Who are the real early-adopters of ERM?
Common-sense might tempt us to believe that the larger financial services organisations are the ones who are most likely to be leading the way towards Enterprise Risk Management. After all they have a more sophisticated view of risk management overall and have many years of experience in different areas of risk management. They also have the most to gain from the benefits of common risk management processes and a consolidated view of risk across the organisation. Some recent market research I have carried out in smaller financial organisations in the US and Europe points to an unexpected challenge to this assumption.
In the smaller banks, insurance companies and asset managers, the growth of regulation means that compliance is one of the most significant challenges that they face and, as a result, compliance management is a comparatively well developed (and well resourced) discipline. Compliance is also a very wide-ranging subject, encompassing most areas of and processes within the organisation and overlapping with many risk areas. What is happening is that regulators on both sides of the Atlantic are asking financial services organisations to take a more risk-based approach to compliance and, at the same time, encouraging them to have an enterprise-wide view of risk.
So why would the smaller firms be in a better position to adopt an Enterprise Risk Management approach? The answer seems to lie in where they are coming from. The larger organisations already have well developed risk management silos for different categories of risk, so there are both technical and organisational barriers to an Enterprise Risk Management approach. Each area has its own specific requirements and has bought or developed sophisticated solutions and bringing them together is both expensive and risky. In the smaller organisations these silos are less well developed, so it appears far more likely that a system implemented to manage compliance risk will also be adopted by other risk management areas that were hitherto using manual methods or spreadsheets. In these firms, cost constraints and small size may mean that instead of there being organisational barriers to an enterprise-wide approach, there are actually organisational incentives.
Mike MacDonagh