Everyone sees the world a bit differently…it’s one of those fun facts that makes life so interesting.
Think about how boring the world would be if we all thought the same way!
As with a group of any size, a company’s personnel will have a variety of perspectives or biases on a particular risk. It’s not that anyone is wrong per se, but rather the change in focus from a singular department to the enterprise creates the need to re-evaluate a risk’s potential impact and likelihood.
For example, let’s say a department has a $10 million budget, but there’s a risk that could cause it to overspend $1 million on a project. Sounds pretty serious, and to the manager of this area, it is. The potential of overspending 10% of your entire department’s budget on one project is a significant risk that needs addressing well before it becomes reality.
This project, though, is one of several being done in pursuit of a core 5-year strategic goal.
Therefore, to the executive in charge of this particular strategic goal, the potential of spending an additional $1 million is a semi-big deal, but it will be a BIG deal if the project doesn’t get completed and the goals end up being missed altogether.
What’s a company to do when one person thinks a risk is significant while someone else says “hey, not so fast”?
I cannot understate the importance of having a realistic assessment of risks to your organization. Without this clear understanding, the company will pay too close of attention to the risks that don’t need the attention, and not enough attention to the risks that do. The result – the risks that really require the attention will continue to get worse until they become full-blown, and potentially existential, crises.
A balancing of assessment results is needed to ensure the company is focusing its time and energy in the right places.
When working as a director of ERM for a large property insurance company in Florida, one of things I always made to sure to remind my team was that we were there to ask questions and challenge assumptions.
One way of doing this can be found in Hans Læssøe’s book Prepare to Dare.
Instead of asking the only risk owner open-ended questions on the impact and likelihood (…or other parameters depending on the situation) and relying solely on their input, Hans suggests that ERM managers discuss the risk with relevant colleague(s) and ask them to assess it as if they were the owner.
When it comes to choosing colleagues, it’s important to select individual(s) with at least some connection to or knowledge of the risk but who can offer a different perspective than the owner. Again, the idea is to get a comprehensive view of the risk.
Someone in charge of product development owns a product-related risk, so they will have a certain perspective on its significance. To better understand the risk and its true impact, a person in sales will be an ideal candidate. They are familiar with the product but have a completely different perspective on risks and opportunities since they are only involved with the product after manufactured or when it is time to sell it.
Another example of a risk owner/challenger combination can be a lawyer as risk owner and an auditor as challenger. Again, both roles in the company will have completely different perspectives that will need to be accounted for.
Of course, you can always reverse roles in both of these examples depending on the circumstances.
What you should have noticed is how the risk owner and challenger both have some connection to the risk, which is desirable in most cases. However, in some circumstances, it can be beneficial to bring on someone with absolutely no connection to the risk to challenge the owner’s assessment. Hans cautions that bringing in someone without a connection can be time consuming, so it’s best to save this option for areas that need the extra scrutiny.
After gathering information from the identified parties, an ERM manager can then discuss it with relevant company leaders and the risk owner themselves to define a final assessment. What I always thought is that risk assessments can truly highlight gaps in communications or situational knowledge. In the end, it is the responsibility of the owner to have the final say over the description and assessment of their risk.
After these conversations are complete, it is entirely possible that what initially seemed like a big risk within one department is rather minor or could even be considered an opportunity at an enterprise-level.
So why get different perspectives? Much like we would do for a major medical problem or some type of big-ticket purchase, it is strongly advised to gather different perspectives to ensure the company is making the best decision possible.
Risks in our companies are no different…
What methods do you use to ensure assessment results reflect the true nature of a risk to the enterprise as a whole?
As always, thank you to Hans for sharing his approaches and experiences through his book and elsewhere.
To share your thoughts or any other methods you’ve encountered, please don’t hesitate to leave a comment below or join the conversation on LinkedIn.
Also, if your company is finding it difficult to obtain an accurate measure of enterprise risks and opportunities and need an outside perspective to get unstuck, feel free to reach out to me by email or through my online calendar to schedule a time to discuss your specific challenges and potential solutions.