Risk management is a daily routine, involving key internal counterparts to be efficient. By identifying and investigating your exposures thoroughly, you are likely to find up to 75% of possible impacts divided over the 4-8 largest risk areas.
In this blogpost written by our guest-author Rasmus Schiønning, you will read about the main reasons for doing risk management, the limitation faced by corporates in their current models, daily work on risk management, onboarding risk ambassadors and finally finding the few risks that matters most.
Why Risk management is important
Why corporates invest in risk management is based on the below areas:
The “current” risk model
Often corporates have risk models and measures, which looks fine on the surface, however have not been maintained or reviewed for a long period. This is partly due to:
From my experience several corporates are aware that their risk modelling is adequate, but not always sufficient. The risk models often have historical roots (we have always measured this way and management likes it).
Further the modelling has proven to be the best available with the resources we have (i.e. no time for updating and rolling out new risk models).
Finally quantifying the risks with high confidence, do require good data & modelling, which might not be directly available (i.e. Operational risk - knowing which (critical) spare parts poses the largest risk cannot be found in any economical reporting/ERP).
Risk – important questions & daily discipline
The first questions in evaluating your risk set up, are often:
When was the last time a review of the risk modelling and reporting was done? Was it a year ago or maybe more?
How sure are we that we have the actual, and most significant risks in our risk strategy?
Secondly, the acceptance of the term “Risk management is a daily discipline” is significant. You cannot be proactive in your risk management based on insufficient data, old models or no resources. It would be like steering without a map.
Unfortunately, some corporates do not set aside enough resources to do a centralized, coordinated effort to mange their risk exposures. With the current workload and standard FTE nominations within Treasury, it is difficult to have time to do proper risk management.
Identifying and communication with risk ambassadors within the company, is important. The change in models are not always well received – I have seen cases where management have asked the Treasurer why the risk reporting had to change. Even with comments like “it has been working until now, right?” Here the Treasurer have a task to educate and inform management and risk ambassadors about risk management and the fact this can/will change over time.
“The few which matters most”
What we know from corporate examples, is, that often 4-6 identified risk areas makes up at least 75% of the corporate risk for the company. That is why finding these risks requires focus and work to identify/map all. Then from risk modelling you can evaluate the possible impact of these few significant risks. Further correlation calculations with other risks can be included to build the proof on importance.
Unfortunately, not all companies have this clarity, thus having a risk strategy covering the 10 most significant risk exposures.
The benefits of doing a detailed risk identification and management, is, the fact that savings are possible. By savings, I mean avoidance of costs - hedging limited risks or buying insurances for improbable exposures, can be eliminated.
Key take aways
Finally, a few points to remember in your risk management. Below a list of elements which will impact your efficiency and risk management:
Organization / Owner
Culture / Mindset
How you manage your risks
About the author
Rasmus Schiønning is a trusted advisor for large international companies and banks within Treasury, Risk Management, Cash Management and Banking, having more than 20 years of experience across 80+ countries. Helping corporates with a range of tasks including; policy definitions, TR vendor negotiations, business transformations to shared services, bank tendering, TMS selection & implementations and compliance evaluations.
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