Much has been written about the risk leader of the future, but there is less agreement as to how exactly this person can be strategic in their approach. Darren Munday, partner at ICG, gives us the ‘how’ and proposes a structured approach to horizon scanning, in our latest #ChangingRisk article
What is strategy? This fundamental question appears to stop many risk leaders in their tracks.
Strategy is simply a means to an end – favourable business outcomes. Yet most risk departments’ time is not focused on these outcomes.
Discussions with internal and external stakeholders regarding governance, oversight and establishing the right culture should take place in support of developing and executing the right business strategy.
For many, the role of the risk department has been one of documenting and not developing or challenging business strategy.
In some sectors such as insurance, the traditional approach has been one where leaders believed the world was predictable; the basis of competition stable; and competitive advantage once obtained is sustainable.
This has inevitably led to incrementalism, where firms seek to maximise efficiency gains and differentiation is based on position, scale and first order underwriting capabilities.
Until recently, the industry avoided disruption largely because of high barriers to entry, notably regulation and capital. The establishment of the Financial Conduct Authority sandbox, accelerators and early-stage capital, has enabled start-ups to secure footholds. Business leaders recognising the strategic landscape is changing and the future no longer predictable, are hastily discussing how business and operating modes can be adapted to this new norm.
When competitive advantage is short-lived
When your competitive advantage is short-lived, the only real response is to continually adapt to change by identifying a number of strategic options that firms can test and act upon. But herein lies the challenge – by continuously experimenting, refining and adapting strategic options – more quickly and economically than competitors, there is a trade-off. Not all innovation will succeed.
Some firms have successfully embraced ‘corporate entrepreneurship’ and implemented adaptive strategic frameworks that continually renew their competitive advantage. What then can risk leaders do to become more strategic in their approach?
It is a tough challenge to ask technical risk professionals to put aside what they know (or can prove based on historic data) and to start thinking creatively about what ‘could be’. Only by partnering with business leaders and exploring the unique combination of plausible outcomes, will practical management actions be identified. Engagement from the business is critical, as is acceptance there is no perfect answer.
The current ad hoc approach to identifying and managing emerging risks fails to recognise their dynamic and interconnected nature. It is imperative risk leaders adopt a highly analytical and fact-based approach that challenges not only their own assumptions, but also those in the business and industry. By developing your own view of the future, it is possible to build strategic resilience and help the business deliver on the right business strategy.
One approach is to adopt ‘always on’ sensing – the organisational capability to scan the business environment and develop valuable strategic insights. There are three elements to this approach:
- Scanning - assimilation of information about events and trends in the external environment and monitoring changes in strategic assets (systems, relationships, culture, knowledge)
- Strategic hypothesis - draws on management intuition and entrepreneurial insights, often informed by scanning outcomes
- Trigger analysis - an assessment of the type and means of strategic change required to act upon various strategic insights
The output could be several potential scenarios that describe certainties, uncertainties, primary and secondary disrupters dispensing with the long-list approach. The resulting strategic narrative could be challenged by business leaders for completeness and accuracy and the effectiveness of management actions.
If we accept from the outset that we will not be able to accurately predict how the unique combination of strategic risks will actually manifest, this lets us off the certainty hook and allows risk leaders to be creative.
By scanning the horizon and thinking about the challenge along continuums, this allows risk leaders to move away from the endless technical debate and start to think creatively about plausible scenarios. There will never be a perfect answer (or scenario that accurately predicts the outcome), but what it will do is allow the debate to move onto the all-important management actions.
There is huge opportunity for risk leaders to deliver value creation and value capture activities for their firms. If we can avoid the tendency to fall into ‘risk jargon’ or a back-office process-led mind-set, risk leaders inherently have the skills and capabilities to help firms win in what is a very challenging trading environment.