Risk management needs to mature

Saying that the risks faced by businesses today are greater than any time in the last 50 years may appear to be stating the obvious but this is a truth that many businesses have been slow to realise. In order to ensure that the existing assets of companies are adequately protected companies need to look more intensely at their risk management in order to ensure the survival of the company.

Celestine Munda, Business Risk Services Director at Ernst & Young comments that any company with a strong scenario planning and risk management competency should have been prepared for the current downturn. The impact of the current crisis is proof that companies large and small were inadequately prepared to proactively protect themselves against this eventuality.

“In order to ensure that the risk management function is capable of dealing with future eventualities the ambit of risk management need to be expanded beyond the financial aspects of the business to encompass operational and performance management issues,” she says.

“What is clear is that these issues are intrinsically linked,” she explains. “Should a particular supplier be unable to secure raw material because of a lack of access to credit this has a direct impact along the entire supply chain. If companies are not performing a risk analysis on all aspects of their supply chain then they are likely to be affected by this,” Munda comments.

She warns that companies that do not look at performance and risk management together risk basing critical decisions on incomplete information. This can have a profound impact, not only on the future of the business, but on its ability to function in the short term.

She adds that it is essential that companies remember that risk is never static, every development in the market has a multitude of knock-on effects and companies that are not cognisant of this fact will suffer the consequences.

“We need only to look at how companies that were previously considered stable have come under pressure in a very short period of time to understand how fast things can change in the current market,” she comments.

In order to properly manage the risk that is associated with the adverse business environment the corporate risk management strategy needs to be championed at the highest level of the organisation. “The right tone is vital in creating a culture within the organisation where risk management is seen as core to the business itself,” she says.

Munda recommends that in order to ensure that companies do not fall foul of risks similar to those that have caused the current downturn companies should be keeping track of a much broader range of risks and opportunities, not just in their immediate market but in the extended market as well.