The evolution of risk management

Ed Ainsworth

Ed is one of the two original founders of 4C Associates. He is a regular author on the subject of best practice in procurement, frequently contributing to industry articles in the subject. Prior to 4C's foundation, Ed was a partner in the Mercer Digital group of Mercer Management Consulting.

I recently participated in a ‘risk insights’ panel discussion at an industry event along with a number of high profile finance leaders. Most of the speakers worked in different industries and as such were faced by distinct challenges. Despite this, there was a universal consensus that a structured and predictive approach to risk management represents best practice.

It is no secret that as businesses become increasingly global, they are opening themselves up to new threats. These risks are further magnified by the current climate of austerity, which has resulted in tighter margins and leaner, more vulnerable supply chains. Simply put, leading companies need to invest in an effective risk management programme, if they are to continue to thrive.

Developing a structured and predictive approach to risk, needs to be a constantly evolving process. The initial step in any risk management initiative, consists in compiling a 'risk register' of the threats facing a company and working out the most effective way to deal with each.

Speaking on the panel, Julian Metherell, CFO and executive director at Genel Energy, explained that Genel's risk register is made up of roughly 50 threats. Each of these is assigned to a senior executive and is reviewed and updated on a quarterly basis. However, not all risks can be effectively tracked in this manner.

Discussing the issues currently affecting the oil business, Metherell pointed out that although some risks, such as commodity price volatility, affect most industries, his sector was facing some unique threats. The rapid escalation of the current situation in Algeria, for example, was unpredictable.

In fact terrorism, by its very nature, focuses on the high impact, low risks which evade many risk registers. Although Genel’s example is extreme, in many cases an external point of view can help identify risks which were previously hidden.

In this context, Jean Drouffe, group finance, risk and strategy director, AXA UK & Ireland shared some of the new threats which are surfacing in the insurance sector. The emergence of easily accessible data has led to a growth in the number of competitors in the insurance market.

Amongst the most prominent, Drouffe listed Google, Tesco and car manufacturers. This risk is certainly not unique to the insurance industry and the current climate is ideal for new, more agile competitors to disrupt long established companies.

Mark Morris, finance director at Rolls Royce, explained that due to the long term nature of his business, he tended to focus on what other industries would classify as long term risks. Amongst these threats, Morris highlighted the issue of growth.

The problem for Rolls Royce, is that as the company continues to expand, its suppliers may struggle to keep up. The key issue here, is that whilst the economic landscape has made it easy for large companies to access cheap funding, the opposite is true for the smaller suppliers which many depend on.

Another risk which Morris underlined was reputational risk. This topic is very much in the news, and few have not heard about the trouble currently affecting Boeing's Dreamliner.

Here Morris recommended the creation of crisis response teams and admitted that in many instances, it is near impossible to predict these 'Black Swan' type events. Some risks are unique and all you can do is learn from them and react as they unfold.

Whilst it was agreed that a structured approach to risk represents the best way for companies to monitor and respond to threats, there was some concern regarding the standardisation of risk, which this approach could lead to.

The panel expressed the need to avoid implementing a 'tick box' mentality, when it comes to comes to risk management. The world we live in is a volatile place and whilst creating a list of 50 threats is a great start, it is important not to forget that risks are constantly evolving.

Ed Ainsworth is the managing director at 4C Associates. The conclusions for his column were drawn from a panel discussion at an event hosted by The Economist group.

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Tags: management, risk