I am sure we all start 2021 with the anticipation that the world will be able to finally get on top of the pandemic and that the business environment can prosper in the new world.
Events in 2020 have demonstration that risks, big impact risk, can and do become reality:
· The pandemic!
· The explosion in Beirut port!
· US Capital building being invaded by protestors!
2020 needs to be, in my view, a wake-up call to us all that we must all be more proactive, rigorous and structured identifying, assessing and mitigating risks. They can not be ignored or swept under the carpet.
When we formed KRM22 in 2018, we couldn't have predicted the huge risks that 2020 presented but what we did see, was the fragmented approach to risk across the capital markets. How the cost and complexity of the past structures, processes and systems meant that firms largely operated by putting out fires rather than being proactive to avoid them.
Risk models are frequently debated, leading many to believe risk is solely mathematics. Yes, complex mathematical models can help refine answers to some questions for example probability that an event may happen, but risk is a much broader topic.
The Oxford English Dictionary definition of risk is a start that most would accept:
“the possibility of something bad happening at some time in the future; a situation that could be dangerous or have a bad result”
The initial risk challenge however is multifaceted:
· Identification…How to frame a risk?
· Who is accountable… Important for regulators but also to ensure ownership is not disputed.
· How to assess impact …the impact of some risks are so catastrophic that they can’t be allowed to happen. I would call them, binary risk which means they can’t happen.
· How to assess probability of a risk happening ….This can be subjective or modelled and new AI tools help refine this significantly.
· People have different psychological reactions to risk.
Other challenges include mitigations to reduce the risk, often know as controls and recover actions in the event a risk occurs. The Pandemic is a good case study. The risk was known but the contingency plans were non existent or very poor. One explanation in the UK apparently was the contingency plan budget was not approved!
Most people think of risk as a parallel universe to day to day business. Something that runs alongside the normal business or is attached to it. That is fundamentally the wrong way to get on top of risks and to drive superior business performance.
“Business performance is fundamentally intertwined with how the business executes and manages the opportunities and risks”
The metrics that we use for our business KPI’s are the very metrics that risks can be assessed against. The better the data we have the better measurement we can have, and the better risk assessment scenarios can be achieved. The Boy Scout motto is the best to put in two words what we should all be doing to succeed in risk management.
KRM22 is a platform service business with subject matter experts and data at its core. It is private cloud service to an ‘app’ store with each application addressing an aspect of risk capital markets firms face. Each application provides high quality functional benefit for customers. A key though, is the more apps a business uses the greater the benefit for the business as data is consumed once on the KRM22 Global Risk Platform and is propagated across applications, reducing complexity, risks and cost.
Contact us and start on the KRM22 road to ‘Risk As Alpha’.
Stay safe and enjoy 2021.
Chairman & CEO