Future-Proofing your Organisation with ERM
“When you look at the risk landscape around us, we all realise that the pace of change has accelerated,” said Ramesh Pillai, at the start of a recent Tea Talk. “The risk landscape is changing super-fast. Every day, the headlines remind us that the future is not just on its way – it has arrived. Blink, and it will pass you by.” Reminding the audience that Risk managers have to constantly live slightly outside their comfort zones, he said the changes happening now were actually providing the outlines of new opportunities and challenges for organisations, and what leaders should be preparing for.His presentation profiled trends that have the potential of altering the global risk landscape.:
For each of these trends, Ramesh’s presentation covered the forces that were driving them, what opportunities could arise, and what potential threats and pitfalls organisations should watch out for. “Wherever you have risk, there are consequences,” he said. “Because of dynamically changing risks, consequences are constantly changing, and the entire nature of how you do risk management is constantly evolving. It is not just risk that is changing, the conversation around risk is changing as well; it is not just about the protection of value but the creation of value; being able to drive performance and strategy; and how to achieve an organisation that is sustainable, agile and resilient.”
He advised organisations to take risk rather than avoid it– but with their eyes wide open. Artificial Intelligence (AI)-based algorithms were beginning to drive cognitive technologies which are able to augment human decision-making. He cited examples of three companies which are already successfully riding the trend.
Controls will become more pervasive, supported by smart devices capable of monitoring risks in real time. At least one US-based logistics company, for example, is already using software to track their vehicles for safety, efficiency, fuel consumption, driver performance, maintenance and other metrics in real time. Japanese firm Fujitsu uses wearable tags which are capable of monitoring employees’ positions to keep them safe from injury when lifting loads, for instance.
Growing popularity of behavioural economics to inform decision-making, and interest in making technology products intuitive for usage, are two factors which are driving the trend of using behavioural science to inform risk insights. However, firms may have to deal with backlash if employees feel behavioural interventions are impinging on their free will.
The world has also seen the broadening in scope and application of risk transfers which are increasingly being driven by events like cyberattacks, political unrest and climate change – and the impacts caused by these. There is rising pressure on organisations to find cost-effective ways to transfer these risks.
Many leaders are now viewing risks in terms of its potential to drive performance and create long-term, sustainable value. This is one of the major factors driving risk becoming a performance enabler. In the past, risk management was often an exercise in fear and avoidance but today, people are striving to measure risk more accurately although “Risk management is not about the measurement of risk,” Ramesh emphasised. “It is about the psychology of risk.” A culture is emerging that views failure as a necessary step to success, and today, technology is available that can help link risk to performance.
Software company Adobe has a Kickbox Innovation Workshop that encourages innovation and risk-taking by providing the participating employees with seed money – US$1,000 on a prepaid credit card – and a step-by-step start-up guide with a 45-day period to experiment with and validate new ideas. Advertising agency Greygives out a‘Heroic Failure Award’ that honours new, unproven ideas that were failures in the market. “We should reward and encourage guided risk-taking among employees, and tells them it is okay to fail. Failure is a prerequisite for success,” Ramesh said. “You cannot succeed if you have not experienced failure before.”
He pointed out that the common denominator among successful people is failure. “At multiple points in their careers, they fail. What is unique is how they bounce back.”
On Disruption that is dominating the executive agenda, he said that organisations needed to disrupt themselves before someone disrupted them, in order to have better control of their situation.
“Given that valuations are to a large extent driven by goodwill, and goodwill is to a large extent driven by perception, and perception is driven by social media, expectations, accurate, misleading and inaccurate information, the convergence of all this tells you that reputation risk has become significantly higher. Organisations are having to fundamentally rethink their approach to risk management, to proactively address these accelerated, amplified risks.”
“Because of the increase in innovation, and because people are increasingly viewing risk as a performance enabler, we have to think slightly differently about how we apply ERM in our organisations,” he said.
“The world is different now, compared to where it was two years ago,” Ramesh said. “The risk environment is also different. Change has been very fast and very disruptive. The geopolitical environment that we are operating in is very volatile now.” Also, ransomware attacks are more frequent; the changing work environment continues to disrupt talent and labour markets; and supply shortages, sanctions and rising raw material costs are heightening risks within supply chains. Each of these risks can cause significant impacts but because they are closely interconnected, any one of them can initiate far-reaching implications.
“There is a lot of turbulence in the business environment, and this requires a lot of senior executives to revise and adapt their strategies and operating models at a very rapid pace,” he said. “They know that in order to capture opportunity and avoid disruption, they have to move fast. Agility is critical.” Risk management support and capabilities therefore need to go up a few notches. The organisation’s risk management and broader resilience capabilities need to quickly adapt. “The only way businesses can be more agile is if risk management processes and capabilities become more resilient,” he concluded. “We need to be more proactive, contribute in a robust and timely way to provide more adequate risk insights for more informed decision-making.”