The financial crisis that began a decade ago undoubtedly triggered a renewed focus on risk management. One result is that finance executives and risk professionals are increasingly asked to provide insights on risks to inform decisions that impact organizational strategy.
In the 2017 AFP Strategic Role of Treasury Survey from the Association of Finance Professionals and Marsh & McLennan Companies’ Global Risk Center, 80% of respondents said that treasury plays a more strategic role at their organizations compared to three years ago, and that the trend is expected to continue. Similar sentiments have also been expressed by risk professionals in recent years of the Marsh and RIMS Excellence in Risk Management survey.
The worlds of treasury and risk professionals are overlapping. Risk professionals are generally becoming more involved with capital deployment decisions, while treasurers and others in finance are taking on more traditional risk management functions, including insurance purchasing, claims management and enterprise risk management.
A Complex Risk Landscape
The financial crisis may have triggered an initial concentration on risk management, but as the risk landscape has become increasingly complex and interconnected, risks and their impacts have become harder and harder for risk professionals and finance executives to forecast. Macro issues such as economic inequality, environmental concerns and technological changes have an impact not only at a broad societal level, but on how organizations set goals and develop strategy.
Amid this increasingly challenging global risk landscape, treasurers surveyed in the AFP/MMC survey pointed to competition (40%), customer satisfaction/retention (33%), political and regulatory uncertainty (32%), product innovation (23%) and geopolitical risk (19%) as having the greatest impact on their organization’s earnings in the next three years.
It should be no surprise that competition ranks at the top of the earnings risk factors cited by treasurers. Competitive forces interact with and accelerate other rapidly evolving risks. Commerce is increasingly conducted on a global basis, meaning the toughest competitors may be operating half a world away, potentially taking advantage of labor market or regulatory benefits unavailable to another organization.
What is surprising is the relatively low emphasis from respondents on product innovation. With technological innovation occurring at lightning speed, there is a high potential for business model disruption. The ability of new entrants to quickly participate in markets by deploying new technologies puts even the best and most mature companies at risk of being displaced. All this plays out in an environment complicated by evolving geopolitics and uncertain regulatory regimes.
Companies are responding to these challenges across multiple fronts, with a particular focus on adjusting product lines/offerings (68%), reprioritizing geographic markets served (56%), and creating new partnerships in the supply chain (48%). Treasurers and risk professionals are applying their judgment and analytical skills to support the planning and execution of these initiatives to help protect and contribute to an organization’s overall success.
Responding at the Pace of Risk
Members of the C-suite and boards increasingly look to risk professionals to provide insights on the changing landscape and to develop effective responses. Risk professionals, in turn, need to consider how to help their organizations proactively understand and respond to evolving and emerging risks.
For example, one area that needs more attention is assessing and managing the risks around technology. Because the pace of innovation has made risks more complex and interconnected, many executives have been left struggling to understand how disruptive technologies affect their business strategies, models and operations. Consider the following disconnect: In the 2017 Excellence in Risk Management survey, 52% of risk professionals said their companies do not use or plan to use the internet of things (IoT). Yet data shows that 90% of companies will be using IoT technologies within two years. Risk professionals need to be more aware of technology deployment.
Disruptive technologies are also changing the ways in which many businesses execute key operations. While payment technology is one such rapidly evolving product area, however, only 24% of treasurers said they are playing a lead role in assessing financial technology. Finance professionals need to be more involved in such technology assessments.
Risk professionals must also provide insight on rapidly shifting geopolitical risks. The tight interplay between economic, political and societal challenges has stimulated a wide range of geopolitical threats to business activity, including policy reversals and regime changes. Brexit, the collapse of the Trans-Pacific Partnership, and calls to renegotiate the North American Free Trade Agreement (NAFTA) are just three recent developments that could seriously impact a company’s supply chain and access to markets. Small wonder, then, that just over half (53%) of finance professionals cite loss of customers and revenue as the biggest potential impact from geopolitical risks.
Despite the uncertain geopolitical environment, however, 39% of respondents said that their senior leaders showed no signs of unease regarding geopolitical risks. This suggests that risk and finance professionals together can help better map and identify the impacts of geopolitical risks to facilitate effective response measures.
Breaking Through Silos
To help their organizations respond to emerging risks, it is important for risk and finance professionals to interact regularly and overcome organizational silos. Failure to do so can impede the dialogue between decision-makers across the organization.
While more risk professionals are focused on working across silos, many companies may not have the right processes in place to support this goal. Many risk executives noted a move away from cross-functional discussions in formalized risk committees. Only 48% of organizations said they have a cross-functional risk committee in 2017, a drop from 62% five years ago. Among those that do not have such a committee, 41% of respondents said their company should have one.
Risk committees or other mechanisms to bring together cross-functional expertise are particularly important in helping companies develop awareness and insights in such areas as emerging risks, geopolitical risks and disruptive technologies. For example, the 2017 Excellence in Risk Management survey found that a siloed approach contributed to misalignment around disruptive technology risks. Three of the top barriers to understanding the impact of such technologies on business strategy related to organizational alignment were that other areas had greater priority, general lack of awareness of key risk management concepts and lack of cross-organizational collaboration.