Using risk sensing to identify strategic risks can better equip businesses for future challenges and help them take advantage of emerging opportunities.
A recent report from Deloitte – “Facing (and Embracing) Strategic Risks” – demonstrated how much effort businesses put into identifying financial, compliance and operational risks, but how few resources are dedicated towards identifying strategic risks.
According to a survey of 155 C-level executives, most respondents could list a series of potential strategic risks that could impact their businesses over the next three years (pace of innovation, increased regulation, loss of talent or loss of reputation, etc.) but few made full use of risk-sensing tools to identify and track them.
Why So Little Focus on Sensing Strategic Risks?
The report blames human nature for the lack of focus on sensing strategic risks and identifies four “behavioral economic” factors that blinds senior executives from strategic risks that may be on the horizon and for which businesses should compile scenario plans. The four factors are:
- Overconfidence – leading us to trust our gut feelings and overestimate the truth of what the business believes.
- Availability – the surfeit or lack of which can cause a distorted view of the importance or likelihood of events.
- Confirmation – paying more attention to information that fits held beliefs while discounting contradictory information.
- Optimism – a natural human tendency that fools businesses to believe their plans will work out as intended.
This failings, the report claims, can cause a misunderstanding of the the likelihood of events that could reshape businesses or their ability to respond to the events. Furthermore, if cognitive failings were not enough to limit focus on sensing strategic risks, other failings – such as poor internal communication, an oligarchic leadership or simple bureaucracy – could prevent senior executives from expressing their concerns.
The Benefit of Using Risk Sensing to Identify Strategic Risks
Businesses able to overcome the behavioral economic factors can benefit from using risk sensing to identify strategic risks. By combining risk sensing with horizon scanning and scenario planning, businesses can course correct before significant financial issues impact the business as a result of changing competitive and regulatory landscapes.
At the same time, data gathered to prompt business-critical decision-making should be used to capitalize on new opportunities. Many business innovations have come as the result of capitalizing on strategic risks; although the report suggests a glut of data is not conducive to successful decision making. It recommends that strategic risk data should be presented in a way consistent with people’s ability to manage and navigate it.
CFOs Should Lead the Way for Strategic Risk Management
The report concludes that, as CFOs serve as strategic advisors on a host of issues, it is they who take the responsibility for strategic risk management. In their capacity, CFOs are well positioned to connect with CEOs, boards, and other senior stakeholders in the conversation about strategic risks.
Armed with the right tools, CFOs can accelerate how quickly strategic risks are discovered and fit them into their ongoing risk management processes. CFOs who achieve this will see how strategic risk – and the ability to name it, track it, and deal with it – can turn into an important organizational resource.