Risk management won’t add value unless it starts with value drivers

Risk and compliance professionals want be “trusted advisors”. To do this they need to help add value to the business. They usually fail because they don’t know where to start. My simple premise is you can’t add value if you don’t understand where value lies. Here are some clues I found helpful.

Hint 1: Value, in economic terms, is usually not found on the balance sheet or in an org chart.

Hint 2: It changes periodically as the business environment changes.

Hint 3: It tends to be industry specific. Your competitors are managing the same risks. You need to do it better.

Hint 4: Equity analysts will tell you. so will credit rating agencies.

Hint 5: Traditional financial metrics may be useless, but the outcome will have financial implications

Mismatches in Risk and Compliance Management

Example 1: Years ago I was general auditor of an oil and gas company. My staff consisted of financial and EDP auditors focused primarily on verifying the existence and value of product inventory at refineries, in pipelines in terminals and bulk storage facilities across the country.

Equity analysts on the other hand made buy/sell recommendations based entirely (at that time) on our ability to add and produce oil and gas reserves cost effectively. The value of proved reserves far exceeded the value of crude and product inventory. Calculating proved reserves involves an understanding of geology, engineering and economics. My audit resources were totally mismatched with the value creation by the business. I needed geologists and engineers as well.

Example 2: In the late 1990’s a French equity analyst firm decided to study the worlds airlines to make recommendations for their clients. (I’d love to find the report again. Its in an old file I cannot locate.) What did they look at? Not airline capacity, not routes, not operating costs, not aircraft. They decided to base their recommendations entirely on their assessment of each airlines customer experience, from reservations, through check-in and inflight service through to baggage handling . (Remember, I did say that value adding activities change over time.)

The list of todays major surviving global airlines matches the analysts conclusions almost perfectly. The airlines they considered weak in terms of customer experience have been merged or are gone. But customer experience is no longer the value determinant on the airlines I fly.

Example 3: Its been a long time since I have been in an audit role. I’m not sure what auditors in ERP vendors spend their time on these days. But I do know what drives share value. I believe its its the rate of growth in Cloud revenue.

Value Lessons to Learn

Here is what I know for sure. To add value today, risk and compliance professionals need to focus on three things.

1. Understand what drives your business value.

Lesson 1: Look at the Section 1A Risk Factors in your annual filings and in those of your competitors . The Risk Factors describing your value adding activities can be interpreted as inverted objectives each of which can have a performance metric

Lesson 2: Understand the business activities, processes or objectives, including the business risks and risk responses that add that value. Example: in oil and gas at the time it would have started with the acquisition of land and continue, seismic evaluation, exploration and development activities and processes. Given todays prices and reserve levels, I suspect refinery efficiency, capacity and distribution systems drive value now.

Lesson 3. Scan the horizon for changes in the environment. The value drivers will change according to competitive, economic, technological and other factors. The first to figure out the new value drivers will win.

Conclusion: My experience tells me that most risk and compliance professionals are still wandering around looking for but not adding value. My experience tells me that value adding activities may account for only 20% or less of the business, with the balance consisting of critical and non critical core activities that support the value adding and compliance.

I’d love to hear your views. Reach out to me directly or leave a comment.

“… almost every problem confronting our society is a result of the fact that our public policy makers are doing the wrong things and are trying to do them righter. The righter we do the wrong thing, the wronger we become. When we make a mistake doing the wrong thing and correct it, we become wronger. When we make a mistake doing the right thing and correct it, we become righter. Therefore, it is better to do the right thing wrong than the wrong thing right.”

Russell Ackoff –



— Oscar Wilde.

Published by Bruce McCuaig

I'm interested in all aspects of risk and compliance management. I want to make it work for business executives, the practitioner community and the business.

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