Revived regulatory pressure and credit crunch losses are combining to create an environment where enterprise risk management - also known as 'convergence' - is becoming a substantial theme at senior management and board levels, according to our new survey, carried out in partnership with international consulting firm Ernst & Young. Sixty-three per cent of respondents said recent market events have either significantly or somewhat increased the importance of assessing, mitigating and reporting risk - risk convergence - to their firm. Another 16.9% indicated that the issues are a critical concern.
Spending on risk convergence is set to spike as a result. More than 14% of respondents indicated they expect spending to increase by more than 20%, while almost 63% said spending would either increase or moderately increase.
Many firms are "broadening their definition of convergence to include all aspects of the risk framework, and are now asking us to take a look at how they've adapted their risk activities - changes in firm-wide reporting, reconsidered risk tolerances - to fit this new, expanded view," says Chris Richardson, senior manager, Ernst & Young's financial services risk management practice. "So, based on that experience, I'd say yes. Of course capital spending is always an issue when business heads south, but the smartest firms are realising convergence is no longer a nicety. It's a necessity if you want your risk management to help protect you against certain kinds of market events such as the one we're living through now."
However, getting a programme off the ground remains difficult - although there have been improvements. More than 38% of respondents indicated that the ability to secure sponsor buy-in has improved, but the challenge of jointly developing risk convergence programmes still remains. But another 26% said the challenges of obtaining senior management buy-in and developing a programme jointly remain firmly intact. Still another 19% indicated that, while joint development has become easier, buy-in remains challenging.
"Cost hampers buy-in," says Richardson. "It all costs money, yes, but also time and resources. And costs are always an issue. That's true when things are going well and when they are going poorly. The thing to remember is that financial firms are working hard to shore up their capital bases and retool their businesses. Part of that process is taking a hard look at the overall state of the firm. That's where risk convergence - and risk 'sponsors' - will have more of a say. And, as the latest survey showed, the chief executive officer is also becoming a more impassioned sponsor of convergence initiatives. That should help propel the effort."
Firms are moving forwards with their convergence plans - but they seem to be taking a more piecemeal approach to convergence. Formal discussions about implementing a risk convergence programme have happened at 19.7% of firms, compared with just 9% in September. Work is in progress in specific areas in 18.3% of firms, compared with 14% eight months ago. And plans have been drafted for specific areas at 9.2% of firms, compared with 7.9% over the same period.
But there is a more mixed picture when looking at statistics for convergence plans across the organisation - essential to creating a truly enterprise-wide framework. The number of respondents who said firm-wide plans have been implemented has risen from just 2.2% in September to 7.7% in the new survey. However, fewer organisations have firm-wide initiatives under way. Just 12% indicated that work is in progress firm-wide, while in September the number was 15.7%. Meanwhile, the number of firms who say firm-wide initiatives have been drafted was unchanged.
This result coincides with the most recent thinking on convergence - that it might be best to bite off manageable chunks that will eventually build up to a more substantial and integrated whole. "What's most important is for firms to take a step back and try to understand the desired end goal," says Richardson. "To do that, they must first take into consideration available business data and feedback on what's not working and then determine what success will look like for their organisation. This allows a firm to prioritise the steps to take now and those to take later. Actual implementation is done in bite-sized chunks, not on a grand scale - although having a firm-wide vision and strategy helps to pull together disparate and sometimes conflicting controls."
Firms' reasons for looking at convergence have also shifted. In September, the primary driving force was cost control - the need to remove duplicative controls and processes, and to better rationalise risk management procedures. Now, executives are much more focused on improving the risk information they receive and their ability to act on it. About 70% indicated they wanted to implement a convergence programme because it would "deliver a more sophisticated organisation-wide risk analysis to enable strategic decision-making", and 74% indicated the programme would increase their firm's ability to respond to regulatory and business change. Reducing redundancies in risk and control processes was ranked either "4" or "5" by just 49% of respondents, and 57.7% indicated that such a programme would enable them to more effectively assess, manage and reduce the costs of risk management.
However, Richardson says that in many ways priorities haven't changed all that much. "It's just that the credit crisis came along and heightened awareness," he says. "But the fact is that having a patchwork of risk controls has never been ideal. It's a strain on resources and people. The credit crisis has been an eye-opener and the survey results bear that out.
"Priorities haven't really changed, but people now may be able to better appreciate what they are," says Richardson. "Before the credit crisis, the downside to having disparate risk controls siloed within various business units perhaps wasn't as obvious. But now that we've seen the fallout from the mortgages change hands - from investment banking to retail banks to the asset-management arms - we can really see the benefits of a consistent, enterprise-wide risk programme."