Two years ago, the business community was still in a state of shock following the global economic meltdown. At that time, risk management was essentially crisis management rather than a forward looking, enterprise-wide approach to managing the full spectrum of business risks. The concept of using risk management to enable sustainable long-term growth was just beginning to gain acceptance.
Today, risk management is growing in strategic importance for many organizations. That was clear in the findings of a new Accenture Global Risk Management Study that incorporated the views of nearly 400 executives across 10 industries and all major geographies.
Across industries and throughout North America, risk management is a much higher priority in 2011 than it was in 2009. Not only is it a priority from a risk mitigation perspective, Accenture's new study found the majority of executives (85 percent) believe their risk management offers them a source of competitive advantage.
Recognizing the need for risk management and seeing the strategic benefits of using risk management to support the overall business, companies have invested in and advanced their risk management capabilities. In fact, more than half of the executives who participated in Accenture's 2011 risk management study said their company spent at least $25 million on risk management in the last couple of years, and about one in 10 invested more than $250 million.
Given that, companies have increasingly implemented comprehensive enterprise risk management programs. Today, organizations are also more likely to have C-level oversight, giving the risk management function board level visibility and ensuring it is aligned with growth objectives and business priorities.
Risk management capabilities also are slated for additional investment in the next two years, according to 83 percent of executives. Those investments will be targeted at helping companies navigate market volatility, manage increased complexity and address a proliferation of risks ranging from supply chain and other operational issues to new regulations, reputational concerns and increased threats from financial fraud and other cyber-based crime.
Among other findings in the study, which generated extensive data on a wide range of topics:
- Increasing volatility and growing complexity make risk management central and strategic to all industries. More than 80 percent of companies surveyed consider their risk area to be a key management function that helps them deal with marketplace volatility and organizational complexity. In addition, 86 percent said the risk management function helps them deal effectively with the increasing volatility of the economic and financial environment, while 83 percent believed the function was driving better management of organizational complexity. For almost all companies, risk management is a higher priority today than it was two years ago. A remarkable 98 percent of respondents indicated this was so, and 60 percent indicated it was so "to a great extent." That number was higher for financial services firms (70 percent) and insurance companies (69 percent).
- Executives see their risk management capabilities as important to future profitability and long-term growth. About half the companies surveyed (49 percent) see their risk organization as a critical driver for enabling long-term profitable growth; another 42 percent saw their risk management capabilities as "important" to growth. Almost identical numbers (48 percent) saw risk management as critical to sustained future profitability with another 45 percent believing it to be "important." Put another way, 91 percent and 93 percent of executives, respectively, see the risk management function as important or critical to growth and profitability.
- A large gap remains between the risk management function and the business agenda at many companies despite the progress made in the past two years as risk moved up corporate priority lists. For instance, executives communicated strong expectations that risk management will drive future profitability, but this is not happening in many companies today. Another gap exists in the alignment of risk to the business strategy. Other areas where expectations are high but delivery is low exist in Risk Adjusted Performance Management and Reduction in the Cost of Capital.
- Companies are implementing comprehensive enterprise risk management programs. Companies are taking risk management seriously from a structural and technological perspective and spending in smart ways to make it more durable. More than 80 percent of survey respondents overall have an enterprise risk management (ERM) program in place or plan to have one in the next two years. Interesting geographical differences were apparent. Companies in Latin America, for example, are especially likely to have ERM programs—an almost unanimous 99 percent of those surveyed. European companies (52 percent) were the least likely to have ERM programs. At 60 percent, North America was also below the survey average.
- Companies are establishing C-Level ownership of the risk function. Compared to two years ago, the study found an increase in Chief Risk Officer (CRO) appointments — executives who in most cases own the primary responsibility for risk management. More than two-thirds of all survey respondents have a CRO operating with that title. Another 20 percent have an executive in the role fulfilling those responsibilities though without the title. Almost half of the executives surveyed (45 percent) said the majority of risk management is owned by the CRO, up from only 33 percent in 2009. In North America, only 70 percent of risk owners report to the CEO, compared to an overall survey average of 79 percent.
Meanwhile, the study found the types and magnitude of risks are increasing, as are costs. In spite of significant investments in risk management structures and technologies, companies remain vulnerable to a host of business, operational and regulatory risks. Structural and governance issues often prevent companies and their executives from gaining sufficient visibility across the business in an integrated fashion to anticipate and mitigate risks, especially given the global nature of operations.
Today's marketplace and economic situation are moving too quickly for companies to be merely reactive when it comes to their risk management capabilities. Companies must remain vigilant by regularly updating and expanding their risk management capabilities to support growth and future profitability.
Chris Thompson is the senior executive responsible for the Risk Management consulting service line in North America at Accenture, a global management consulting, technology services and outsourcing company.
Don't miss Chris Thompson's video interview The Competitive Advantage of Managing Risk and Q&A Why Risk Management is Increasingly Linked to Profitability