Part 2: How Do You Know it Works? Measuring the Benefits of Your Risk Management

Part 2: How To Measure the Benefits of Your Risk Management

Risk management can be costly: it requires time, effort, data, methodology, human and IT resources, reporting and committees. More often than not, it needs a regulatory push for firms to start formalising risk management into an organised practice.

The Value of Risk Management is More than Regulatory Compliance
Risk management must bring much more than regulatory compliance. To prove the benefits we must ask what value does it bring and how are we able to measure it? Linking to our previous blog Part One: The Three Levels of Risk Management, we suggest that in order to assess the benefits of risk management we need to consider it at the three levels of implementation:

-        Strategic: Optimised, safer strategy aligned with business objectives
-        Tactical: Reduction in number and value of errors
-        Dynamic: Improved productivity and performance

Productivity improvements are probably the easiest to quantify. Comparing the time and resources dedicated to produce one product unit, one dollar of sales or one dollar of profit, can be straight forward for organisations with good management information. Improved performance and optimised processes mean there will be less repetitive errors and less minor operational losses: the “running taps” are turned off. With better processes, organisations may also be able to avoid larger accidents and losses.

Reduction in the Number and Value of Errors can be Dramatic
Tactical operational risk is measured by the reduction in number and value of errors over time; in some cases this can be particularly noticeable. For example, Manigent’s Risk Based Performance methodology has helped an Investment Banking Client to reduce operational losses by 50% in the first year of implementation. Another Manigent client claims on their blog:

In 2008, [..] started a journey to ingrain a new approach to risk management [...] significant benefits have been achieved which have made a difference to [...] bottom line:

·         A 94% reduction in the value of errors
·         A 63% reduction in the volume of errors

Risk is an inevitable part of every organisation. By using an integrated and proactive approach to managing risk, negative consequences can be controlled and opportunities for growth and success exploited.

Reduction in volume and value of errors, better controls and demonstrated risk and performance monitoring all contribute to reduced regulatory capital, reduced funding costs and protection against regulatory fines. These are outstanding results that Manigent strives to help all of its clients to achieve.

Strategy: Skills, Luck and Strategy Map
Of prime importance, strategic value in risk management can be hard to quantify. It relates to the quality of the decisions taken, the products to launch, the markets to be in and the executives you hire. Measured by taking into account the absence of bad decisions, products recall, regulatory fines, top management turnover and fraud losses. Low volumes of these factors mean the organisation is either well managed, or simply lucky.

Conversely, firms experiencing such type of adverse events should think of improving their strategic risk assessment and align their risk appetite to their business objectives, as outlined throughout the Risk-Based Performance Methodology. Mis-selling fines and top management disarray at Lloyds Banking Group, subprime investment and rogue trading at UBS, subprime investment at AIG and overinvestment in sovereign European bonds by French banks are all signs of poor strategic risk management, or were these organisations simply unlucky?

Telling apart skills from luck is an eternal challenge in such uncertain environments.  A cautious approach dictates: if all goes well, consider it luck, if something goes bad, blame yourself and adapt.

Better than caution alone, Manigent suggests that the use of a Strategy Map for Risk Management effectiveness is an ideal tool to frame discussions with the Board and Executive about the risk strategy. It enables a link to develop between the risk management framework and process, and allows business outcomes to be clarified and communicated. Read more about this in a recent blog by the founder of Manigent, Andrew Smart:  Strategy Map for Risk Management Effectiveness.

How much value has risk management brought to your company? Have you ever measured it? Please tell us about your experience.