Magazine article The RMA Journal

Risk Management and Business Strategy: Risk Management and Strategic Planning Are Not Two Separate Things. They Are Two Braids of the Same Rope-And They Must Be Built That Way in Order to Contribute to the Strength of the Whole

Magazine article The RMA Journal

Risk Management and Business Strategy: Risk Management and Strategic Planning Are Not Two Separate Things. They Are Two Braids of the Same Rope-And They Must Be Built That Way in Order to Contribute to the Strength of the Whole

Article excerpt

[ILLUSTRATION OMITTED]

There is a light moment in the movie The Lord of the Rings: The Return of the King, the third installment of J.R.R. Tolkien's epic trilogy, when the small band of warriors central to the story is contemplating a critical, but seemingly impossible, mission: facing the enemy head-on at their main gates. After spending a few minutes contemplating this grim task, the dwarf Gimli casually offers his assessment of the situation: "Certainty of death, small chance of success.... What are we waiting for?" And off they go.

Actually, this assessment was fairly balanced. The warriors knew the benefit (saving the world), they knew the cost (probably everything), and they knew the risk (almost certain failure). But the risk was within their acceptable tolerance range and the need was critical. The decision was easy.

The intertwining of risk management and strategic planning is a marriage of strange bedfellows. The two disciplines seek the same goal (maximizing profits), but they approach it from two uniquely different perspectives. No one would argue that risk isn't considered in some form when thinking about possible business strategies; of course it is. The question isn't whether risk management is woven into the process of strategic planning, but how.

A recent survey conducted by the Economist Intelligence Unit (1) and sponsored by KPMG and ACE found that only about 44% of respondents included their risk management function when setting strategy. This figure is hard to interpret because the question is so broad, and it doesn't address whether a risk management process was included, but still it's a disappointing statistic. Risk management must be included in setting business strategy, because to do otherwise is at best reckless, and at worst incredibly negligent. The basic purpose in setting a strategy is to determine a set of business objectives that will yield positive results for the shareholders, customers, and employees. The process of planning strategy should identify and quantify the expected positive result and lead to the design of systems and processes to execute it. This is all predicated on a set of assumptions that may or may not be accurate, not the least of which is management's ability to execute on that strategy.

All strategic initiatives have one element in common--they involve some form of change. The seeds of risk are sown in change, both change we encounter and change we invoke. Since strategic planning clearly falls into the latter category, it is imperative that we manage change in a way that considers all aspects of risk without dragging the process into the bottomless, soul-crushing abyss of "What could go wrong?"

The Challenge

In the simplest terms, any new proposal has to involve three major considerations:

1. What is the expected benefit?

2. What is the expected cost?

3. What is the potential risk?

The proposal's success requires both a willingness to honestly explore all three considerations and an understanding of how to assess both the benefit and the risk. This is where deep cultural and organizational issues are often encountered. In many cases, the first (benefit) is enthusiastically embraced, the second (cost) is tolerated, and the third (risk) is suffered. This dynamic is not unique or surprising. Consider the following challenges:

* People want to trust their instincts. A room full of 50-year-old bankers doesn't want to be told by a 30-yearold "risk guy" why the idea is a bad one. The problem is, sometimes the 30-year-old is right.

* The benefit of a strategic proposal is easy to embrace because it is all good news. Who doesn't like good news? Humans are masters at rationalization. Simply put, human perception is not rational. How many of us have justified a major purchase because of all the "good" it will bring to our lives? The cost aspect is easy to estimate and can be rationalized as necessary to achieve the benefit. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.