Gartner’s Matt Shinkman discusses a sound strategy to increase executive urgency to address exposure to emerging risks, including building agreement on risk impact and presenting leadership with solution options.
Gartner research suggests that 90 percent of risk leaders believe their companies need to act faster to get ahead of emerging risks. “Emerging risk” is defined as “a risk that does not meaningfully impact the organization today and is highly uncertain, fast-moving, nonlinear and interdisciplinary.”
These risks are faster-moving and more interrelated than they were five years ago, making them more difficult to address before they become enterprise risks. Because of the speed at which they materialize, risk management leaders need to have a solution in place before those risks can have a meaningful impact. In short, organizations need solutions sooner to combat the increasing velocity of emerging risks, but planning takes longer to coordinate because of their increasingly interdisciplinary nature.
For example, when marijuana legalization at the U.S. state level spiked, the IRS was overwhelmed by the sheer volume of cash payments from the large, but unbanked, marijuana industry. As a result, staff were exposed to a period of heightened security and fraud risk. In addition, mitigation costs, such as consultancy and extra staff, were higher than if the IRS had seen the oncoming cash flow and prepared for it.
Most organizations are all too familiar with this kind of situation. Nearly 70 percent of risk management leaders have been hit by an emerging risk that they believe they could have seen coming and better prepared for.
To address this concern, 89 percent of risk leaders believe that more precise predictions will drive faster action on an emerging risk. Another approach could be more effective, however.
In fact, while 76 percent of risk management leaders share emerging risk information with the board, only about 22 percent of risk committees are likely to take action or change their perspective as a result of that information.
Research shows that, contrary to risk managers’ beliefs, more information about a risk or more predictions rarely leads the risk committee to act or change its perspective. Instead, a focus on solution options is 64 percentage points more likely to drive the risk committee to act or change their perception.
Some of the issues with generating more information or predictions around a risk are that executives may disagree with predictions or the methodology used and therefore ignore the findings, or they may simply be overwhelmed by information that shifts their focus away from taking action.
Solution Options Approach
Risk management leaders rely on the persuasive power of information to drive action. But while 76 percent of risk management leaders report on emerging risks to the board, only 42 percent are able to engage the risk committee with that information. And just as an informed committee does not guarantee engagement, an engaged committee does not guarantee action. Only about half of engaged risk committees are likely to take action or change their perspective as a result of the emerging risk information.
Offering a selection of ready-made solutions on the clearest emerging risks is far more likely to drive action, because it reduces the decision-making burden on leaders. We can all understand that it’s often easier to respond to a question with a list of answers than an open-ended one.
Communicating the urgency of action is also important because, in reality, executives are often genuinely concerned about emerging risks – especially so amid some very public failures by other organizations. To this end, 77 percent of risk management leaders feel pressure from their executives to do more on emerging risks. They often fail, however, to drive executive action in this area.
The tendency that we see is that describing a problem in ever more detail or with more alarming predictions regularly results in paralysis. In fact, our survey suggests that such an approach is likely to make a change in approach just 3 percent more likely, whereas the figure for a solutions option approach is 67 percent.
This is a very stark difference that is likely to make a material impact to an organization’s bottom line if it mitigates a serious risk more effectively.
Risk management leaders should, therefore, present the board with solutions to emerging risks that may only show small impacts now. They should focus on small actions with immediate benefits to effectively put action on a plate for leaders. With this approach, it’s harder to say, “not now” to everything, whereas predictions about the future often seem like something to revisit later or discuss rather than act on.
Determining which emerging risks require action can be challenging. Traditional risk assessment criteria evaluate likelihood and impact. These criteria are nearly impossible to assess for a risk with an uncertain trajectory, leaving risk management leaders uncertain of which risks to focus on. Instead, risk management leaders should assess the organization’s ability to respond to a risk. By applying new criteria to existing sources of risk information, risk management leaders can determine which emerging risks are most ripe for action.
Risk management professionals are far more likely to reach the threshold of executive action if they ask for smaller actions; moreover, they may find that their current level of understanding of a risk is already sufficient to take small steps. This negates a requirement for more information before taking action on risk, driving a faster response.
Once an executive is committed to taking action on a risk, they are more likely to endorse further actions. Bolster this approach by informing rather than challenging the organization’s plans. Conversations that challenge plans tend to undermine executive confidence, potentially resulting in a haphazard approach.
Instead, seek to have conversations on risk that inform, not challenge, the organization’s plans. Build agreement on the risk’s impact and likelihood. This approach increases executive urgency to address enterprise risk exposure.
In summary, risk management leaders should detect a subset of emerging risks that are ripe for action and work with executives and the business to identify low-cost actions that address them. Try to do this by taking executives on a different learning journey, more focused on solution options than the traditional risk presentation.