On Using Data to Find the True North of Your Risk Strategy
Risk in the Days Before Data
In the dusty days of yore, when businesses still relied on paper and customer relationships were managed with smiles and handshakes, success was often based on an entrepreneur’s personal knowledge of the lay of the land. A baker would know many of the local families, how to optimize the supply chain of ingredients, who his best customers were, how to plan for possible disruptions such as a bad wheat crop, how to meet extra demand during a busy season and how to manage the business’s reputation with personalized, attentive service.
The bakery had several real but constrained and, usually, navigable risks. An experienced baker could likely plan for and adapt to most, if not all, of the scenarios on the horizon—from a grumpy customer to a leaky roof. The baker’s territory was usually limited to his home town. The baker’s risks could often be managed with experience and good judgment.
Over time, more sophisticated transportation and modern communication enabled businesses to expand in scope and terrain. The geographic, cultural and operational elements of business broadened, lengthened and deepened. Pieces of paper became data. Neighborhoods became continents. Relationships became networks. Transactions became processes. Opportunity shifted and grew in scope—at times burgeoning on the horizon—and at times lying deep beneath the surface.
As the nature of doing business increased in scope and possibility, so too did the nature of risk.
The modern, interconnected business world demands a modern vision of what risk means. We know that risk is not what it once was—a manageable series of responses based largely on a limited set of possibilities predicated on the past. We also know that the risk of today is future-oriented, dynamic, global, real-time—as full of the nebulous and strange as a science fiction novel. It has the potential to reap windfalls for corporate growth or deliver stunting reputational blows to brands in milliseconds. So, how should the modern enterprise look at risk?
Modern risk management demands top-tier attention. The dizzying pace of complexity, immediate ramifications of reputational threats and the correlation between risk management and bottom-line performance are all reasons for executives, and finance in particular, to give the concept of business risk new attention. “Today, there’s a growing recognition that risk management needs to be a part of a comprehensive strategic plan in which the risks that could prevent the organization from achieving its objectives are identified and addressed,” says PwC. The CFO’s perspective on company performance, data, technology and security all uniquely qualify finance to oversee the modern facets of risk management.
Along with the many possibilities created by this additional complexity, the finance leader of today is—and must be—relentlessly focused on the risks that this complexity poses. Over the past 20 years, the finance chief has evolved from risk observer to risk strategist. According to KPMG, “Today’s CFO is managing an ecosystem of expanding complexity —thinking and operating globally, leveraging financial data and analytics to achieve profitable growth, challenging and enabling business strategies, and capitalizing on a dynamic regulatory environment — all with a view to achieving competitive advantage.”
It’s clear that risk isn’t a hill to climb any longer, but a mountain.
All companies are on a growth journey. Your unique business journey might be a local one requiring a bicycle, smartphone and a lunch bag to get around the neighborhood. Or, you might require a large, experienced team, a Sherpa and a mountain goat to navigate the endless terrain and the elements.
Once you start your journey, the unexpected might happen. It might rain. You might lose your wallet. One of your key team members might decide to go on a different journey halfway to your destination.
If you’re doing business right, you are taking risks every day. Large or small, macro or micro, planned or unplanned, managed or unmanaged, risks are a part of the most seasoned business veteran’s daily life. But the risk and return implications of choices that companies make can be critical to driving a growth agenda.
Risk is no longer a nebulous swamp monster to avoid, manage, react to or mitigate. Nor is risk, in itself, a sure-fire gateway to the doors of opportunity and growth. To scale risk effectively, you need to identify the right growth journey for your company and make a plan to get there, preparing for and even optimizing the risks you’ll face along the way. The complexity of modern risk demands that we use data to identify, navigate and decide.
Most financial leaders are keenly aware of the importance of data and analytics to inform their strategic endeavors, but effectively taking an integrated approach to moving the entire operation of their companies in the right direction—up the right mountain—and with the right supplies, is, to be blunt, tricky. Yet, in the wake of cyber security threats, globalization, economic disruption, digitization, reputational threats and regulatory pressures, it’s never been more important to prepare and have an expert mountaineer’s clear risk vision.
It’s time to reimagine risk.
Where do you want to go?
Many companies view risk as an expensive functional area whose sole purpose is to protect the company from catastrophe. But, if we are to reimagine risk, we must understand that it’s a strategic endeavor and one requiring great skill and careful planning to scale.
What every mountaineer, and every finance guru needs, is a data-infused compass and a map drawn with insights from data. It’s not only about finding your strategic true north; it’s about identifying the location on your map that you’d like to scale, and creating a plan to scale it.
Your strategic true north is not everyone else’s strategic true north. Companies often conflate a large risk appetite with big growth opportunity. But it’s entirely possible to have a serene, rolling hills risk appetite and to run a successful business. It’s also possible to have an Alps-scale risk appetite and flounder on the cliffs. “Just as organizations set different objectives, they will also develop different risk appetites. There is no standard or universal risk appetite statement that applies to all organizations, nor is there a “right” risk appetite,” COSO comments in its Enterprise Risk Management Study. There isn’t necessarily a correlation among which mountain range you choose to climb, the intensity of your risk appetite and your success. Organizations can choose to have high or low risk appetites, but those appetites need to consider the type and magnitude of risks that the enterprise must navigate.
Once you decide how much risk makes sense for you, you’ll need your compass and your map. And that’s where data comes in.
Finding Your Direction in the Data Deluge
If you aren’t sure which way is up, you aren’t the only one. Finding meaning and direction in the piles of data around you has left the most well-intentioned finance leader questioning north and south. Yet, without clean, integrated data, your compass and your risk management strategy will not work. “Beyond the obvious benefits of staying one step ahead of regulatory mandates, having accurate, integrated and transparent data will drive confident, proactive decisions to support a solid risk management foundation,” says SAS Risk Research.
Digging deep into your organization’s data, ensuring its cleanliness and understanding its sources is one of the best ways to begin understanding where your organizational compass is guiding you.
Creating your map is the next major step toward ensuring your growth journey is successful. Analytics is the ability to derive insight from data and thus should inform every enterprise’s risk management strategy. Vivek Katyal of Deloitte remarks, “There is no exact science for measuring risk. But with analytics, you can build measurement parameters that can help you establish and examine likely risk scenarios. From there, it’s easier to understand the potential impact of a risk—and start planning around it.” Your map should be the guide for the journey, as well as the final destination, of your company. Both the compass and the map are essential to starting your journey.
Inevitably, when risks appear and the terrain is mountainous, you may find yourself identifying with one of the following mountaineers:
The good news is that whether you’re a Prepared Pioneer or a Disoriented Drifter, there’s hope. Through collaboration and data inspiration you can arrive at your desired destination.
Risk doesn’t have to be simply a reality to be managed or a steep cliff to steer clear of; it can be reimagined as an adventure—and even your ticket to growth. Whether it’s a plateau, a mountain, or a cliff, finding it and making sure you’re ready to climb it when it’s in front of you is critical to your success—and survival. Look for more posts in the coming weeks Perspectives to help you navigate modern risk with data.