The future of risk

Protecting and enabling performance, Report 2009

Source: Ernst & Young, partner of PRIMO Europe

Albeit painful, progress ultimately results from crisis. The current downturn is causing companies to challenge their risk management processes and ask how they can further improve their risk management efforts. Against this backdrop, we conducted a survey to provide a snapshot of the current risk environment and to understand organizational attitudes toward enterprise risk management. We were also interested in understanding how recent events have impacted approaches to risk management and organizations’ abilities to identify and manage different types of risk. Never has there been a more critical time to define a path forward for the “future of risk.”

We believe that the recent economic challenges were, in part, more difficult to predict and manage due to the increasing complexity of risk management processes. Over the past few decades, the number of risk management functions has grown to the point where most large companies have seven or more separate risk functions — not counting their independent financial auditor. This has created inefficiencies and resulted in a degree of fatigue on the business. As the number of risk functions increases, coordination becomes more difficult and often results in coverage gaps and overlapping responsibilities. The demands and various reporting requirements placed on the business by these risk functions can become significant and burdensome. The number of risk functions and the various communications from these functions can be a challenge for executives and the board of directors to manage and understand.

As complexity has increased, so has company spending on risk management. Based on a previous survey we conducted last year of Fortune 1000 companies, we estimate that the average company spends about 4% of revenue on risk management activities.
We believe the answer to these challenges can be found by carefully considering how to balance risk, cost and value across the enterprise.

Considering the events of the past 12 months, it is not surprising that 96% of our recent survey respondents believe that their risk management programs could be improved. Furthermore, only 1% of companies intend to reduce their risk management resources. Given the current cost-conscious mentality, the fact that nearly all companies want to improve their risk management efforts and intend to maintain or increase their current levels of investment underscores the growing awareness of the value of sound risk management.

Moreover, 46% agreed that committing more resources to risk management would help to create a competitive advantage. Clearly, organizations recognize the importance of risk management. Leading organizations acknowledge that risk management is more than simply protecting existing assets; it is also about enabling performance to create future value.

However, the reality is that most risk functions will be asked to do more with the same or limited additional resources. There is a strong drive to improve risk coverage through better use of existing resources and to deliver more value from their respective functions. The challenge for most organizations will be to find increased efficiencies in the way their risk management functions operate and define the improvements that create the greatest value. We believe the answer to these challenges can be found by carefully considering how best to balance risk, cost and value across the enterprise. Companies that effectively address this challenge are more likely to outperform their competitors.

Download Future of Risk report 2009