Managing risk: a new opportunity

Managing risk: a new opportunity
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First Published: Sun, May 18 2008. 10 47 PM IST

Updated: Sun, May 18 2008. 10 47 PM IST
If sentiment is the barometer for judging the robustness of an economy, the Indian economy is clearly in fine fettle.
In a recent survey of 600 global business leaders on the prospects for their economy, business and industry over the coming decade, Indian respondents emerged more optimistic than their global peers. The survey, titled Risk 2018 — Planning for an Unpredictable Decade, was done by the Economist Intelligence Unit, or EIU, and had 44 respondents from India-based companies.
More than three-fourths of the business leaders surveyed said there would be a significant increase in the complexity of doing business as the world heads into a decade fraught with political, economic and environmental risks. “In many cases, Indian respondents say they are also more prepared to deal with these threats than the global set of respondents,” says EIU’s Rob Mitchell, who authored the report.
As businesses across the globe are buffeted by a growing tide of economic, environmental and political issues, companies are increasingly turning to risk management as a strategic business tool.
The Indian respondents, more than half of whom run businesses with global revenues of $500 million (around Rs2,070 crore) or less, expect to see a significant development in the use of risk management tools to counter increasing pressures on business. Currently, Indian businesses rate risk management as the fourth most important company function—after strategy and business development, general management, and marketing and sales functions.
“Indian businesses still equate risk with financial planning. They need to shift towards a mode of anticipation and preparedness across functions that includes risk management,” says Bhupendra Sharma, director and senior strategy consultant, Erehwon Innovation Consulting. He expects more Indian businesses to integrate risk functions as they aim for a global presence. “Particularly in sectors such as telecom and financial services, Indian companies with current revenues of less than Rs100 crore are aiming to earn $2 billion in revenues over the next two or three years—this will require a clearly planned strategy of anticipation and preparedness,” Sharma adds.
Poonam Barua, regional director, The Conference Board, a not-for-profit business research organization, says: “There are really not many Indian companies that actually practise enterprise risk management, or ERM, in India. Also, there is need to develop an India-centric model of ERM.”
Risk management as a strategic business tool is gaining currency with managers across the globe as they grapple with a host of issues—ranging from volatile oil prices, increasing protectionism, international terrorism and climate change to increased industrial pollution, all of which are part of the Top 12 risks that businesses will face in the decade up to 2018.
“Risk and resilience planning, along with collaboration and sustainability, are the three main drivers of our business,” says Mark Danton, head of security at BT Group Plc. (British Telecommunications). Danton adds that integrating risk into operational planning is crucial for companies such as BT that contend with increasing volatility in the technology sector.
BT, which commissioned the Risk 2018 report, has a full-fledged risk management function that includes a chief risk officer, which is a centralized function, with regional footprints that deal with issues unique to particular geographies. “BT is structured to be close to its customers as there are unique risks in particular geographies and then there are global risks, so risk management is a hybrid function,” says Danton.
Typically, Indian respondents were concerned with the threat of global recession, the rising cost of human resources and environmental risks such as floods and droughts. Political volatility in the region, such as interstate conflicts and civil war, is also an issue that perturbs Indian business leaders, even as they contend with trade issues such as a failure to honour contracts, embargoes on trade and a downward pressure on prices.
In contrast, concerns about economic risks dominated the thoughts of business leaders in other geographies. Such concerns included the risk of a collapse in prices of assets, fuelled in large part by the subprime crisis, and the attendant fear of global recession.
While companies in North America are more acutely aware of the threat of economic recession, fast-growing countries of the Asia-Pacific, or Apac, region are more conscious of rising oil prices as their economies exhibit an increasing appetite for fossil fuel.
“A higher awareness of human capital risks in the Apac region is mainly due to concerns about rising labour costs, and the potential that this could erode competitiveness,” says EIU’s Mitchell.
Risk management is also increasingly being viewed as a business opportunity in itself. Therefore, while the survey has thrown up a basket of more than 40 risks—12 of which have been categorized as tier I—both the survey and the qualitative research point to a high level of optimism about the long-term prospects for business globally.
“Risk is seen as a positive factor in companies that are building a learning organization,” explains Danton, who says that the awareness of risk leads to a higher level of business preparedness that boosts business growth.
Two-thirds of all the respondents said they thought risk management would become more important as a strategic tool, and 58% expected more boardroom attention to be devoted to the function and discipline.
Even within the Indian firms that responded to the survey, roughly half said they used risk management tools, such as scenario planning, as an aid for long-term strategic thinking, though only one-fifth of all the respondents admitted to doing this on a regular basis. Scenario planning is a strategic planning tool with roots in World War II military operations. This tool helps business managers evaluate a strategic business decision against the backdrop of several future scenarios, all of which are plausible.
This growing awareness of risk management as a strategic tool is fuelling, in turn, a demand for products and services—a market opportunity for some.
Nucleus Software, an India-based software maker, is building products for financial risk management. Finn One, its flagship offering, helps institutions manage credit risk by building databases of credit histories and ratings. “In the face of global financial crisis—like the subprime crisis—and increased demand of many financial institutions to manage their credit portfolios and evaluate their credit risks, it becomes imperative to integrate risk management with day-to-day business planning,” says Vishnu Dusad, chief executive officer and managing director, Nucleus Software. Dusad rates financial crisis as a big risk that businesses face globally.
The use of risk management as a long-term business planning tool is also driven in part by increased regulatory risk and compliance standards across markets. “Risk management as a strategic tool is a reasonably new phenomenon, as is hiring a chief risk officer, which is an emerging trend,” says Mitchell, who believes companies approach risk management more as a compliance requirement.
In India, new provisions added to clause 49—the listing agreement between stock exchanges and listed companies that helps the Securities and Exchange Board of India monitor corporate governance norms—mandate companies to lay down procedures by which board members are informed about risk management and minimization procedures.
“Since the mandatory regulations have come into force, every consulting engagement has a certain degree of risk management today,” says Monish Chatrath, national markets leader at Grant Thornton Llp, a consulting firm.
He says risk management is happening by default at most Indian firms, with the preparation of an enterprise-wide risk management document now emerging as a mandatory requirement. However—as the benefits of compiling such risks become clear—even statutory audit planning is focused now on evaluating preparedness for risk at companies. “Risk management is having a cascading effect across different services in a company,” Chatrath adds.
A report titled Assessing the Climate for Enterprise Risk Management in India, released in April by The Conference Board, has case studies of four companies that practise ERM. At automobile manufacturer Tata Motors Ltd, the process is based on the framework laid down by the Committee of Sponsoring Organizations of the Treadway Commission 2004. Eight interrelated aspects of risk and events that trigger these risks are identified by company business managers, who then identify each risk and attach a score to it. These managers then have to develop mitigation plans.
In its first year, the ERM group at Tata Motors met 540 executives, and asked them to list the risks they thought most important. These were discussed in risk management workshops (RMWs), and a company risk register was drawn up. From this, ERM staff was able to compile a “heat map”, which ranked risks as “high”, “medium”, or “low”.
Another Tata group company that has institutionalized ERM practices is Tata Chemicals Ltd.
So, too, has ICICI Bank Ltd, which expects its offshore business to grow by 3% in the next two years. At the board level, the audit committee, the credit committee, the risk committee, the fraud monitoring committee, and the asset/liability management committee are all responsible for different aspects of risk oversight. The power to take decisions on risk-related matters, in relation to operations such as new product launches, lies with the product and process approval committees, consisting of senior managers.
According to The Conference Board report, pharmaceutical firm Dr Reddy’s Laboratories Ltd set up an ERM practice in 2006 following its listing on the New York Stock Exchange—it had to meet the requirements of the US regulatory environment.
The Risk 2018 survey also points to an increasing focus by Indian businesses on both the domestic market and on other regional markets such as China and Apac. While more than 86% of the respondents were bullish on the prospects of their businesses in the Indian market, close to three-fourths of all respondents said they expected strong business growth in China, followed by the larger Apac region.
It is a trend that is mirrored across the globe as emerging markets are expected—very clearly—to lead the way in the world of business, with business leaders expecting current strong growth in emerging markets to be sustained over the next 10 years. Most global companies expect their businesses to grow strongly in China, followed by Europe (including Eastern Europe) and Asia-Pacific.
The mature markets of the US and Australia lagged some way behind, as they did with India-based respondents, only one-fifth of whom are targeting North America as a business destination in the next 10 years.
“Growth in emerging markets, such as India, is a direct result of the change in mindset of business leaders here. There is a willingness to embrace risk, and that is fuelling this confidence,” says Erehwon’s Sharma.
He says Indian companies will need to develop customized risk management and scenario planning tools that take into account this surging wave of optimism across the Indian business landscape. “Conventional tools such as scenario planning will have to make way for customized India-specific tools that reflect the flurry of corporate activity in the country,” says Sharma.
Clearly, the biggest danger lies in not embracing risk itself.
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First Published: Sun, May 18 2008. 10 47 PM IST