There‘s an old joke of unknown origin that goes something like: A huge bear appears in front of two campers in the woods. The bear sees the campers and begins to run toward them. The first camper drops her backpack, digs out a pair of sneakers and frantically begins to put them on. The second camper says, “What are you doing? Sneakers won’t help you outrun that bear.” The first camper replies: “I know I can’t fun faster than the bear. I just have to run faster than you.”
CFOs should have the notion of competitive advantage on their minds when they consider the values and goals of their companies’ enterprise risk management (ERM) programs. As a company becomes more committed to managing its risks in a unified way, it also begins to see risk management as competitive endeavor.
Our consulting experience suggests that corporations that adopt ERM programs do so at one of three levels of commitment within their company. Some CFOs think that fundamental risk management practices, such as those emphasizing claims management and safety, are enough. Others want to employ a broader approach to risk across the entire organization. And still others want to cultivate ERM best practices to create new value (embedding the ERM process into strategic planning is one example).
Obviously, the three different approaches to ERM mean different levels of budget allocations, commitment from the CEO and the board and the skill sets of the people required to administer the program. At the third, or deepest, level of risk management commitment, value creation, however, corporations can achieve a competitive advantage by managing their risks better than their competition. Risk management for competitive gain revolves around three central themes:
- If I know more about my risks than my competitors, I should be able to manage those risks better by going on the offensive. I will consider each risk and opportunity together to provide a view of both its upsides and downsides.
- If I know more than my competitor about my organization’s risks and those in our industry, I should be able to see adversity on the horizon sooner than the competition is able to. I should be able to adjust to changing conditions faster when, for example, making an acquisition or spotting a potential break in a supply chain.
- I will embed the ERM process into our strategic and business planning with the goal of providing support for making risk-informed decisions around both risks and opportunities, thereby improving our chances of achieving planned financial and operating objectives.
Tools and Techniques
There are many tools and techniques that can be used by CFOs to help their companies gain a risk management competitive advantage. And a risk management competitive advantage should also end up being a financial and/or operational advantage.
The starting point is having high-quality data and information. Obtaining risk and opportunity intelligence from line operations at the micro level, coupling it with intelligence at the macro level and making the entire package actionable is the objective.
That presupposes that the organization has a system capable of identifying and gathering information, reporting it to the right people and tracking it. Some companies organize their risk information within software programs that will produce risk registers to help them prioritize.
One way to test a company’s risk management program and its information-gathering capabilities is by using the old standby tool of a SWOT (strengths, weaknesses, opportunities, threats) analysis. Say a valid cross-representation of your company indicates that your companies key risks are being well managed. To confirm the SWOT analysis is valid, CFOs can survey key executives and internal auditors about their perceptions of the SWOT analysis.
Another tool that has been adopted by many organizations is a “risk map,” a graphical snapshot of current risks that can serve as an executive summary of the risk register. A better tool for tracking a possible competitive advantage or the upside of an opportunity, however, is a “value map,” an illustration of both threats and opportunities.
Because threats and opportunities are two sides of the same coin, a value map also has two sides: Threats (negative outcomes) are plotted on the left side of the map, while Opportunities (positive outcomes) are located on the right side. Those outcome values may be measures of earnings per share or a project’s net present value, for example.
Far more advanced techniques that support risk-informed decision-making, especially when considering the competition, involve Game Theory. Such techniques can be used to plot competitive advantages in acquisitions, negotiations, setting prices and launching a new product, for example.
Finance chiefs, in short, should always maintain their focus on their companies’ competitive advantages when plotting out the risks to their enterprises. Conversely, the pathway to competitive advantage is to embed the ERM process within strategic and business planning.
John Bugalla is a principal with ermINSIGHTS and Kristina Narvaez is president and CEO of ERM Strategies LLC.
Photo by: SWOT pt.svg