
In today's dynamic business environment, it’s becoming increasingly difficult to account properly for the constantly evolving barrage of financial and non-financial risks. Periodic risk assessments provide a valuable snapshot (particularly of an organization's compliance and non-financial risk profile), but are insufficient in isolation.
To effectively navigate this complex landscape, a bold shift towards continuous risk monitoring is essential – one that recognizes the fluid nature of risk and emphasizes the need for ongoing vigilance and adaptation.
While traditional risk assessments capture important point-in-time data, they offer only a static view of an organization's risk exposure and fail to reflect the ongoing fluctuations inherent in today's business environment.
Pedro Morales
New technologies, regulatory changes, geopolitical events and economic shifts continually reshape the risk landscape, rendering periodic assessments quickly outdated. Furthermore, an overreliance on self-assessments in risk management can create blind spots.
Indeed, while valuable for gathering information and promoting internal awareness, self-assessments are inherently susceptible to subjective biases that often lead to incorrect measurements. This rings particularly true for non-financial risks, such as operational, reputational, and cybersecurity risks, which are more challenging to quantify.
These evolving, often intangible threats can be better identified and managed through vigilant, continuous monitoring. But how can this be achieved?
A Multi-Step Approach
To effectively and continuously quantify non-financial risks, organizations should adopt a multi-faceted approach that includes (1) implementing specific risk indicators; (2) keeping a closer eye on both cybersecurity and broader operational risks; and (3) leveraging scenario analysis.
The first step requires a firm to define its measurable metrics, which can signal potential threats. Ideally, risk parameters should be established to align with your firm’s risk appetite. Simple metrics can be used, for example, to track social media sentiment, news mentions and customer reviews, helping to protect a company’s reputation.
For cybersecurity risk, the proper quantification of non-financial risk requires monitoring the frequency of security incidents, dedicating time to patching vulnerabilities, and improving employee training. For operational risks, indicators should be used to monitor incidences and to develop a robust event inventory that factors in data from related “external” events.
Scenario analysis, meanwhile, can be deployed to better inform your firm’s risk appetite, to more effectively measure the impact of risks, and to model potential risk events. Various factors must be considered, including the likelihood of an event occurring, the potential magnitude of the impact and the effectiveness of existing risk controls.
Throughout the monitoring process, moreover, expert opinions must be incorporated to ensure the use of the right quantification techniques. By committing to measuring non-financial risks comprehensively, organizations can gain a deeper understanding of the more intangible threats they face and create effective mitigation strategies, ultimately resulting in superior operational resilience.
Operational Resilience: Detect, Adapt and Enhance
Leveraging data is one of the keys to gaining real-time insights into your organization's risk profile. By tracking multiple metrics (i.e., risk indicators) and by analyzing emerging trends, organizations can proactively work on risks as they unfold, instead of merely reacting to them. This dynamic approach to continuous risk monitoring yields many benefits, including:
- Early detection of emerging risks. Identifying subtle shifts and patterns may foreshadow significant risks, allowing for timely intervention.
- Adaptive risk management. As the risk environment evolves, organizations can adjust their controls and mitigation strategies in real-time, ensuring their risk management frameworks remain relevant and effective.
- Enhanced decision-making. Real-time data empowers informed decision-making at all levels of the organization, promoting agility and responsiveness.
Continuous monitoring, in short, proactively addresses potential threats, strengthening an organization's ability to maintain operational continuity and to withstand disruptions.
Importantly, a robust risk identification program is step one in developing a comprehensive monitoring approach. Risk identification should be straightforward and should encourage broad participation across the organization, while effectively capturing a wide spectrum of potential risks. Carefully weighing the monitoring program during the risk identification phase creates a closed-loop system that fosters a proactive and responsive risk culture.
Parting Thoughts
Continuous risk monitoring is not merely an enhancement but a necessity in today's dynamic business environment. By moving beyond static assessments and embracing real-time data analysis, organizations can cultivate a proactive risk management approach that improves decision-making and strengthens resilience.
When managing the ever-evolving landscape of non-financial risks, this approach is particularly critical, because it will safeguard organizations from potentially detrimental threats that traditional approaches may overlook.
Pedro Morales is a Risk & Compliance Director at Google. He began his career in consulting before moving to Santander's risk team, and later held various leadership roles at the Federal Reserve System supervising large banks. The views he expressed in this article are his alone and do not necessarily reflect those of his employer.
Topics: Enterprise