A Modern Risk Management View: Strategy Before Structure

Long before information technology found its place in the C-suite—back before we even started referring to it as "IT"—companies thought about technology in an entirely different light. In most businesses, those newfangled computers were viewed as being much the same as adding machines and paper punches. They were essentially discrete tools used as needed by individuals and departments. If Accounts Payable thought a computer would help them process invoices more efficiently, they'd buy one. Plenty of old-school CEOs bristled at recommendations to spend big dollars on what many saw as toys.

As computing power increased and networks became practical, the most visionary company leaders began to take a more holistic view of these devices and systems. They saw the potential to turn what had long been considered an expense into an investment in pursuing their companies' strategic goals faster and more efficiently. Today, it's a rare enterprise that lacks a chief information officer or chief technology officer who's directly involved in developing and deploying business strategies.

There's a remarkable parallel in C-suite attitudes toward managing inherent business risks. For decades, the familiar concept was a mix of buying commercial insurance for risks that could be covered and crossing your fingers that the rest wouldn't put the company out of business. As with technology, there were forward-thinking leaders who began to adopt innovative approaches for specific risk categories or business units.

As the cost of commercial insurance has climbed, most business owners have sought ways to trim the premiums they pay. While it's not that difficult to shave a percentage point here or there through simple steps like increasing deductibles, most of the tactics they use produce only short-term benefits. The visionaries among them are instead considering the same challenges from a completely different perspective: taking a holistic view of risk and its management and their direct impact on the company's strategies.

When you treat risk as a problem and buy insurance as the solution, you've created a transactional relationship. Most company leaders are comfortable with that model because they've grown up with it. Next year, they'll do the same thing, and again the year after that, groaning about ever-increasing rates or trying to cut costs this year by going through the hassle of returning to the commercial market.

What if they were aware of the potential strategic value accompanying that risk? Suppose they could project the balance sheet across the entire organization's risk profile, providing a clearer picture of where it's in their best interest to transfer risk and where they should retain it. Instead of handing all the power to the insurance market, that would allow them to remain in control and make decisions that benefit them the most. By marrying their risk strategy to their organizational strategy, they help the company grow and succeed.

Giving risk management a seat at the strategic decision-making table makes sure companies are investing their dollars in their company's mission instead of dropping them in someone else's pocket. Employees and assets will be better protected, too.

When companies begin to look at risk through the framework of why they do what it is they do, they start looking at challenges and objectives in new ways. A stronger grasp of risk deepens their understanding of the business and the strategies that drive performance. Knowing and focusing on the "why" of a business feeds the organization's long-term sustainability and gives its leaders a shared course to follow.

Understanding and addressing the risks associated with a company often improves its leverage, too, building and freeing up capital over time to support future investments in strategic initiatives. Approaches are commonly structured to reward the company for achieving risk-related goals. That's why we find the best way to investigate the opportunities is through what we call a "whiteboard session." Bringing key stakeholders together to identify potential areas is the first step in prioritizing and then pursuing the best strategies.

Two important caveats bear mention. First, companies should steer clear of the common misconception that enhancing risk's role in strategy will generate short-term results. Success nearly always demands a long-term view focused on the company's vision statement instead of next quarter's numbers. (After all, that's why you have a vision statement.)

Also, we always remind companies that every business is unique. There's no single structure that magically resolves everyone's risk issues. The right course of action is the one that works best for a company's strategies—and its financials.

Running the numbers may tell you that your company currently lacks sufficient capitalization to take a closer look at assuming more risk. That doesn't mean traditional insurance is your only option. Working with strategic, risk-focused experts can help you unlock, capture, and capitalize on what you can do for your company's balance sheet—and for its long-term future.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.