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December 23, 2016

3 Things SMEs Can Teach Big Firms

Summary:

Risk managers, take note: Small firms know that, unless an activity directly contributes to achieving objectives, it's not going to be done.

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I was very fortunate to host a roundtable during the FERMA risk seminar in Malta. I am very thankful for the opportunity, because the experience of brainstorming for 45 minutes with the representatives from various small and medium enterprises (SMEs) really highlighted some major problems with modern-day risk management and risk managers.

Here are three things that I think all of us could learn from managing risk at SMEs:

SMEs simply can’t afford to waste time or other resources on an activity that does not generate direct value

For SMEs, time is pressure, management teams are small, margins are limited and, as a result, management is very pragmatic about any new, sexy activities and initiatives. Risk management is no different. It has been around for years, yet few SMEs have properly adopted it. Something’s not right…

So can risk management make companies money? Of course it can. Do modern-day risk managers in non-financial companies in fact make money for their companies? Very few. Most of the modern-day approaches used by risk managers are so academic and superficial that management has a tough job buying it. Here is a short video on showing value from risk management, and it’s not what most risk managers are doing.

See also: Can Risk Management Even Be Effective?  

I think it’s about time we had an honest look at some of the activities risk managers do:

  • Do risk assessments really change the way business processes work, change the manufacturing process and change the way products are sold?
  • Do risk managers bring something of value to the table when any important business decision is made?
  • Do risk assessments change the way executives make decisions, and is risk analysis available on time to support every significant decision?
  • Are risk registers looked at by the CEO before making an important decision?
  • Do risk owners check their risk mitigation actions regularly?
  • Do risk appetite statements in non-financial companies change the way the company operates and the way decisions are made?
  • Do employees regularly read risk management framework documents?
  • Do managers call the risk manager before making a decision when faced with uncertainty?

I suspect the answer to most of those questions is “not quite.” This could mean one of two things: Either the risk manager is not doing his job properly, or he is properly doing his completely wrong. My bet is on the second option. There is simply a better way than risk profiles, risk registers, risk frameworks, risk owners — and so on. Here is a short video about what the future holds for risk management.

SMEs don’t do risk management to mitigate risks; they do it to make better decisions

This I found bizarre: We seem to have created a myth that risk management is about managing risks. Not so. Risk management is not an objective in itself. It’s just another management tool to help make better decisions and achieve objectives. This realization is a big difference between SMEs and large corporations.

SMEs do risk analysis when a decision needs to be made, using whatever risk analysis methodology is appropriate for that particular type of decision. Large corporations do risk management when it’s time to do risk management, be it annually, quarterly or some other regular internal. Nothing could be further from the truth. Unless your methodologies, approaches and tools allow risks to be analyzed at any moment during the day — when an important decision is being made or at every milestone within the core business processes — you are probably doing something wrong.

If there is one thing I learned over the years it is that no one in the company, and I mean NO ONE, expects the risk manager to care about risks. Well, maybe some about-to-retire audit committee member would, but most executives wouldn’t have the courage to deal with the real risks if you showed the risks to them. The rest of the company cares about making money, meeting objectives with the least amount of effort and getting nice bonuses as a result.

You can assign risk ownership to top executives as much as you like — no one cares. SMEs learned the hard way that unless an activity directly contributes to achieving objectives, it’s not going to be done. Risk management is no different. I find it ridiculous when risk managers talks about high risks and the need to mitigate them when, instead, they could be saying things like, “the probability of meeting this objective is 10% — unless we change things,” “there is an 85% chance your business unit will not get bonuses this year based on our risk analysis” and so on.

Anyone can be a risk manager, but it’s not natural

Despite what we within the risk management community have been telling each other for years, managers are not really managing risks every day. Thinking about risks is not natural for humans. The way System 1 and System 2 thinking operate in our brain make it literally impossible to see most of the risks associated with making decisions, let alone analyze them or manage them. Since the 1970s, many scientists, including two Nobel Prize winners (Kahnemann and Tversky), have discovered more than 200 cognitive biases that prevent managers from seeing, understanding and dealing with risks.

See also: 4 Ways Risk Managers Can Engage on Cyber  

This basically means risk surveys, most risk workshops and any kind of qualitative risk assessments are very unlikely to produce truthful results. But then what should risk managers use? There are plenty of alternatives, much better alternatives.

So how was the rest of the FERMA seminar?

My feedback to the organizers stays the same as my last post on the FERMA forum in Venice last year. In short, it’s impossible to grow if the people you talk to at conferences are people just like you: risk and insurance professionals.

Someone needs to play the devil’s advocate. It would be good to hear from a CFO who says he doesn’t care about any of the work risk managers do and budgets based on his own methodology with no input from the risk manager.

But, then again, Europe is probably way too politically correct for that 🙂

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About the Author

Alex Sidorenko has more than 13 years of strategic, innovation, risk and performance management experience across Australia, Russia, Poland and Kazakhstan. In 2014, he was named the risk manager of the year by the Russian Risk Management Association.

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