A recent Deloitte poll surveyed nearly 2,400 professionals in a bid to better understand third-party or extended enterprise risk management (EERM) programs and explore how enhanced management of these programs can drive value for an organization. Deloitte’s Dan Kinsella explains why executives should reimagine EERM for value creation.
The benefits related to expanding a company’s capabilities beyond the traditional four walls of an organization are too big to ignore, but many executives see challenges in managing the third-party risk involved. Unfortunately, these challenges can obscure the perceived value in expanding the enterprise and test the resolve of decision-makers who want to make it happen.
That’s the thrust of the poll, which surveyed professionals across a range of industries, including banking and securities, technology, investment management, travel, hospitality and services, insurance and other sectors. A mere 3.9 percent of respondents in the survey defined their EERM efforts as “optimized.”
That means a small fraction of organizations have matured EERM to the point of having an integrated strategy and decision-making, continuous improvement and investment, executive champions and highly customized decision support tools with external data. In constructing our poll, we positioned these as some of the key attributes necessary to mature EERM programs and create value. In developing these attributes, organizations can better streamline with improved confidence the management of third parties. So why do so few companies have these attributes in place to do EERM well?
EERM as a Value Engine
I’ll share a bit more of the survey results below, but I can’t stress how important it is to understand value in the right context. When we look at how more mature third-party management can create value for organizations, we define value as both revenue generation and cost-reducing efficiencies. Third parties with market presence can help organizations expand more rapidly into new or untapped markets. Better management of those third parties can also help to control cost by maintaining integrity and value expected out of contracts.
The survey is a snapshot of the challenges many organizations are experiencing today amid shifting technologies and business models. A problem — especially among senior leaders who may not have a clear view of contractor relationships at the business unit level — is that the pain associated with third-party risk is more evident than the eventual gain that comes with extending the enterprise when managed well.
The truth is that EERM can be a powerful business driver — rather than a mere compliance requirement — as we extend the physical and virtual boundaries of the organization with third-party or even fourth- and fifth-party assets. But that requires a shift in thinking of risk management as more than mitigating the downside.
Executives, in other words, should consider reimagining EERM for value creation by learning to apply risk management only where it’s needed. They should consider how to leverage risk for efficiency gains and apply such processes strategically — without applying the brakes on business growth. Against that backdrop, the EERM maturity problems uncovered in our recent study hold new urgency.
Navigating Through Challenges
Consider how more than one-third of respondents in the Deloitte survey defined their current organizations’ processes to measure and monitor risks in the extended enterprise as “ad hoc” or “reactive.” And among the top barriers to progress cited in the survey were some tough management challenges – including leadership’s view of EERM as primarily a compliance-driven requirement and EERM awareness anchored at the mid-management level, with little board or senior management visibility.
These findings are significant, particularly at a time when third parties are moving closer to the core of businesses. Organizations should consider how to raise the visibility of EERM programs in order to elevate awareness among the C-suite and board. The objective is to evolve these programs to be more coordinated, consistent and transformational in harmonizing risk, financial and performance aspects together into actionable business strategies.
Optimizing EERM is easier said than done, and it involves breaking a few old habits. Many organizations, for instance, continue to manage risks in the extended enterprise in a decentralized manner that often lacks consistent analysis and governance. Imagine, for instance, how different departments in a company might conduct their own security audits of the same third-party vendor that happens to work with many parts of the enterprise. Business units often function autonomously in their oversight of third parties, and this decentralized approach inhibits EERM maturity.
Instead, organizations should adopt a more formalized, “federated” governance model – one that centralizes certain functions to achieve efficiencies and avoid redundancies but that still allows some customization within business units. Striking this balance between standardization and customization — and supporting it with an effective mix of technology, people and policies — can be a potent driver of value.
A Stronger Future for EERM
Fortunately, the poll found a majority of respondents believe their organization will keep investing in EERM programs over the next 12 months. Of those responding in the affirmative, 24 percent believe their organization is most likely to invest in exploring and adopting technology, while 14.6 percent believe their organization is most likely to invest in exploring ongoing monitoring using risk sensing.
Mature EERM can help solve the conundrum that technology can present to executives: technology is necessary for innovation and growth, but it’s increasingly coming to the enterprise by way of third parties that — without the right policies and programs in place — can import risk into the heart of your organization. Better management of these third parties — better EERM, in other words — can reap the benefits of technology while minimizing the downside of third-party risks.
This is all food for thought as leaders look to embrace EERM more fully for improved return on investment and not just compliance. The more leaders understand the value of EERM and remain committed to maturing their approach to managing third-party risk, the more value third-party relationships can bring to their organizations. That’s why improving maturity of EERM programs can not only protect current assets, but also have the potential to expand business opportunities.