Risk-based strategies: Creating opportunities from risk

Risk-based strategies: Creating opportunities from risk

If companies are going to turn disruption into opportunity, many will need to revolutionise their approach to risk management. Chief Risk Officers need to do more than focus on value preservation. Katie Clinton, Head of Internal Audit, Risk & Compliance Services, explains more.

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Partner and Brexit Head of Internal Audit & Risk Compliance Services Lead

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The nature of business is changing fast with technology empowering customers, overturning business models and creating opportunities for new entrants. Established companies are responding with radical transformations of their own due to the need for upending traditional approaches to management. 

Business leaders are acutely aware of the need for faster, better informed decision-making. While CEOs take a more dynamic approach to strategy, CROs are under increasing pressure to develop a more pro-active view of risk.

If companies are going to turn disruption into opportunity, many will need to revolutionise their approach to risk management. CROs need to do more than focus on value preservation. They should view external changes not only as potential risks, but also as possible springboards for growth.

A smart risk management framework helps businesses to make informed decisions in the midst of technology-led disruption. KPMG’s Risk Based Strategies approach gives companies a set of analytical tools to compare ‘apples with pears’ – in other words, to weigh existing investments against emerging alternatives.  

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How do risk-based strategies work?

In practical terms, the approach has four key stages. First, CROs need to identify signals of change for their companies, their sector and the wider market. Signals of change could include macro trends such as urbanisation; technological innovations such as robotics; the actions of competitors; or changes in customer preferences. Once identified, the importance of signals can be gauged according to the potential scope and speed of their impact.

Second, businesses need to assess possible ‘headaches’ – areas where signals of change may impact their profit levers. What are the potential effects on products and services? How vulnerable are income streams? How resilient are operations? Will costs be pushed up?

The third step is for companies to reassess their current risk-reward assumptions. The goal is to identify areas where, in light of changing circumstances, firms may be taking too much risk – or too little. Businesses need to consciously recalibrate their risk appetite in response to their changing environment.

The final step is to convert insights into action. Companies align the outcomes of a risk-based strategy approach with their wider goals, allowing them to define the investments and initiatives most likely to achieve their ambitions.

A risk-based strategies approach has many practical benefits. It helps to prevent tensions between entrepreneurialism and governance to name but two. It also assesses rival investment proposals analytically, allowing firms to make decisions based on facts rather than hunches. It provides executives with a dashboard for communicating risk-reward information to boards and investors. And, by weighing downside risks against upside potential, it helps to avoid any last minute loss of nerve over ‘hidden risks’.  

Business is changing. A new era calls for a new approach to risk management. Risk-based strategies enable companies to anticipate disruption and invest in creative responses that will take them to the next level.

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