Economic turmoil, political upheavals and natural disasters, all combined with advancing globalization and rapid technology progress, are creating a new era of risk for businesses, according to a new PwC US annual report titled Risk in Review. Based on a survey of more than 1,000 executives and risk management leaders, the report examines the state of global risk, and discusses risk management approaches companies may take to better cope with the ever-widening risk landscape.
Separately, PwC today launched a new on-line benchmarking tool to enable companies to benchmark their risk profile in comparison to their peers and the industry.
“2011 marked a year of reckoning, and many companies are still struggling to create an effective approach to managing the ever-widening risk landscape. Businesses are scrambling to fix weak links in their systems stemming from non-traditional risks such as social media and digital technology, to dealing with the realities of operating in today’s global marketplace,” said Dean Simone, leader of PwC’s U.S. Risk Assurance practice. “In this new risk era, corporate boards and senior management have a crucial role to play to ensure they set the right culture and align their strategy to risk imperatives.”
According to the report, forward-looking companies are responding by shifting their risk management focus in several fundamental ways: from internal to external, from operational to strategic and from bottom-up to top-down. To better prepare themselves to deal with unexpected events for the upcoming year and beyond, companies installed new risk management organizational structures, have put in place a new breed of risk management leadership and have adopted innovative techniques such as scenario analysis and predictive indicators.
PwC’s Risk in Review identified the risks ahead for 2012:
Intensifying economic uncertainty: Reflecting concerns about further economic deterioration, economic uncertainty tops the list as the biggest perceived threat as noted by 73 percent of respondents, with 77 percent of financial institutions seeing it as a critical risk.
Increasing regulations: With high unemployment, rising financial insecurity and escalating social problems, 60 percent of participants view regulatory risk as a major threat, and 75 percent of respondents operating in the financial and healthcare sectors consider regulatory change among their most critical risks.
Renewed financial volatility: Nearly 60 percent of respondents cited financial volatility as a paramount risk, with many worrying that the Eurozone debt crisis won’t get solved. More than 75 percent of the firms in the banking and other financial services sectors consider financial volatility as a serious risk.
Growing competition: As trade barriers fall and globalization grows, 63 percent of respondents believe competition will continue to increase. The rise of the digital economy is also adding to the competitive pressures, with 73 percent of technology, information, communications and entertainment (TICE) companies considering increased competition as the most critical risk.
Data privacy and security threats: The pervasive use of the Internet and social media will catapult data privacy and security risks to a higher perch on the risk agenda, according to the 56 percent of participants, a jump from 28 percent in 2011.
Competing for talent and labor: The ability to access the right talent and labor represent a major risk for more than half of the respondents in 2012, as compared with 25 percent of companies that cited it as a top risk in 2011.
“There is an increasing pressure on leaders from boards and senior management to adopt stronger measures to prepare for the evolving risk landscape,” continued PwC’s Simone. “Companies need to assess their risk management approach by taking a holistic view and thinking beyond traditional risk frameworks to focus on the right strategic risks that they can identify, as well as those that are unexpected.”
To address the new realities of the growing global risk landscape, PwC recommends the following risk management approaches for 2012:
Increasing cross-communication: Place greater emphasis on communications and data sharing in 2012 and take steps to improve cross-functional and departmental communication.
Improving data quality and reporting: Enhance global economic teams to help improve data quality and put in place improved processes for reporting data. Different business units should meet periodically with different business units to review and exchange information and data as a form of early alert to possible upcoming risks to the business.
Better forecasting and scenario analysis: Leverage more sophisticated tools such as early-warning systems and contingency plans to reconfigure approaches to manage risk (i.e. set up scenario models or Monte Carlo analysis geared to the nuances of the business, run models as events unfold, etc.)
Elevating the CRO: Put risk management role on the proactive offensive instead of reactive defense by giving CROs more cross-functional access and ability to effect decision-making.
Integrating risk management: Manage risk holistically by continuing to integrate risk management into decision-making processes relating to “traditional” functions (i.e. strategic planning). Don’t exclude new areas of risk (i.e. talent management and outsourcing), but address and integrate them into decision-making processes.
Bolstering IT: Address data privacy and security concerns and take stock of where to build better processes, practices, procedures and technical defenses. Shifting technology and heightened competition for new customers in new markets are also exposed to more risks, so it’s imperative to study the setbacks and successes of peers who pioneered the use of these new technologies.
Greater board involvement: Understand the risks facing a company and have in-depth discussions with management to make sure those risks are being handled properly. The discussion should also cover potential risks that are not yet on management’s radar and what the implications of those emerging risks might be.
“With today’s complex, volatile and uncertain world, risk management leaders have their work cut out for them, especially with the fact that risk is always changing. Companies must adopt a new and more robust approach to defining, communicating and managing their global risk profile,” concluded Simon.
You can download a copy of the entire report here.