systems of sub-systems and networks of processes that interact and synchronise across scales to enable functionality.
Interdependent agents act differently to independent agents and to assess the stability of the system an holistic view [of the system] is required.
Whilst we now have the ability to capture vast quantities of data, without new tools and techniques with which to conduct analyses, we are limited by the extent of our knowledge i.e. how can we recognise a “pattern” [correlation] that we haven’t seen before? Characterised by feedbacks, causal openness, causal synergy (interactivity), disproportionality of cause and effect (i.e., nonlinear behaviour), and contingency identifies statistical correlation as a source of, potentially, dangerous assumptions…
Causality NOT Correlation: using system generated data, according to the Accounting and Management parameters utilised by the organisation (examples per infographic), we conduct analyses to identify and map the “hidden structure” of the information flow within the system: data may be sufficient for GAAP and to identify statistical correlations but EACH PIECE OF DATA IS AN AUTONOMOUS INFORMATION AGENT i.e. it contains vital information about the system in a similar manner as a human hair carries the DNA of its owner.
Unknown (or Unseen) NOT Unknowable: a human hair or a spec of blood are visible but, unless our visual spectrum (less than 1% of the electro-magnetic spectrum!) is supplemented by tools and techniques that enable [endogenous] examination at an appropriate scale, the DNA of both are invisible. To all intents and purposes cancer cells, clogged arteries, damaged organs and faulty valves cannot be easily detected! Medical research and innovation have made known what was, once, unknown. But, no matter how hard we look we cannot know (until it’s too late) if/when we may be hit by a car, bitten by a deadly snake or similar [exogenous] event – the unknowable. A visual examination can reveal very little but, more importantly, can prove to be dangerously misleading. This knowledge is particularly useful to an individual or business intent upon using marketing, manipulation (financial or otherwise) and misinformation to present themselves as something they are not!
We now know about the “fractal nature” of systems and how much there is to be learnt by examination at different scales (from macro to micro and nano). Courtesy of Ontonix, we now have the tools to do so, we have the means to: make the unseen, seen; the unforeseen, foreseeable; and to build resilience to the unforeseeable. Our unique technology enables identification and analyses of information to reveal SOURCES of complexity and resilience, NOT to wait until excessive complexity impairs the ability and effectiveness of the system to perform the functions for which it was designed.
…to overcome the organizational silos that have hampered visibility across the business, sometimes letting small problems become big ones, companies are focusing on the integration of risk data and management across functions. In response to past governance inadequacies and risk management’s traditionally low profile and lack of influence, companies are increasingly establishing C-level risk executives, often with a direct reporting relationship to the CEO and with more direct involvement in decision-making processes. And in the face of an increasingly complex business and operational environment for which many companies have been woefully unprepared, they are improving the sophistication of the systems they use to measure and analyse risk.
Most important, our global research has found evidence of the more effective execution of advanced risk management capabilities among a subset of companies participating in the Accenture survey. We call these companies, roughly 10 percent of all respondents, “Risk Masters.”
These companies are protecting themselves better in the short term by taking a longer-term perspective. They see the risk management function as a proactive enabler of investment opportunities. They are significantly more likely to consider risk management something that creates shareholder value, and they are especially adept at creating processes and mechanisms that link risk to business performance. The Masters are making clear that there is untapped business value in getting risk management right.
|Mastery Capability No. 1: Raise the bar on risk management as a driver of shareholder value|
Almost two-thirds (64 percent) of Risk Masters indicate that their risk management capabilities provide competitive advantage to “a great extent,” compared with only 42 percent of the peer set (see chart). Masters are also more likely to identify risk as a higher priority.
Risk Masters are especially attuned to the risk management function as a source of specific benefits. For example, almost three in every four Risk Masters consider the risk organization critical to reducing operational, credit and market losses, compared with only a third of non-Risk Masters—a significant difference.
Sixty-seven percent of Risk Masters believe that the risk management function drives sustained future profitability, while only 46 percent of peers agree. Fifty-seven percent of Risk Masters say their risk capabilities have helped them manage the increasing volatility of the economic and financial environment, compared with only 25 percent of non-Risk Masters.
In short, the Risk Masters acknowledge risk management as a key priority for their companies, and they plan and invest accordingly. As the chief risk officer for one global energy company put it, “A high-quality and efficient risk management function is among the top strategic goals of the company, ranking second only to growth and profitability.”
Mastery Capability No. 2: Involve the risk organization in key decision-making processes
Companies that participated in this year’s Risk Management Study were far more likely than those in the 2009 report to involve the risk management function in major business decisions.
For example, half (50 percent) of respondents say their risk organization is involved in the strategic planning process “to a great extent.” A significant rise can be seen in risk management’s involvement in budgeting and forecasting, up from 33 percent in 2009 to 45 percent today. When it comes to setting objectives and incentives, the risk organization is now involved to a great extent at 39 percent of responding companies, compared with only 27 percent in 2009.
Large gaps exist between Risk Masters and non-Risk Masters in the extent to which risk management is involved in several key decision processes. For example, 79 percent of Risk Masters say their risk function is involved to a great extent in strategic planning, while only 46 percent of the peer set say this is so.
By involving the risk function in key business decisions, companies can link risk and profitability objectives, improve strategic capital decisions and increase shareholder returns. To a great extent, the visibility of risk management at the highest levels of an organization is what enables risk management to become a proactive force for guiding the business toward new opportunities.
Mastery Capability No. 3: Improve the sophistication of measurement and modelling
Many of the ongoing risk exposures companies face are rooted in a failure to adequately measure, model and analyze a broader array of risk types. Too often, the risk management function is slow and manual in its approach, wasting valuable time and effort on collecting, consolidating and aligning multiple data sources as opposed to having the time to effectively leverage information enabling more complete analysis and the evaluation of future risk scenarios – refer to AT Kearney infographic below.
Risk Masters, by contrast, are also masters of measurement. Much higher proportions of Risk Masters currently measure a fuller spectrum of risk types. For example, 90 percent of Risk Masters measure strategic risks, compared with just 63 percent of peers; 95 percent measure business risks, while only 70 percent of non-Risk Masters do so.
Risk Masters also have a significantly higher commitment to analytics and risk modelling. Sixty-four percent of Risk Masters are instituting analytics and modelling programs to enhance the effectiveness of their risk organization, compared with just 47 percent of non-Risk Masters.
As the global risk manager for one European manufacturer noted in a research interview, “Risk key performance indicators and specific, focused risk analyses are now more often included in investment and strategic decisions.”
“Our continuous improvement of risk tools and processes helps us maintain a high level of risk awareness and alignment with the business,” observed another risk executive. “But the tools and processes also release employees from basic number crunching and enable them to use their capabilities for deeper analysis.”
Mastery Capability No. 4: Integrate risk management capabilities across the organization
Among the striking gaps between the performance of Risk Masters and their peers are those that appear in the area of risk integration. Across all types of risk, Risk Masters excel at integration in comparison to peers (see chart).
As the CRO of a global reinsurance company put it, “An integrated vision of risks is absolutely necessary, not only in terms of consolidation of risks at the entity level but also across entities, per business line. Our risk management approach is integrated: Risk is clearly taken into account in the process for making key decisions, because the risk management function is always associated with that process.”
Mastery Capability No. 5: Establish a dedicated risk executive with oversight and visibility across the business
One way Risk Masters separate themselves from the pack is by having a highly placed risk executive—one with not only broad oversight but also with broad visibility and influence and backed by a dedicated risk management organization. This can ensure that risk and performance management are better aligned with the company’s strategic business priorities. Having a seat at the table can mean there will be a strong advocate at the top for an effective, sustained risk management culture.
Risk Masters are more likely to concentrate risk management in the hands of a chief risk officer and, by 81 percent to 62 percent, more likely than their peers to have a risk executive with the actual CRO title. This suggests that Risk Masters more readily acknowledge the importance of having a C-level risk executive as an influential part of top management.
However, it is the reporting relationship—and the inclusion of the head risk executive in setting and executing the broader business strategy—that is ultimately more important than the title itself. Risk Masters are more likely to have their risk executive report directly to the CEO (91 percent versus 78 percent for non-Risk Masters).
Mastery Capability No. 6: Infuse risk awareness across the organizational culture
One of the critical points to remember about risk management is that people are fallible, especially in the face of the growing complexity of business. Consequently, one of the key factors that distinguishes Risk Masters from their peers is their commitment to creating and infusing an awareness of risk exposure and the means to mitigate risks—as well as more detailed tacit knowledge and training—across the corporate culture. Sixty-two percent of Risk Masters say they have achieved a strong risk culture in the organization, compared with only 30 percent of non-Risk Masters.
In every industry, people and skills are critical components in achieving risk mastery. One CRO we spoke to placed the challenge of the people dimension on the same level as increased regulatory risk and the challenge of organizational integration. The company has lost a number of critical risk management personnel, and the executive faces the challenge of replacing the knowledge held by those people. In a market where demand for risk management skills remains high, it is important that companies build these capabilities in a broader population and have up-to-date plans to fill key positions promptly when they are vacated.
Risk Masters emphasize the importance of making risk management part of everyone’s daily responsibilities. In a company with a pervasive risk culture, people at all levels instinctively look for risks and consider their impacts when making decisions and performing their tasks.
Mastery Capability No. 7: Invest in continuous improvement
A final performance gap between Risk Masters and their peers can be found in the area of future investments in risk management, and in the goals of those investments. Across the board, Risk Masters were more likely to have improvement plans in place.
For example, 67 percent of Risk Masters are currently undertaking plans to improve the integration of their risk and finance processes, compared with 47 percent of their peers. Sixty-four percent of Risk Masters are at work on better analytics and risk modelling capabilities, while only 47 percent of non-Risk Masters have such plans.
In general, the data appears conclusive: Those that do not invest in risk mastery at the proper level or that do so only tactically, without an overall risk management vision in place, will struggle to outperform peers who do.
As the Accenture 2011 Global Risk Management Study makes clear, risk management is now becoming, for leading companies, a critical lever for supporting growth and future profitability. Companies that are able to master a range of integrated elements—involving risk management in key decision-making processes, putting leadership with board-level visibility in place, and infusing risk awareness across the organization—are creating the means to differentiate themselves from the competition.
The Risk Masters have set a very high bar: They are looking beyond reactive, compliance-oriented mindsets and are seeking, through their risk management investments, to create shareholder value and achieve sustainable long-term growth.
About the research
The Accenture 2011 Global Risk Management Study is based on a quantitative survey of executives from 397 companies across 10 industries. All respondents were C-level executives involved in risk management decisions at their companies; organizations were split primarily among Europe, North America, Latin America and Asia Pacific. Different-sized companies were also represented: About half of the companies have annual revenues of more than $5 billion; one-fourth have revenues between $1 billion and $5 billion; the remaining quarter have revenues between $500 million and $1 billion. In addition to the quantitative survey, in-depth interviews were conducted with a number of executives whose views are represented in the research findings.