by Thor Olavsrud

How risk management leads to increased profit margins

Apr 16, 20154 mins
IT LeadershipIT StrategyRisk Management

Companies that put a premium on risk management can cope with ever-increasing business risks while seizing opportunities that present themselves.

risk management
Credit: Thinkstock

The conventional wisdom says that putting an emphasis on risk management slows your business, but a new report from PwC finds the contrary is true: Companies that put a premium on risk management are seeing better growth and increased profit margins.

“Risks are increasing dramatically and executives are constantly faced with making decisions to protect their businesses, while also trying to improve their financial performance,” says Dean Simone, leader of PwC’s U.S. Risk Assurance practice. “By integrating risk management into the business life cycle, these two objectives can easily come together to work in unison. Developing an effective strategy requires investment, but the payoff and competitive advantage can be enormous.”

PwC surveyed more than 1,200 senior executives and board members for the report, Risk in review: Decoding uncertainty, delivering value. It found that companies that lead in risk management tend to take a holistic view of risk and involve risk management in the business at a strategic level. As a result, over the past three years, 55 percent of risk management leaders recorded increased profit margins and 41 percent achieved an annual profit margin of more than 10 percent.

While 73 percent of executives say that risks to their companies are rising, only 12 percent of respondents demonstrate the hallmarks of risk management leaders. PwC says risk management leaders set themselves apart in four key areas:

1. Risk management leaders understand how risks interconnect and impact business. The study found that 70 percent of risk management leaders say they can see how risks interconnect and cascade, as compared with only 23 percent of non-leaders in risk management. Risk management leaders are also more likely to compile an aggregated view of risks when making decisions (73 percent of leaders vs. 27 percent of non-leaders). This gives them a clear and realistic understanding of operational issues and market opportunities.

2. Risk management leaders have a strategic understanding of their risk appetite and are willing to take risks. With a thorough understanding of potential risks, risk management leaders actually have a high or very high appetite for risk, according to the report. Nearly 90 percent of risk leaders say they are increasingly taking a risk-enabled approach to growth.

“Analyzing and assessing how different business risks affect one another is an essential step in achieving a holistic and accurate risk management perspective,” says Brian Schwartz, PwC’s U.S. Performance Governance, Risk and Compliance leader. “Undertaking systematic review that determines what aggregated level of risk a company is willing to take on — and ensuring that all business units understand those limits — remains a central tenet of risk management leadership.”

3. Risk management leaders are more aligned across business units. Fully 90 percent of risk management leaders (compared with 36 percent of non-leaders) say their risk management program is fully aligned or very aligned with their company’s strategic planning process.

PwC says risk leaders also demonstrate greater cross-functional alignment, particularly with finance (93 percent vs. 58 percent), internal audit (95 percent vs. 65 percent) and corporate compliance (93 percent vs. 55 percent). Risk management leaders are also much more likely (67 percent vs. 43 percent) to involve risk analysis in the decision-making process.

PwC says this lends them great speed and agility in neutralizing threats and seizing opportunities. “Business leaders see the landscape today as one of both threat and opportunity, in roughly equal proportions,” says Dennis L. Chesley, PwC global risk consulting leader. “To survive and evolve in this environment, companies need to prepare their entire organizations to take advantage of big shifts ahead of the competition.”

4. Risk management leaders apply more sophisticated techniques. PwC found that 46 percent of risk management leaders spend more time calculating and preparing for risk than reacting to it, as compared with 21 percent of non-leaders. Risk leaders also use a variety of tools, including identification and forecasting of emerging risks (96 percent vs. 59 percent), horizon scanning and early-warning indicators (81 percent vs. 33 percent) and building organizational resilience to risk (88 percent vs. 42 percent).

New analytics systems are also making it easier than ever to bring disparate data together to create insight. “When executives have the power to collect the right data and synthesize this data into actionable intelligence, they are empowered with a deeper understanding of their business and of the drivers that impact performance,” says John Sabatini, leader of PwC’s risk and compliance systems and analytics practice. “We can now do things that weren’t possible a decade ago. This allows for much better decision-making.”