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Are you feeling frustrated and unappreciated in your role as a risk manager? Do you sense that your efforts aren’t making any impact on business performance? Are you ignored when important and risky decisions are being made? It’s time to confront the truth: ERM, or RM1 as I call it, is holding you back. This article explores how shifting from ERM to risk based decision making, or RM2, can not only revitalize your career but save real money and improve company valuation.
Just think about it, RM2 is superior in every conceivable way, yet risk management associations, risk management education organisations and majority of practicing risk managers make an actual effort to ignore the very though of integrating risk management into decisions and processes. Don’t get me wrong, they all claim to embrace risk based decision making, but they are lying. You can’t put a lipstick on RM1 to turn it into RM2.
Over the last 6 months I spoke to more than 50 risk managers, trying to narrow down 3 common misconceptions, which make risk managers waste their time on RM1. Let’s unpack them together, starting with the fear of skills gap, the fear of management pushback, and the fear of losing credibility. I will show how overcoming these fears with RM2 can lead to more effective risk management and more importantly better decision-making and real tangible savings for the company.
Fear of skill gaps
Many risk managers worry that they lack the skills to implement RM2 effectively. There is some truth to it. RM2 is based on fundamental knowledge in probability theory, decision science, and neuroscience. Unfortunately, these topics are not typically covered in most risk courses or certifications (by the way plenty of non-risk management courses and certifications that teach RM2), leading to an ever escalating fear of inadequacy. This fear prevents risk managers from even attempting better risk analysis methods. But sticking with RM1 is not only holding you back personally, ERM is also a huge company money waster.
The value derived from RM1 and the role it plays in corporate governance and compliance is limited and often has a low correlation with actual risk reduction in terms of reduced cash flow volatility or significant savings. The true value comes from adopting RM2 methodologies, which integrate risk analysis into various decisions across the organization.
The good news is that this value comes in different shapes and sizes. Every decision requires its own specific risk analysis methodology, and most methodologies are not overly complex or quantitative. Many operational decisions can be significantly improved using existing skills without needing advanced techniques like Monte Carlo simulations. For example, integrating risk analysis into new vendors and contracts requires timely checklists with little math, the math on project and cost risk analysis at the early stages is very basic and linking risk analysis to budgeting cycle and calculating budget contingency can be done by a 5 year old.
RM2 is not about advanced quant, it is about doing the risk analysis at the right time. It is actually extremely easy to start moving towards RM2 with existing skills and resources.
Fear of management pushback
Another significant fear among risk managers is management pushback—that executives and decision-makers will resist or reject new approaches like RM2, making it difficult to gain support for risk management changes. This fear often stems from past experiences where traditional RM1 tools failed to resonate with management, leading to frustration and disengagement. This is real, but easily solvable.
Risk managers that I have spoken to and who experienced push back fall into 1 of 3 categories:
- Overcommitted to RM2 – some risk managers tried to bite more than they can chew. They tried to integrate RM2 into too many decisions including complex strategic investment decisions with multiple conflicting stakeholders. Start small, like I normally do, don’t integrate into whole procurement cycle, start by reviewing and modifying how vendors are accredited, then few months later move on to linking risks identified during vendor accreditation to RFP and tendering process then to using the risk information for contract terms negotiations, then to risk-based vendor performance management and credit risk calculation to determine appropriate limits for advances and so on. Don’t jump from a risk register to a monte carlo model, that’s too confusing even for the best executives.
- Never asked because got burned on RM1 – many risk managers are holding back, because they got push back on RM1 in the past. This is good news. Management should push back on RM1, because it is a waste of time and resources. Management had no problem with trying small changes to decisions when they see the value. Don’t start with critical business decisions, start with simple decisions where you have existing good relationship with the decision makers. Every single instance of RM2 is a separate sale, if you fail with budgeting, just do investment projects or vendor performance or major contracts, keep looking for pilots until something works really well and provide real savings. For example, I sold RM2 on insurance, by doubling limits, not changing deductibles and still saving 40% on annual premiums.
- Don’t understand RM2, so can’t sell – this one is easy, talk to my free RAW@AI to learn how RM2 can be applied in different business processes.
Building trust takes time. Start small, document successes meticulously, and gradually scale up your efforts as you gain more buy-in from management. By showing tangible results and maintaining open lines of communication with executives, you’ll be able to mitigate their resistance and pave the way for broader adoption of RM2 practices within your organization.
Fear of losing credibility
Lastly, there’s the fear of losing credibility—an anxiety that adopting new methods might undermine their credibility if not executed perfectly. This concern often leads risk managers back into the comfort zone of familiar yet ineffective practices.
Ironically, sticking with outdated methods like RM1 can do more harm than good when it comes to credibility. When decision-makers see that traditional tools fail to provide actionable insights or lead to poor outcomes, it undermines trust in the entire risk management function. I have met more than a dozen risk managers who lost their job because management realised RM1 was all smoke and mirrors.
Work closely with departments like finance or strategy or cost engineering or HSE that already use quantitative methods in their operations. By teaming up with these departments on joint projects or analyses, you share both the workload and ownership of results.
It’s also vital to document all successes meticulously—even small wins matter when building credibility over time. Keep detailed records of how implementing RM2 has led to better decision-making outcomes such as cost savings or improved project timelines; use these case studies as evidence for broader adoption within your organization.
You can do it, I believe in you. But, but, if you still need motivation, join me at https://2024.riskawarenessweek.com/ to learn how AI can make the transition to RM2 so much easier and quicker.
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