Enterprise Risk Management: Getting Beyond the Promise
The potential impact on earnings from Dodd-Frank alone is not known (some say a 6% hit on earnings just from interchange caps), however there is a very real potential for its compliance and revenue replacement costs to dwarf Sarbanes Oxley — maybe 10 fold.
Just how costly was SOX? Foley and Lardner report that in 2001, before SOX, the average compliance cost for companies was $1.1 million. In 2006 that cost increased to an average of $2.8 million, a 270% increase over a 5 year period.
Of course from a P&L perspective there is much to balance beyond risk and compliance such as building channels and customer loyalty, launching new services and revenue streams, all while driving on-going efficiency and better service. Finding the right balance between risk and infrastructure initiatives vs. revenue and innovation initiatives feels more like calculus than simple arithmetic. It requires sophisticated management, leadership alignment and a common playbook for effective business execution.
Getting beyond the mere promise of Enterprise Risk Management (ERM) to actual performance involves several core principles. The first one is to establish a shared vision for risk management that doesn’t just launch a new initiative, but strategically fits with current business realities, future needs, the existing and desired culture, and creates leadership buy-in along the way. It may not be time to jump towards the vision of ERM as a marketplace advantage, but it certainly is appropriate to get the house in order and rely less on the expertise of a siloed function or Chief Risk Officer to drive risk management for the business.
Unfortunately, a frank assessment has to conclude that most financial services organizations are falling well short of where they need to be in terms of finding the right balance and managing risk strategically with a vision for what they need to become. To help frame the issue, next week in the Guidon blog we’ll outline a couple levels of risk management maturity. Is it clear where your organization is along the journey?
In the meantime join me on Wednesday, June 29 at 1pm EDT for a live webinar to discuss principles and the roadmap for building mature and effective ERM that leads to competitive advantages. I will be co-presenting the webinar along with David Potterton – Vice President, and Michael Versace – Research Director from IDC Financial Insights.