After the failure of risk management during the recent (and ongoing) financial crisis one could be forgiven for thinking that risk management – as we know it – is dead. However, effective risk management is the only means which businesses have to: (i) assess and compare investment decisions, (ii) seize subtle opportunities, and (iii) ensure regulatory compliance. Risk management has greater utility beyond these obvious benefits. Listed below are 5 of the top financial benefits of effective risk management:
1. IMPROVED LIQUIDITY
When managers cannot identify or mitigate complex risks they create risk contingency slush funds and pad their accounts with excessive risk premiums. This is not an efficient allocation of capital and it can even price a business out of the market. Precise identification of risk premiums removes these slush funds and creates greater firm liquidity and the ability to allocate capital where it is needed.
2. BETTER PROJECT PERFORMANCE
The best methods for risk identification and analysis of risk in projects are through the quantitative analysis of cost models and project schedules. However, these methods are only useful where such models are in enough detail. Good risk management leads to greater collaboration by cross-functional teams to optimise cost and schedule performance.
3. BETTER OPPORTUNITY MANAGEMENT
With greater liquidity comes the ability to seize emerging opportunities. Not only can the company use this capital across portfolios to manage risks but it can also seize opportunities for M&A, talent acquisition, share buybacks, increased dividends, employee bonuses or increased project funding/investment.
4. CONSENSUAL MANAGEMENT CULTURE
As managers work across the business to calibrate cost models with the project schedules; the contract and commercials with the technical architecture, the business is forced to adopt a more consensual, multi-disciplinary approach. Where GRC is implemented as part of a high-performance business initiative the culture is more likely to stick rather than one imposed from the top-down.
5. IMPROVED REPORTING & DECISION MAKING
An active GRC process which is fully integrated with the business relies on the quantitative analysis of core artifacts (cost models, project schedules and technical architectures and contracts). A quantitative culture coupled with regular, detailed analytical outputs also greatly improves the standard of financial and operational reporting and therefore the possibility for improved investment decision making.