The future of “Risk Management” would look brighter if we removed the word “Risk”. It is just “Management”. If “Risk” is “the effect of uncertainty on objectives”, Risk Management must be “managing the effect of uncertainty on objectives”. This is “Outcome Management”.
Business Management involves making decisions aimed at achieving business objectives. Outcome management is therefore just management.
The future success of risk management relies on making it an integral part of management. This will only happen if risk management provides the right incentives. Humans and hence organisations run by humans, respond to incentives. Read related article: '10 keys to Risk Management Success'.
Psychologists have discovered that when a person is handed an unexpectedly hot cup of coffee, they typically drop the cup if they perceive it to be inexpensive but manage to hang on if they believe the cup is valuable.
Risk Management is the coffee cup. Implementing risk management creates a degree of pain for the business. Will the business hold onto the cup through the period of pain or drop it? Which way the business goes will depend on their perception of value. As a result, low-value risk management will be dropped. There is no future. High-value risk management will be held onto and treasured.
Protection of stakeholders is critical. Unfortunately, on its own, the incentive is often not enough. It is like the parent who tells their child to wear a bike helmet as “You will get hurt if you fall off!” We all know it makes sense but, next time no helmet is to be seen. Why is this?
Let’s return to the child. If on the other hand, we say “if you wear your helmet you can ride to the shops and go over that large BMX bike jump” the child is more likely to respond positively. This is risk management being used in the pursuit of opportunity.
This became real for me in 1987 when I met a hanglider pilot who encouraged me to take up the sport. After a short risk assessment, it was clear the sport was very high risk as many pilots were dying. I perceived the risk as above my appetite and greater than the reward. I declined. Later I decided to do a more in-depth risk assessment and concluded that the main cause of accidents was pilot error. I considered ways that the risk could be reduced and developed a 44-point checklist (risk management). Watch the webinar recording 'Balancing Risk and Reward'.
After applying this, I concluded that revised level of risk was now below my risk appetite and below the reward. Rationally I was now able to do it and enjoyed 15 wonderful years of sustainable reward from flying. Risk management enabled me to fly!
"Great risk management enables a business to pursue opportunities by bringing the residual risk within appetite and below reward. The number one goal of risk management is therefore, “Sustainable Reward”.
This leads me to what I see as the ultimate future of risk management, decision-making. The decision-making process of many organisations is unstructured, informal, undocumented and open to the many human influences such as anchored and biased thinking. To make better decisions, we need a more structured, rational, data-rich and transparent processes.
A simple base for good decision-making is:
The future of risk management lies in supporting this process by:
This demands a big improvement in risk management’s current capabilities including:
A healthy future for risk management will occur when it is used in proactive decision making. Ultimately the greatest measure of success is when the word “Risk” is removed from “Risk Management”.
This article was originally published by RMIA in The Risk Magazine March Edition.
Author of 'A Short Guide to Operational Risk', David Tattam is an internationally recognised specialist in all facets of risk management, particularly at the enterprise level. His career includes many years working with PwC, as well as two Australian banks. His achievements include the creation of the Middle Office (Risk Management Department) for The Industrial Bank of Japan in Australia and the complete implementation of all Australian operations, systems, procedures and controls for Westdeutsche Landesbank (WestLB).