How can companies best navigate through the current turbulent times? While there are abundant potential answers, EY advises organizations to look hard at their perhaps outdated approach to risk management.
The consulting organization says its research has revealed a cohort of companies that are half as likely to be surprised by external shocks, and a third better at swiftly identifying incidents and mounting a rapid response.
To arrive at these conclusions, EY surveyed 1,200 risk professionals at organizations with more than $1 billion in annual revenue, and qualitatively interviewed 40 of them, to capture the extent to which they:
- Align the risk management function with overall business strategy.
- Make business decisions based on a risk-informed strategy.
- Incentivize risk management professionals using business metrics.
- View risk management as an enabler of business growth.
Respondents answered questions on a five-point scale, from which EY created a rating index. The firm identified two groups it calls “risk strategists,” representing the top 32% of index scores, and “risk traditionalists,” comprising the bottom 25%.
Three-quarters (74%) of risk strategists reported that since 2020, their companies have made a moderate to significant reduction in the proportion of risks that are unexpected, a key risk management metric, compared with 50% for risk traditionalists.
There were similar disparities in favor of the risk strategists group for several other critical risk metrics.
According to EY, high performance in such areas is critical for negotiating what it calls the “NAVI” world, in which risks are increasingly:
- Nonlinear, triggering sudden tipping points that can catch companies by surprise.
- Accelerated, demanding an increased speed of response.
- Volatile, with frequent changes in direction that test companies’ agility.
- Interconnected, setting off multiple Nth-order downstream impacts and risks.
Mentions of NAVI-related keywords in companies’ public documents have leaped by 50% since 2020, according to EY’s research report.
Among the surveyed risk professionals, 55% of the strategists, but only 34% of the traditionalists, agreed that the external risk environment has become less linear over the past five years.
Similarly, about 60% of the strategists but 35-40% of the traditionalists agreed that the external risk environment has accelerated and grown more volatile and interconnected during that time span.
EY observed that a key constraint to improved risk management is the mindsets of those in the risk function.
“Risk management has historically attracted professionals who tend to be cautious and risk-averse,” the report said. “Much of risk management is driven by consensus, both in identification of risks and in the approaches used to manage risk.”
The key, according to EY, is changing the mindset from one of “checking the box on regulation” to creating added value.
