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Summary
Unsurprisingly, companies of all types are increasing rapidly their focus on risks in their business. Enterprise Risk Management is the term used to describe the set of activities that organizations undertake to deal with the many and diverse risks they face, many of which can have a significant impact on their reputation, effectiveness and profitability. Of course, “risk” means different things to different people in a company, depending on their role and scope of responsibilities. Typically people look at risks parochially, focusing on those that affect them directly. To the extent they communicate information about such risks, they likely do so only within their area of the company. Unfortunately, in many cases these negative events will also impact other parts of the business, often with a time lag. Managing cross-functional corporate risks is a part of enterprise risk management that typically receives less attention than it should. Ventana Research asserts that senior executives must make it a priority to improve the communication of conditions and events that will or could adversely affect other parts of the business. Doing so effectively requires collaborative assessments and analyses on a regular basis, as well as the information technology tools to communicate potential risks and provide alerts when negative events occur or become much more likely.

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Challenging economic environments tend to focus executives’ attention on risk. Yet even in difficult periods, risk is a subject many companies handle haphazardly. One reason for this is that “risk” means different things to different parts of the business. Finance organizations focus on risks related to credit, fraud and accounting errors. Those in sales are concerned with things that will prevent them from closing business, while human resources and legal departments spend their time addressing regulatory risks. Many categories of risks, especially those encountered by finance organizations, are routinely managed and (largely as a result of the Sarbanes-Oxley Act) measured and monitored. (Indeed, we would argue that the main value of Sarbanes-Oxley has been to force more corporations to make what once were tacit and casual risk assessments more explicit and rigorous.) Even where risk mitigation is not an inherent part of a routine business process, individual business units may do a reasonably good job of managing their business risks because there is a widespread understanding of what they are.
 
Still, there are a wide range of cross-functional risks – ones where the impact of an event in one part of a company ultimately has a negative impact on others – that companies could be far more effective in addressing. For example, your company may need an export or import license for a large order, but issuance of that license is delayed by some political event. This will certainly alter your delivery schedule. However, depending on your business, it may also free up inventory that needs to be sold, affect your production scheduling at multiple plants, or put a big hole in your company’s cash flow. Unless the order was huge, business units that ultimately are affected by the event likely will be forced to react to it only when the consequences land on their doorstep – when the cash that was built into the forecast fails to show up, for example.

Most corporations work around these issues and shrug off the impact as part of doing business. However, in many instances the negative events have a greater impact on productivity and effectiveness than executives and managers realize, especially on working capital requirements, where they can cause higher than necessary inventories or receivables and poor use of cash or short-term debt. Moreover, the distraction of dealing with what could have been a preventable activity takes time away from focusing on more useful matters. Better preparation and communication can mitigate the impact of unfavorable events. After all, not all of the risks that companies need to manage are catastrophic; indeed, the biggest payoffs may come from handling the frequently occurring moderate risks better because over time they have the greatest impact on a company, especially the finance organization. By creating a mechanism for monitoring risks and putting in place effective information technology tools to inform those affected when they occur, your company would be able to reduce the negative impact of these disruptive events. A hodgepodge of e-mail programs and spreadsheets are not the right tools; handling the communication and coordination between groups in this fashion will not work reliably enough to be a workable, reliable long-term solution.

Assessment
Ventana Research asserts that more effective management of cross-functional risks will produce tangible savings and reduce the impact that negative events can have on profitability, competitiveness and reputation. The first step to take in mitigating these risks is to focus on the people and process aspects: Establish an ongoing method of identifying and prioritizing cross-functional risks and determining the roles and responsibilities for the people engaged in this risk identification and mitigation process. The next, equally important step is to define the information technology requirements to deliver the needed analytics, dashboards, alerts and scorecard assessments. These will enable line managers to communicate and collaborate efficiently and enable executives to determine how well the company is managing risk. Although it may seem counterintuitive, the current environment is ideally suited to focus on this issue productively. Ventana Research recommends that senior executives make this a priority in the coming year, justifying it on the basis of cost savings and competitive positioning.