Integrating risk management into business decision making is the missing link in corporate governance. Organisations that view risk management as a standalone periodic process designed to manage risks make the news more often than not. Risk based decision making is the next stage of the corporate evolution. And yet many organisations choose not to go down that path. Here are some of the reasons why many organisations are still stuck in RM1 world.
Balancing Short-term and Long-term Objectives
One of the most significant challenges in risk-based decision making is finding the right balance between short-term needs and long-term goals. Decision-makers must weigh immediate concerns, such as cost savings or productivity gains, against the potential impact of those decisions on the organization’s long-term objectives and stability. Striking the right balance requires a deep understanding of the underlying risk profile of the decision at hand.
Read our guide on the topic: https://riskacademy.blog/download/risk-academys-guide-on-risk-appetite/
Overcoming Cognitive Biases
Cognitive biases, such as overconfidence, anchoring, and confirmation bias, can significantly impact the quality of risk-based decision making. These biases often lead to suboptimal risk assessments, as decision-makers may overlook potential risks, underestimate their severity, or rely too heavily on previous experiences. To overcome these biases, organizations can invest in training programs that help decision-makers recognize and counteract their biases, as well as implement structured decision-making processes that encourage diverse perspectives and thorough risk evaluations.
Read our guide on the topic: https://riskacademy.blog/download/risk-academys-guide-to-risk-culture/
Data Quality and Availability
Access to reliable, high-quality data is essential for accurate risk assessments and informed decision making. This is more a myth than a real issue, as Douglas Hubbard illustrates in his books companies need less data than they need and have more data than they think. Ensuring that the data used in risk assessments is accurate, up-to-date, and relevant requires ongoing investment in data management processes and infrastructure, as well as a commitment to fostering a data-driven culture within the organization. This sounds complex, but in reality just means finding existing data sources with the company and making slight modifications to how data is stored to make it suitable for future risk analysis.
Resistance to Change
Implementing new risk management practices and strategies can encounter resistance from employees and stakeholders who are accustomed to existing processes or reluctant to adopt new risk based approaches. This resistance can hinder the organization’s ability to effectively identify risks during decision preparation and adapt to changing circumstances. To address this challenge, organizations need to invest in change management initiatives that engage stakeholders in the decision-making process, communicate the benefits of new risk management practices, and provide the necessary resources and support to facilitate a smooth transition.
Skill Gaps and Expertise
Organizations may lack the necessary skills and expertise to effectively and quickly quantify risks during decision making process. Filling these skill gaps requires ongoing investment in risk management team training and development, as well as the recruitment of experienced risk management professionals. Additionally, organizations can leverage external resources, such as consultants or industry experts, to supplement their internal capabilities and ensure that risk-based decision making is informed by the latest best practices and insights.
Read our guide on the topic: https://riskacademy.blog/download/risk-academys-guide-to-being-a-risk-manager/
Measuring the Effectiveness of Risk Mitigation Strategies
Quantifying the success of risk mitigation efforts is believed to be challenging, as it often involves assessing the impact of actions taken against hypothetical scenarios that did not occur. To address this challenge, organizations can develop performance metrics and indicators that track the progress and effectiveness of risk mitigation initiatives over time. For example our team showed value of risk management through reducing the cost of insurance, reducing market risk volatility and the costs associated with procurement. Regularly reviewing and adjusting these metrics based on new information or changing circumstances can help organizations continuously improve their risk management processes and ensure they are achieving their desired outcomes.