Risk Management: Arguably an Organization’s Best Strategic Weapon

Risk Management.  To some, its very name conjures up thoughts of red tape and administrative burdens.  But there’s more to the Risk Management discipline than protocol and procedure – let’s take a deeper look:

What is Risk Management, and how can it improve my bottom line?

A common misconception about Risk Management is that its sole function is to minimize the downside of catastrophic events, many of which have a low likelihood of occurrence.  Of course, the importance of preventative measures certainly cannot be discounted, but the statistical likelihood of a catastrophic incidence is far less than that of a supply chain interruption or sudden departure of a key executive.  Therein lies the “hidden” value of Risk Management:  maximizing business upside by reducing those factors which might interfere with the every day efficient use of human and financial capital.

Top Five Organizational Benefits of a Comprehensive Risk Management Program:

1. Financial Stability

One of the area’s most immediately impacted by a robust Risk Management program is the income statement.  While the known cost of Risk Management initiatives can be an initial budgetary encumbrance, the benefit is realized in a marked reduction of cash flow variability.  Furthermore, as time passes, variable costs associated with Risk Management practices tend to decrease, as Risk Management becomes more deeply ingrained in an organization’s culture.  Much in the way speculative traders hedge their investment positions, an organization’s CFO would be prudent to “hedge” against unexpected losses to preserve cash flow stability.

2. Improved Operational Efficiency

While many industry-specific examples can be made for how Risk Management can improve operational performance, the two most universally recognized benefits are the development of robust contingency plans, and the promotion of continual process improvements.  It should be noted that Risk Management – especially as it relates to the aforementioned – is not a static process.  Weaknesses and vulnerabilities are continuously to be examined, and contingency plans should be repeatedly stress-tested; adjustments should be made in real time to reflect any operational or programmatic changes.  If executed accordingly, this will result in both a higher quality of output and a reduction in the magnitude of existential threats.

3. Personnel Improvements

Risk Management practices can not only improve the quality of your prospective hires, but it can also ensure that they are adequately protected on the job.  For employers, there is a definitively negative correlation between embracing Risk Management and the frequency of employee absenteeism, turnover, and injury.

4. Regulatory Favor

While many industry regulatory bodies seek to encourage Risk Management practices and attitudes through mandatory reporting regulations, an organization’s management may view them as an administrative burden, rather than within the greater context of contributing to a holistic Risk Management program.  A Risk Management approach to areas of compliance can help merge mandatory with elective reporting, improve the efficiency of – and reduce costs for – data collection, and ensure continuing accreditation (if applicable). All of the aforementioned will be viewed favorably as “above and beyond” measures by regulatory bodies.

5. Reputational Benefits

These can be classified as the residual effects of a well-organized Risk Management program. Namely, this includes improved brand perception from employees, investors, vendors, partners, customers, and regulators.  By implementing a company-wide Risk Management program, your organization has effectively stated that not only has it given thought to the unexpected, but takes an active approach to controlling and mitigating undesirable consequences.  This creates an appearance of professionalism and competence among stakeholders and quells their fears of a “cascading effect” in the wake of an unexpected loss.  While they cannot be easily quantified, any marketing professional can speak to the importance of a positive public image.