The natural evolution of an organization often leads to disconnected key internal processes that exhibit various levels of maturity. This generates unique challenges for senior management and business leaders over time as key stakeholders, and their expectations for process sophistication, change during a company’s lifecycle. The unevenness in process maturity and dynamism of stakeholder expectation has historically led organizations to focus on the improvement of individual business processes rather than on enhancing the interaction between them.
Changing focus to the alignment of functional processes, and creating a symbiotic relationship between them, can increase both the effectiveness of the individual components and create powerful opportunities for efficiency, better decision-making, process control and collaboration across functions. Leading companies are focusing on this integration and realizing the benefits of process symbiosis.
Considering Risk Management and Strategic Planning
Risk management and strategic planning are two key business processes that are, more often than not, implemented at different times and grow at distinct rates. Initially, there may be reasons to grow these two integral functions in siloes, however continued separation and misalignment can lead to an overabundance of issues.
When firms do not incorporate strategic planning into risk management activities, hidden “pockets of risk” can develop due to new initiatives, acquisitions or any number of drivers related to firm growth. Without having a strong understanding of the risks associated with a growth strategy and associated strategic plan, companies leave themselves unequipped to combat threats to successful strategy execution as they arise.
On the other hand, firms that do not incorporate risk management into strategic planning exercises miss out on the opportunity to optimize where they allocate their scarce resources. Investors have return expectations for the risks that they take in providing capital. To generate this return, management acts as agents for investors (the classic principal-agent problem) which can lead to a unique interaction of incentives and aggressive (or too conservative) risk taking by an organization. By incorporating risk information in the strategic planning process, participants have purview into both the return and the risk of proposed initiatives providing an appropriate balance to decision-making.
Recent trends in these processes show that leaders across many industries are learning and achieving the benefits of aligning risk management and strategic planning activities with the other. Their focus has been on:
- Identifying risks associated with key firm initiatives
- Quantifying the amount of capital to hold for the risks associated with a project or business
- Establishing Key Risk Indicators and Key Performance Indicators to monitor deviations from anticipated results
- Calculating consistent risk-adjusted metrics to assess performance
- Identifying the range of scenarios and associated results for a given initiative
Regulators and governing bodies are also recognizing the importance of developing a symbiotic relationship between risk management and strategic planning. In the financial services industry in particular, we have seen regulators focus on the marriage of risk and strategy to support sustainability and business continuity.
Weighing the Effort and the Benefits
A hesitation to integrating risk management and strategic planning derives from the concern that it consumes too much time and too many resources or a view that if “it’s not broken, don’t fix it”. Business leaders want to focus on the strategic plan without distractions and want the flexibility to undertake initiatives of their choosing. However, what often goes unconsidered is the time consuming nature of addressing risk events as they occur and threaten the execution of a company’s strategy. Ultimately, taking the time to thoughtfully embed risk management into strategic planning eliminates unpreparedness around unforeseen issues down the road, which often occupy more time and resources than initially allotted.
Companies should not view risk management as a hindrance to strategy development; rather, they should consider it an enabler of effective and informed decision-making. Companies that take risks while having a full understanding of those risks can help manage unwanted exposure and capitalize on competitive advantages.
The benefits of fostering and creating a symbiotic relationship with risk management and strategic planning produces many benefits to the company. Exhibit 1 outlines several of these however companies will find that continued dividends will be realized throughout the organization.
Exhibit 1 – The symbiotic relationship of risk management and strategic planning
What You Can Do to Get Started
The first step in integrating strategic planning and risk management processes, is to actively engage the participants involved in both processes and generate excitement about the opportunity. Additionally, like any other firm initiative, achieving buy-in from senior management is crucial for success. Below are a few action items you can take to begin developing the beneficial interrelationship between strategic planning and risk management:
- Review current strategic planning and risk management activities to determine where information is shared between the two processes.
- Analyze prior strategic plans to identify initiatives that did not achieve desired results and identify the key risks that lead to the variance.
- Identify information that, if incorporated into previous planning cycles, could have made a difference in achieving desired goals.
- Develop a process to document the risks associated with key initiatives and construct contingency plans in the event risks come to fruition.
- Interview senior management and strategic planning participants to identify risk information that would bolster their decision-making power.
- Identify Key Risk Indicators for use in monitoring key initiatives.
Creating a symbiotic relationship between risk management and strategic planning activities boosts your ability to execute your strategy and manage your risks. With enhanced information, companies are more prepared and agile in adapting to changing circumstances. Furthermore, integrating risk management and strategic planning allows companies to have a balanced view of capital allocation due to a deeper understanding of risk and return trade-offs associated with different initiatives. Having the courage to break down siloes and integrate two traditionally separate processes yields immense benefits for your company and will position you to capitalize on and manage growth opportunities in the future.