Does it pay off to enhance a company|s risk management framework?

Free advice is always free. But some high end advice and consulting is not only chargeable, but also can be expensive at times. This very fact prevents many eager corporates to defer enhancements to risk management systems and practices. Often companies call for consultant meetings, but end up trashing their recommendations and brochures.

Why is it that companies feel that such consulting is not worth the money spent? Why is it that risk management projects are always last in the list. Given below are various reasons why we believe that risk management does pay off.

1. Large losses often occur due to low probability tail events. By definition, these events are rare in occurrence. The goals of risk management is to mitigate such large losses in the best possible manner. So, consider money spent on anything towards this end as insurance against such large losses. Naturally, if the event does not happen, then companies may feel that the money was wasted. But no, if the event had happened, the company would have saved millions.

2. Risk management deeply integrates in the company, its culture and the interlinked processes and work steps. So, good risk management practices that are recommended by consultants are not attributable to a specific activity or task. Instead these recommendations are used throughout the day by everyone. When a consultant suggests that a fraud risk management policy should be drafted and implemented, then there is no way to really measure the benefits of this.

3. Risk management is not all technology. Governance, corporate culture, risk management framework etc are intangibles that are introduced with the help of company staff. It is difficult to put a cost / benefit ratio for these practices.

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