Finding Rewards within Risk

Most factors that prolong declines in top-line growth are rooted in preventable management mistakes, not the outside economic cycle itself

By The Staff of the Corporate Executive Board

U.S. and European companies are facing an unprecedented level and velocity of risk that is threatening their near-term growth potential.

Given the volatility of the past 18 months companies are making significant investments to improve their ability to understand the likelihood and severity of potential risk events. Such events could include a data center outage, natural disasters, change of government in operating country, etc. Most companies have designed programs to focus on risk identification and prevention. In fact, according to research by the Corporate Executive Board (CEB), senior management spends 80% of their time on risk processes and only 20% of their time on actively managing risks and opportunities.

CEB found that companies that utilize this risk management approach can often become paralyzed if they attempt to prepare for every possible reaction to every piece of new information. More important, such tactics typically do not account for the increasing velocity with which risk can swamp a company with unpredictable market conditions.

This trend is so prevalent that CEB's Annual Executive Guidance identified improper risk assessment as one of the top "enemies" that most threaten companies' post-recession performance in 2010. Based on testing thousands of corporate plan reviews across its global network of over 5,100 leading companies against its own deep research, this annual initiative uncovered that about 81 percent of the factors that prolong declines in top-line growth are rooted in preventable management mistakes, not the economic cycle itself.

Knowing this, how can companies effectively develop a successful risk management initiative that will help them achieve growth?

Through its research, CEB has found that organizations that focus on risk prioritization and response receive a 20 percent higher revenue growth and as much as 50 percent higher earnings growth than their peers that focus only on risk identification and prevention.

To confront the enemy of larger and more frequent losses due to increasing risk velocity, companies should:

— Focus on building agile risk response capabilities by preparing for only the most important and uncertain scenarios rather than spending time on risk assessment

— Balance a careful view of a limited set of metrics by testing each for economic relevance before adding them to business scorecards

— Prioritize risk based on the velocity of its emergence and how quickly it can impact operating plans

While there is a significant amount of risk in the current economy, by following the steps outlined here to create an effective risk management strategy, companies have an opportunity to find rewards that can in fact ignite profits.

Provided by Corporate Executive Board —What the Best Companies Do™

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