Enterprise Risk Management in Lean Times

working under a tight budget

working under a tight budget

The good news for risk managers is: since times have been tough, company management is listening to your message.  The bad news for risk managers is: since times have been tough, there’s not much budget for anyone, let alone an area with no hope of new revenue generation.  So risk managers are being asked to do more and more with less and less.  Here are some tips on how to meet expectations without crashing the budget.

Start With the Most Expensive Area

Identify the area or activity that currently has the most expensive risk oversight process and ask:

  • What’s the reason for that expense ?
  • Is there really a need for that much oversight ?
  • Do profit margins support the oversight expense ?
  • Does the riskiest 20% of that activity produce a high proportion of the profits ?

Consider whether a shift in risk acceptance criteria or risk limits could make a drastic change in oversight needs without a drastic change in profitability.

Get More People Involved

We don’t mean hiring more staff!  Determine which activities of the ERM staff can be transferred to business unit staff.  ERM staff can then shift to periodic review of their activities instead.

This is a natural evolution of risk management anyway – embedding risk management culture more fully in the business.  The risk management culture can evolve to look just like the expense management culture that many firms have worked hard to build.  In the expense management culture, everyone is taught to ask questions like: “How much does it cost?” and “how can we achieve the same objective at a lower cost?”

In an expense management culture expenses are tracked frequently and expense reports are important management tools.  If you spend over budget you will have to explain variance immediately.  Compensation programs reward good expense management.  Those ideas can all be ported directly to the risk management culture.  Teach everyone to ask “How much risk does this create?” and “How can we achieve the same result at a lower risk?”

In the risk management culture risks are tracked frequently and risk reports are important management tools.  If your risk goes over your limit you will have to explain the variance immediately.  Compensation programs reward good risk management.  Risk management can cost less as an embedded part of the culture than it does as an additional add on activity.

Eliminate Unused Risk Reports

Find out which risk reports are not being used and eliminate them.  This saves time and printing costs – and enhances morale!

Reduce Focus in Shrinking Areas

Risk management activity should ramp up with growth and the corresponding risk increase – it must ramp down too.

Leverage Outside Resources

In lean times, vendors and other business partners may be eager to provide free or low-cost support.  Just make sure that their help actually addresses your needs – don’t allow this to increase workload or create more unused reports.

Delegate

Expand your own personal capacity by delegating the matters that have become routine.  Lean times will not last forever; you need to be available to pay attention to the thing that will pull your firm forward into the next stage of robust growth.

Grow Where There is a Need

Cost reduction cannot be the main goal of ERM however.  All of the above techniques, and more, must be applied to bring the cost of repeat activities down below the stretch budget target. This will allow for growth in the areas where there is the most need for risk management attention.

Extra Attention for Growth Areas

Risk management needs to be opportunistic.  The fastest growing areas of the company usually need the most attention.  The risk manager needs to allow for that and have a staff that is fully on board with the need to shift focus without notice.  Of course, not all growth areas produce large losses but a high percentage of large losses come from current or recent high growth areas.  Often that is because a rigid ERM system did not grow their attention as the new area grew in activity level.

Monitoring the Risk Environment

The risk manager needs to keep up the staffing and expertise needed to monitor the risk environment, looking for reasons to increase or decrease risk management attention to different risks.   This idea has been used in urban policing to make sure that the police resources are in the right place at the right time.

Smart Risk Management is Less Expensive

A fully effective fixed risk defense system is both unachievable and extremely expensive.  But an adaptive and flexible risk defense system can be smaller but more effective.

 

About Dave Ingram

Dave is an Executive Vice President of Willis Re, specialising in theory and practice of ERM for insurers. Based in…
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