5 Underappreciated Ways Risk Departments Bring Value to CFOs
To the CFOs out there, listen up this is an important message you need to hear.
Sometimes your risk department may feel like nothing more than a cost center or a bearer of bad news, but that is not the case. If you utilize your risk department to its full potential, you can help the company save money in many areas—and even generate revenue.
Here’s a list of reasons why your organization cannot thrive without a risk department!
1. Your risk department gives your company a full picture of all the risks it may face and finds ways to minimize those risks
In an imaginary world, a company can do whatever it wants without worrying about any types of risks. But we don’t live in an imaginary world. There are many types of risks out there that every organization will inevitably have to face. This is because all businesses exist in a complex ecosystem including political, economic, social, and environmental forces. Changes in any of these can create a new set of risks and exposures that an organization must deal with.
In the last few years, we’ve seen many disruptions, such as the COVID-19 pandemic, the global supply chain crisis, increasing natural disasters, political uncertainty, cybersecurity threats, geopolitical instability, and now, the ongoing economic downturn. This disruptive volatility is going to continue as our world becomes more globalized and new technology emerges.
Aside from external risks, all companies need to take a certain amount of internal risks to achieve their goals and to grow their business. Your risk department is crucial in helping your organization get a full picture of all the risks it may face—whether internal or external.
The goal of the risk department is not to eliminate all risks but rather to understand, anticipate, and minimize the impact of risks. An effective risk department maps out all the potential risks your company might have to encounter and draws up plans for how to manage or avoid them whenever possible. Those plans encompass all aspects of your organization including finance, legal, safety, cybersecurity, leadership, and organizational concerns. Thus, their understanding of your organization and the risks it may face can be more complicated and nuanced than others in leadership positions.
Although it’s impossible to account for every single risk scenario that can happen and for new ones that may emerge, having a game plan will make you more prepared than if you didn’t have one. As Warren Buffet famously said, “Risk comes from not knowing what you are doing.” Let your risk department guide you as you work to achieve your business goals.
2. Your risk department can help minimize repetitive losses and help generate revenue
As a CFO, the profitability of the company is always on your mind because no business can be sustainable if it can’t hit its revenue and profit goals. Your risk department might not be one of the first departments you go to when thinking about profitability, but maybe you should start going to them.
Your risk experts can calculate your organization’s Total Cost of Risk (TCOR), use data to detect high-frequency incidents, and find ways to minimize repetitive losses. For example, if you work at a manufacturing company, your risk managers can detect risks in using certain machines and swap them out for other machinery that will reduce liability. Your risk managers can also look at your supplier sources and uncover areas that might be affected by supply chain interruption that could heavily impact your organization.
By utilizing your risk department and its risk-averse way of seeing the world, your organization can catch areas that cause repetitive losses early on, find ways to mitigate these issues, and improve your company’s operations and efficiency. These improvements protect your company’s resources and can save your company thousands, millions, and even billions of dollars depending on the size of your organization. The money saved can then be used for other revenue-generating activities for your business.
3. Your risk department ensures safe working environments
One of the largest responsibilities of any risk department is to create a safe working environment for all employees across an organization. They do this by actively monitoring problem areas (such as injuries and losses) and implementing safety protocols to reduce the number of hazards.
For example, if you work in the construction industry, you may see many claims for workplace injuries. With access to the right data, your risk experts may be able to advise on and implement strategies that improve worker safety. By doing so, your organization not only saves money on workers’ compensation but more importantly, demonstrates that your company champions a culture that values the health and safety of your workers.
4. Your risk department protects your company’s reputation
You may be thinking, “Wait.... doesn’t protecting the company’s reputation fall into the public relations department?” Yes, that is true, but your risk department also plays a pivotal role in protecting your company’s brand reputation and ensuring that reputation is intact when something negative occurs. Similar to how risks can emerge from any corner, disaster can easily befall any organization of all sizes. However, public opinion can be shaped and reshaped rapidly.
When an undesirable event occurs, your risk department will likely have formal plans and processes in place to best handle the situation and prevent further escalation. Having a clear risk management action plan makes all the difference in the speed and method by which your organization responds. Showing that you can weather undesirable events can maintain positive public opinion and instill confidence in your employees, customers, partners, and stakeholders that your organization has what it takes to overcome momentous obstacles.
5. Your risk department can guide you in strategic decision-making
A business cannot simply exist without having goals. To achieve these goals, there must be extensive planning about the steps needed to get there. Part of creating the roadmap to achieve your goals and objectives is understanding the risks involved with getting there. This is where your risk department comes in.
Using data and analytics, risk managers can quickly identify most unforeseen events, issues, and risks that may arise on your roadmap and determine what protections to put in place to help you achieve your end goals. Along the way, they can also advise you on the pros and cons of your decisions and provide recommendations on which risks you should avoid and which may be worthwhile in the long term. As we previously mentioned, there is no way to eliminate all risks, but your risk department will have a good sense of which ones are worth undertaking to help the company get to where it wants to be so you can know where to put your money.
It would be a costly mistake to not include your risk department in your large-scale strategic business planning. If you leave your risk department out of your planning, there is a greater likelihood that your progress could be derailed when unexpected risks occur.
As you can see, your risk department has much more to contribute than buying insurance and responding to disasters. In fact, the best CFOs integrate their risk department into other functions of their organization rather than keeping them on the sidelines. They understand that their risk department is integral to their organization’s success as a whole and take steps to encourage valuable cross-departmental collaboration.
Strategic planning and decision-making with a risk-aware mindset will only become more essential as we move towards an increasingly unpredictable political, economic, and environmental climate where risks continue to evolve.
Where do you stand on the role of your risk department?