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Risk management should not be viewed as a separate, stand-alone process. One of the most effective and yet simple ways to change management’s perception about risk management is to integrate risk analysis into the various decision-making processes.
Performing risk assessments for all significant business decisions can dramatically raise decision quality and provide management with valuable insight and alternatives. This statement alone has great implications for modern-day risk management. Business decisions are made daily, not monthly or quarterly when risk managers usually refresh their risk assessments. Risk management processes should change to accommodate this business demand.
Another important question is – who should be responsible for the quality and timeliness of risk analysis for each decision. Should it be the business units, risk owners who initiate the decision or an independent risk manager? Despite the widely-accepted model of three lines of defence, the choice is not always obvious. While the authors are confident that risk analysis should be integrated in the decision-making process, the scope and complexity of each decision should determine the extent of the necessary risk analysis, the tools used and the responsible party.
To help integrate risk management into decision-making, risk managers may consider making changes to the current templates which are used for presenting decisions to senior management and the Board. Including a simple section called “risks associated with the proposed decisions and risk mitigation” can help raise risk awareness, reinforce the need for timely risk analysis and improve risk disclosure.
Other examples may include:
- Investment decisions. Using simulation modelling to assess the investment attractiveness of projects can allow the company to avoid many pitfalls associated with more traditional valuation methods. Instead of the net present value (NPV) assessment, companies can estimate distribution of possible outcomes, the probability of a negative NPV and most significant risks that need to be mitigated to improve project performance. Scenario analysis and simulations can significantly improve the quality of the investment analysis.
- Assessing behavioural risks. Use elements of game theory and behavioural psychology to improve the quality of risk analysis, identify trends and, consequently, increase the quality of business decisions. Additional material on game theory can be found at patrickmcnutt.com
- Financing decisions. Most financing decisions involve a trade-off between risk (potential cost) and potential benefit. Very often these decisions are based on expert opinions and assumptions, instead of the proper analysis of cash flow at risk or other risk-based financial indicators.
- Operational decisions. Decisions on production forecasts, supply chain, plant maintenance, outsourcing and inventory also require a balanced analysis of risk and return.
HERE IS A QUICK CHECKLIST TO TURN THIS SECTION INTO ACTIONS
| ☐ | Review a sample of past significant business decisions to see whether information about risks relevant to the decision was captured, analysed and disclosed |
| ☐ | Determine which business decisions regularly taken by the management may benefit most from additional risk analysis |
| ☐ | Develop a methodology that will allow risk assessments to be carried for every significant business decision before the decision is taken |
| ☐ | Quality control the results of risk analysis used during decision making |
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