RISK MANAGEMENT – A CATALYST FOR CHANGE

Risk Management-A catalyst for change

The world is in crisis at the moment: the Amazon is still burning, changing weather is causing floods and extreme conditions, and the planet is becoming hotter by the day, with the average surface temperature rising every year.

Not only was 2016 the warmest year on record, but eight of the 12 months that make up the year — from January through September, apart from June — were the warmest on record for those respective months.

If that’s not bad enough, we’re living with political uncertainty and global economic growth is slow, with some of the biggest economies in the world feeling the effects. In June 2019, the World Bank forecast that global economic growth will ease to a weaker-than-expected 2.6% this year before inching up to 2.7% in 2020. Growth in emerging markets and developing economies is expected to stabilise next year as some countries move past periods of financial strain, but economic momentum remains weak. In the UK, Brexit is playing deal or no-deal, which is affecting global currencies.

None of the uncertainty we are faced with today is in any way new. Over the past 100 years, we have seen two world wars, among other things. In the past few decades, we have faced a financial crisis, with the crash in 2009; seen the collapse of the Twin Towers in the US; and witnessed war and mass migration, the scourge of illnesses like malaria and HIV, natural disasters like an earthquake in Haiti in 2010, and a tsunami in Sumatra in 2004, Hurricane Katrina in 2005, the Sichuan earthquake in China in 2008, and the California wildfires of 2018. The diagram below illustrates the types of natural disasters we have lived with.

‘Business unusual’ and uncertainty that we have faced is not new but has been the status quo for centuries. In order to respond to uncertainty change is required to stay relevant and survive.  Resilient organisations with the ability to adapt are the only organisations that remain competitive. They are the ultimate survivors.

Below are a few organisations that were disrupted by a changing environment.

NOKIA

In less than a decade, Nokia emerged from Finland to lead the mobile phone revolution. It rapidly became one of the most recognisable and valuable brands in the world. At its height, Nokia commanded a global market share of over 40% in mobile phones. While its journey to the top was swift, its decline was equally so, culminating in the sale of its mobile phone business to Microsoft in 2013.

It is tempting to lay the blame for Nokia’s demise at the doors of Apple, Google and Samsung. But this ignores one very important fact: Nokia had begun to collapse from within well before any of these companies entered the mobile communications market. In these times of technological advancement, rapid market change and growing complexity, analysing the story of Nokia provides salutary lessons for any company wanting to either forge or maintain a leading position in their industry.

KODAK

There are few corporate blunders as staggering as Kodak’s missed opportunities in digital photography – a technology that it invented. This strategic failure was the direct cause of Kodak’s decades-long decline as digital photography destroyed its film-based business model.

The lessons from Kodak are subtle. Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up. Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. However, they failed to realise that online photo sharing was the new business, not just a way to expand the printing business.

It is evident that there needs to be a correlation between the rate of change and innovation and an organisation’s response to change. To initiate change, a catalyst is required, and before we look at what this means in the context of an organisation, I thought it might be a good idea to first look at science.

The definition of a catalyst is a person or thing that precipitates an event or a substance that increases the rate of a chemical reaction without itself undergoing any permanent chemical change. When we look to science and understand what the key components of a catalyst are, there are three key elements that have to be present:

What does this mean in the context of business and how can we use risk management as a catalyst for change? Let’s use the analogy of chemistry to analyse this within a business context.

Active component:

In chemistry, active components are responsible for the principal chemical reaction. Selecting the active component is the first step in catalyst design. I initially thought that the active component in an organisation referred to the operational level – the doers – but soon realised that it is strategy and leadership that drive everything. Strategy in most organisations is static and only gets looked at and revised on an annual basis. Organisational strategy should be agile and have the ability to change in response to changes in its operating environment.

Where does risk management fit into all of this? According to ISO 31000, the definition of risk is the effect uncertainty has on meeting objectives. Do we spend enough time anticipating and understanding the uncertainties that our organisation is faced with? Uncertainty can potentially hinder us from meeting our objectives, so we really need to understand them, along with our strategy.

Organisations often only undertake strategic risk assessments once they have set their strategies. Is that not perhaps going about thing the wrong way? Should we not understand our risks while we set our strategic objectives? We would then have a better understanding of where we should allocate resources and what indicators we should monitor and manage. According to a study done by Dr Viljoen van der Walt (MBA, PhD), risk identification should be incorporated into the strategy-setting process.

In his research, Dr van der Walt proposed that the risk management and strategic objective-setting processes be integrated, as the steps in both processes are complementary, as illustrated in the diagram below.

 

In order for risk management to be a catalyst for change, the risk management and strategic objective-setting processes have to serve as the active component as they are the first step in the design and initiation of the change process.

The supporter

In chemistry, a catalyst support is the material to which a catalyst is affixed (usually a solid with a high surface area). The support may be inert or participate in the catalytic reactions.

As a consultant with vast experience of how various organisations of different sizes work, I believe that leadership is the most important component involved in initiating change and managing risk. Leadership (decision-making by top management) has to set the tone and see the value that risk management can add to an organisation.

There are many different definitions of leadership. Not everyone has the same view of what good leadership entails, but I think they would agree that vision, innovation, strategic direction and intent are vital to advance any type of organisation. When it comes to the management of risk in an organisation, and the potential value it adds, leadership commitment is what it comes down to.

Leaders need to create a safe environment and be approachable for staff to share concerns and new ideas. They need to create an environment in which innovation and improvement are encouraged.

When it comes to integrating risk management as a strategic enabler, one of the biggest challenges is to get buy-in from leadership. Risk management is often seen as a compliance tick-the-box exercise – something we need to do to keep the auditors happy. There is a poorly understood perception of what risk management is. In order for any business to grow, create value, stay relevant and respond to change, a level of risk-taking is required. The risk management process is there to support this and enable better decision-making. In order to make better decisions, we need to have the right information and data.

Data has just overtaken oil as the world’s most valuable commodity, as illustrated in the diagram below.

Diagram 3: Comparison between declining importance of resources of the industrial age relative to that of data

I still question how this data is used to provide input on decision-making. Do we understand the data and what it is telling us? Are we even looking at the right data and indicators? Understanding your organisation’s risks and identifying indicators to serve as an early warning system will assist with a response to trends before they become incidents and lead to losses or damage. The data will empower leadership and show the value of risk information.

The promoters

In chemistry, promoters are metallic ions incorporated into metals and metallic oxide catalysts, reducing and oxidising gases or liquids, and acids and bases added during the reaction, or to the catalysts before being used.

Since it was introduced in organisations, risk management has been seen as a ‘grudge purchase’; it initially arose from buying insurance in case something went wrong. The risk management discipline in effect began as a study of using insurance to manage risk.

Later, from the 1950s to the 1970s, risk managers began to realise that it was too expensive to manage every risk with insurance, so the discipline expanded to alternatives to insurance. For example, training and safety programmes might be considered insurance alternatives. Let’s fast-forward to where we are today and look at the role that effective risk management can potentially play in a constantly operating environment. The environment should not be the driver for change but rather the other way around.

There is a saying that culture eats strategy for breakfast. In order for risk management to catalyse change, all staff members must play the role of promoters. Staff need to understand strategic objectives and risks, and the importance and impact of what they do on a day-to-day basis. A culture of ownership, purpose, intent and accountability will drive the right behavior.

In closing, when the right components are present, risk management can be a catalyst for change in response to uncertain operating environments. With uncertainty the ‘new normal’, we have to manage risk effectively if we want our organisations to remain sustainable in future.