In their book, Surviving And Thriving In Uncertainty: Creating The Risk Intelligen..., Funston and Wagner shed to light how a conventional approach to risk management has failed many businesses. In the book, the authors exhibit a situation where businesses have failed to identify the differences between conventional wisdom and unconventional realities when it comes to managing business risks. They go on further to argue that, a traditional approach to risk management is misguided as it assumes that:
Instead, Funston and Wagner believe organizations should take an unconventional approach to risk management which takes into consideration unconventional realities based on a random walk with hops, skips and jumps. By taking this approach, the authors believe managers will be able to learn that:
The events of the past decade such as: the 1997 Asian Financial Crisis, 1998 Russian Financial Crisis, September 11 attacks, 2004 Asian Tsunami, 2010 Haiti Earthquake and the 2007 Global Financial Crisis all prove that we live and work in a world full of uncertainty. A number of organizations were completely caught unaware and unprepared by these events and suffered huge loses. As no one person or business can accurately predict the future, planning for the worst case scenario in advance and developing early warning systems will reduce the severity of an extreme event.
A number of causes have been levelled on the 2007 Global Financial Crisis, chief among them being lack of information to guide decision making and poor risk management by financial institutions. In pursuit of higher salaries and bonuses, managers and their employees became very much innovative and risk-taking. They developed complex financial products carrying a lot of risk too difficult to understand for the layman and the developers themselves.
What started as a housing bubble in the US economy ended up crippling the entire global economy. Those managers who followed the conventional thinking of risk management, misguided by the notion that events are independent of one another, were never alerted by what was happening in the US and how this could have an impact on their bottom-line. As the events unfolded, reality that events interact, hit home. By then it was too late to react as much damage had been done.
Events in one function of the organization can have a crippling effect on the entire organization. For example, a breakdown in IT infrastructure will not only affect IT operations, but will also affect the operations of the marketing, finance, human resources , production and other functions that rely on the infrastructure working to achieve their goals and targets. A product recall due to wrong design and poor quality will affect the reputation and sales revenue of the entire business and not only the production department. Supply of incorrect customer information by the sales and marketing functions will have a huge impact on the cash flow forecasts prepared by the finance function.
Improving alignment among risk management, finance and operations is key to achieving organizational strategic objectives. Organizations wanting to improve their competitive position within their sector or industry need to move away from the narrow approach of viewing functions as silos with their own goals and targets to achieve and start accepting that they are part of the whole working towards the achievement of the corporate goals. Improving alignment among risk management, finance and operations involves: