Front liners better able to manage risk in dynamic business environment

11 July 2017 Consultancy.uk

In the face of a rapidly evolving business environment, risk management is increasingly become a proactive rather than reactive game. A new report highlights that companies that move risk management to the front line tend to be better able to manage risks events as the arise.

Innovation is creating a host of challenges for companies, as new technologies, new operating models and new ways of working come to disrupt aspects of, or whole, businesses. Reacting to changes in a timely and effective manner is increasingly key to long-term survival.

In a new report PwC considers the effect of imbuing front line staff, senior management and business units, with risk related responsibilities. The report, titled ‘Risk in Review: managing risk from the front line’, is based on responses from 1,581 corporate officers from 30 industries and spanning 80 countries.

Front line decision making is ideal

The research finds that organisations are increasingly shifting risk management responsibilities to front line decision makers. As it stands, 13% of organisations currently lead risk decision making and collaboration from the front line. In three years from now, a further 46% of respondents to the survey expect to have migrated their risk management responsibility to the front line.

Among the majority of respondents (63%) a clear reason for the move of risk decision making to the front line is that it makes them better at anticipating and mitigating risk. “The key to growth isn’t in avoiding risk; front liners make risk management a mandate for the board, the C-suite and perhaps most importantly, among crucial business unit decision makers,” said Dean Simone, leader of PwC’s US Risk Assurance practice. “This year’s survey tells us that leaders must make risk management a more collaborative, measurable and strategic function. We also see great alignment on the biggest growing risk factors, such as cybersecurity, but a lack of maturity in terms of preparing for and planning around the biggest risks facing executives today.”

Front liners by industry and region

The research finds that there is considerable variation across industries and regions in relation to the number of front liners. By region, North America and Europe are far out ahead in the process of extending responsibility to front line managers, at 34% and 33% of respondents respectively. In the Asia Pacific region, 19% of respondents have front liners, while in Latin America and the Middle East and Africa, the practice is used by 7% of respondents apiece.

There is major variation between industries. The consumer and industrial products and services industry has the largest number of front liners at 40%, followed by financial services, at 33%. Education, government and healthcare are the least engaged in the practice, with each sector falling well below the 10% mark.

Front liners manage risks more effectively

The research broadly finds that front liners manage risks more effectively. When asked to judge their ability to manage a risk during a risk event, front liners in all categories perceived themselves to have been more competent at managing the risks than all other respondents. The biggest discrepancies were noted in operations, brand/reputation, human capital and third party. The areas with the lowest level of discrepancy include culture and incentives and regulatory and compliance.

“The key to effective risk management is active engagement, placing responsibility for the various building blocks of an effective risk management program - strategic alignment, expertise, processes, assurance - with the line of defense that is best prepared to execute them,” said Jason Pett, US Internal Audit, Compliance & Risk Management Solutions Leader at PwC. “Clarifying the function of each line of defense and collaborating closely between the lines, enabled with technology, helps promote a free and welcomed flow of perspectives and ideas.”

Front Liners report better performance metrics

According to the firm’s analysis, shifting risk management to front liners allow companies to be more proactive in managing risks, rather than reacting to events reactively. The net result is better performance metrics – for instance, 59% of companies with front liners expect to see profit margin increases in the coming two years compared to 51% of all other respondents, while 77% of front liner companies expect to see revenue increases compared to 71% of all respondents.

Front liners more likely to use risk management tools and techniques

The research also found that front liners tend to leverage a number risk management techniques and tools more often than all other respondents. The difference was most marked in the use of ‘risk rating systems’ at 14% of respondents, and ‘building organisational resilience to risks’ at 13%. The front liners were also more likely to ‘specify a corporate risk appetite’ (13%) and leverage ‘third-party/vendor audits’ (12%).

The areas in which the least difference was noted between front liners and all others was in ‘environmental, health and safety audits’ (2%) and ‘corporate risk dashboard/visualisation’ (6%).

Front Liners take a more regorous approach to risk management

The research notes that front liner companies tend to have a more rigorous approach to managing risks compared to all other respondents. For instance, ‘risk appetite or tolerance has been defined across a number of categories’ at 69% of front liner companies compared to 53% for all other companies, while ‘taking our defined risk appetite into account when making business decisions’ occurs at 66% of front liner companies and 52% of all other companies.

Front liners tend to also be more onto having a ‘well-defined risk appetite statement and framework that is clearly communicated’ at 49% for all respondents and 65% for front liners. The ‘effective monitoring of risk appetite by using risk indicators’ was the area of least activity between the groups, all respondents and front liners, at 45% and 57% respectively.

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