Cost out, value in

How can investments be made when risk management budgets are under pressure? How can risk management increase its value-add while it is expected to cut costs? In this blog I will propose some answers to these questions. My colleague Symon Dawson also talked about this in his recent blog.

Cost-saving and value creation in one model

At first glance, cost-saving and value creation might not come hand in hand. But is that always the case? In my opinion, the answer to reconcile the two lies in  a ‘self-funding’ model, where risk functions reduce costs with one hand, and simultaneously invest, innovate and add sustainable value with the other.

Long-term vision needed

The short-sighted year-on-year budgeting cycle which most organisations use doesn't work for this purpose. To demonstrate the offsetting effect of what I call ‘cost out’ and ‘value in’, we need a longer term vision and planning horizon, i.e. a multi-year scheme of investments and cost-savings for the upcoming two, three years.

Coronacrisis reinforces the need to cut costs

Cost reduction is simply necessary today, also for risk functions, and the coronacrisis has amplified this need. As a risk manager you may feel this is impossible, as regulatory, political and societal expectations continue to soar, new risks related to cyber, climate and conduct are emerging.

Your teams already cannot get all the work done. I respectfully disagree. Increasing cost-effectiveness isn’t just necessary, it is truly possible.

Approach risk management differently

Cost cutting should not be achieved by continuing what you have always done, and even more, in the same way, but with fewer people. That would only reduce the quality and impact of risk management, and have an adverse effect on the well-being of your staff. It may also destroy value in the long run. No, I believe Risk needs to do less, and it needs to do things differently.

'Switch off' outdated and inefficient controls

You need to 'switch off' outdated and inefficient controls (much like cutting out dead wood), which I believe can be done without a negative impact on mitigating your most important risks. Controls which are relevant and effective areto be automated to the extent possible.

You need to embrace new technology and digitalise standardised processes and procedures. Far more than what has already been done. And you need to outsource - and potentially offshore - all those tasks that others can do for us, at lower cost but also at higher quality. Like this, you free up the time, money, energy and mind-space, to invest in sustainable value creation in risk management.

Refocus, realign, redesign and rebuild

By reducing the cost of risk whilst increasing its operational efficiency and effectiveness, you pave the way for transformation in a changing world: refocus, realign, redesign and rebuild risk management.

Refocus on new and emerging risks such as cyber and technology risk, climate and environmental risk, and conduct and behavioural risk. Realign with the strategy, purpose and values of your organisation. Redesign your risk management of the future, harnessing the power of data and technology. 

Rebuild your workforce

And rebuild your organisation and your workforce. I don’t think you need more people - you need different skills. Different times call for different skill sets and profiles, and most risk management teams - I believe - are not fit for the future. Or maybe not even for today.

You will need to hire new talent - and upskill existing staff - with expertise in areas such as cyber, climate and conduct. In addition, soft skills, digital savviness, communication and advisory skills, business acumen, agility, lateral thinking and an ability to look beyond silos are vital for the risk manager of the future.

Cost reduction and value creation

As such, reducing cost with one hand whilst increasing value with the other, your risk transformation can pay for itself. Also,it will make risk management a more inspiring and fun place to work. There is really no good reason to wait. Tomorrow starts today.

Five dimensions for tomorrow's risk management

The risk transformation journey starts with a ‘future readiness assessment’. This assessment is performed together with advisors who can compare your organisation to peers, and evaluates your organisation’s risk management on five dimensions, which I believe are instrumental to make your risk function  fit for the future. 

These dimensions evaluate the level of digitalisation, but also the extent to which your staff has a future-proof skillset. Furthermore, the assessment looks into the scope of the current risk taxonomy and risk management framework, and the cost effectiveness of your risk management function.

Last but not least, the assessment evaluates the alignment between the strategy, purpose and values of your organisation and the way risk is managed.

Do you wonder what your organisation’s ‘risk spider web’ would look like?

In my next blog, before diving into each of the building blocks of risk transformation in more detail, I want to take a bit of a side step, and talk about how to sell this to your colleagues, or how to market risk. That is another key piece of the puzzle.

Also read the earlier parts of this blog series:

• Reimagine risk
• The seven ingredients of risk transformation