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Risk Management – Value of Effective Risk Management
Most think of risk management as an insurance policy, the price paid to help prevent potentially negative outcomes. Such a view leads to the conclusion that risk management is a business expense with a highly subjective value proposition. Risk management, however, offers companies a great deal of value and StrategyDriven would suggest the insurance view is far too narrow. Instead, effective risk management enables a business to accelerate its operations and market entry, to become more aggressive, an approach that in today’s fast paced marketplace environment is immeasurably valuable.[wcm_restrict plans=”25541, 25542, 25653″]
An Analogy
Instead of correlating risk management to an insurance policy, leaders should think of it in terms of a high performance automotive breaking system. High performance breaks, such as those on racing cars, enable the driver to reach higher rates of speed while still maintaining the same level of safety as slower drivers whose cars have less capable breaking systems.
In the case of an effective risk management system, the system itself warns of pending adverse impacts earlier so that less costly adjustments can be made to avoid risks; allowing the organization to speed its decisions and actions while maintaining the same risk profile as a company employing a less effective risk management program. Thus, an effective risk management system serves as both an insurance policy and a performance enhancer.
Determining the Risk Management System’s Value
Valuing the risk management system follows the same traditional cost-benefit calculation, as do all operations and initiatives.
Programmatic Costs
The risk management program’s total cost is the sum of the programmatic costs (labor, office space, tools – computers and software, consultants, subscriptions, etcetera) combined with the purchase cost of risk mitigating financial instruments (insurance policies, bonds, etcetera).
Programmatic Benefits
The risk management program’s benefits are the sum of the value of adverse impacts avoided plus the monetary and good will benefits of faster operations. Impact avoidance is calculated by examining preprogram rates of occurrence and costs of correction as compared with post program expenses; the difference (post program costs – preprogram costs) being the benefit added. The value of business operations acceleration is calculated based on the increased revenues generated by earlier market entry, reduce operating expenses resulting from preemptive improvement/corrective actions combined with some subjective measures as to the value of first-to-market activities (such as larger market share and cost reducing good will).
Programmatic Value
The value of the risk management program is the difference between the program’s total benefits and the total expenses.
Examining the risk management program value calculations reveals the traditional valuation shortfall. From the calculation, it is easily seen that the resulting benefits from the increased speed of decisions and actions is the erroneously discounted value proposition.[/wcm_restrict][wcm_nonmember plans=”25541, 25542, 25653″]
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