RiskManagement: The Changing Landscape
RiskManagement: The Changing Landscape
Inthe recent years, the risk management scene has seen considerablechange. In the past, risk management’s role was limited to justloss exposure and was perceived as an avenue of conflict management.Currently, it has gained significance and have become the foundationto competitive advantage. To enhance their risk management potential,organizations are investing in risk management. At the time when theindustry had begun to show signs of recovery from the global creditcrunch of 2008 four years ago, risk management looked more likecrisis management. However, it is playing the role of a forwardlooking technique in managing a wide range of business risks whichcan enhance sustainable long-term development. This is the mainreason why risk management has taken a greater responsibility and agreater role than it had some years back (Taylor,Artman & Woelfer 2012).This shift has been influenced by the complexity and instability ofthe marketplace. Consequently, the risks facing companies and theirseriousness continue to increase. There is a growing shift incompanies as they have a Chief Risk officer in place. The CEO in somecompanies have assumed this responsibility.
Normally,organizations have a greater tolerance for financial risks as opposedto operating risks. Risks related to liquidity, foreign exchangerates, credit decisions etc constitute financial risks while risksrelated to supply chain or information technology constituteoperating risks. It is generally easier to calculate and controlfinancial risks than operating risks, most of which are determined byexternal factors beyond control of the company (Alexander,2013).The growth of financial markets and institutions have significantlyinfluenced the risk management process. The last ten years forexample, has seen tremendous transformation in financial markets. Thechanges in the market has also seen an expansion in risk management.Notable changes in our financial environment include ICT andreduction in regulatory and legal obstacles to entry. The globaleconomic crises also showed limitations in the industry’s riskmanagement tools and processes (Alexander,2013).
Inmilieu of current changes, companies have realized the significanceof a few things. First is the idea of linking risk to organizationalperformance. There is need for companies to establish systems thatwill link risk to organizational performance. Under the existingcircumstances, risk management also entail parameters such as veryinnovative measurements, modeling and analytics for risk anticipationand incorporating risk management potentials with organizationalstructure and through the business units.
Correspondingly,as indicated by Taylor,Artman & Woelfer (2012),growing relations regulatory authorities and managing control andcompliance has become critical. Besides, thorough training on riskmanagement and integrating risk knowledge across the organization isimportant. In essence, to achieve sustainable advantage, it hasbecome critical to integrate the risk function to encompass strategicplanning.
Theglobal economic environment has been challenging in the past fewyears. Similarly, the global operating models have led tocomplexities in global business. Cornettet al. (2011) notes that, whereas technology enhances our connectivity, italso makes it challenging to manage huge volumes of data and tomaintain consistency. Even though we can see that the pressure of theeconomic crises have lessened, it has become difficult for businessto pause in regard to risk management. Hence, risk managementcontinues to grow, making it necessary for business to invest incontinuous development of their risk management abilities. As aresult of the weakening economy and uncertainty that comes with it,business risks continue to sour. The driving force for the businessrisks is principally the competition for market share, which isworsened by the slow economic growth (McNeil,Frey & Embrechts, 2010).
Accordingto Cornettet al.(2011), focusing on risk map for industries globally, it’s evidentthat the risk map had been predominantly controlled by the financial,economic and regulatory risks. However, the international risk map iscurrently subject to other risks like political, strategic, creditand liquidity risks.
EnterpriseRisk Management in the context of the shifting economic landscape hasbecome an appropriate risk assessment and management tool forbusinesses. Besides considering all the risks, it necessitateseffective interaction throughout the organization. In addition tohelping organizations establish, manage and reduce risks, it helpsthem in seizing opportunities linked to achieving management andstrategic objectives. For this reason, CFOs in most companies haveplaced importance in ERM (McNeil,Frey & Embrechts, 2010).Considering the heightening uncertainty and complexity of thebusiness environment, companies are seeing the importance of riskmanagement.
Theextent of change in the risk management is also from the fact that,organizations are increasingly embracing it in their corporatestrategy. A significant change has been established in the makeupactivity of risk management agents in various organizations.Conformity capabilities have as well improved dramatically. Companieshave also been able to achieve several things like liquidity,compliance, reduction in the cost of capital, cash flow management,etc, thanks to improved risk capabilities of companies. Consequently, several companies with ERM have emerged since 2009.Regardless, there is a need to create enhanced capabilities to dealwith the rising uncertain risk scene (Taylor,Artman & Woelfer 2012).
Risk,compliance efficiency and finance integration are the most developedrisk capabilities across organizations while the least developed aregovernance and risk organization since they require furtheradvancement. To enhance analytics, companies must apply sophisticatedtechnologies. Staff training and technology are necessary forsuccessful analytics. Several organizations have developed practicesfor senior managers. In the current situation, companies are as wellinterested in forward-looking risk management approaches. The riskmanagement scene have significantly changed as is expected tocontinue changing in the future. Long term profitable growth andperformance management will occur as a result of risk managementdevelopment. It will therefore be appropriate to state that, muchattention and priority has been given on risk management over therecent past.
Alexander,K. (Ed.). (2013). Facilitiesmanagement: theory and practice.Routledge.
Cornett,M. M., McNutt, J. J., Strahan, P. E., & Tehranian, H. (2011).Liquidity risk management and credit supply in the financial crisis.Journalof Financial Economics,101(2),297-312.
McNeil,A. J., Frey, R., & Embrechts, P. (2010). Quantitativerisk management: concepts, techniques, and tools.Princeton university press.
Taylor,H., Artman, E., & Woelfer, J. P. (2012). Information technologyproject risk management: bridging the gap between research andpractice. Journalof information technology,27(1),17-34.