Since the financial crisis of 2008–09, financial institutions have significantly expanded their risk and compliance functions. And with increased headcount came increased complexity. Many institutions grew rapidly and piecemeal, often scrambling to respond to regulatory feedback or indirect pressures. Most banks today are consequently looking to improve productivity. Risk management, however, has often been off-limits for cost reductions. Actions to reduce cost required cutting through the complexity and therefore were viewed as hazardous, given the nature of risk and the expectations of regulators. Faulty moves to make risk management more efficient can in fact cost an institution significantly more than they save.
Fortunately, the most potent levers for increasing risk-management effectiveness, if applied in careful sequence, also improve efficiency. A well-executed, end-to-end risk-function transformationcan decrease costs by up to 20 percent while improving transparency, accountability, and employee and customer experience.
A sequential journey
Banks looking to transform risk management can focus on four mutually reinforcing areas: organization, governance, processes, and digitization and advanced analytics. While enhancements isolated in each area can boost both effectiveness and efficiency, the true potential comes from tackling them in sequential order. Organizational optimization facilitates governance rationalization, which facilitates effective streamlining of processes, which enables digitization and advanced analytics to yield maximal benefit.
- By optimizing the organization, institutions can gain effectiveness, clarifying responsibilities, increasing accountability, and matching talent to jobs. The changes also promote efficiency by reducing redundancy in activities across the first and second lines of defense. Perhaps most important, organizational improvements lay a necessary foundation for rationalizing governance, streamlining processes, and digitization.
- By rationalizing governance, banks can focus attention on what matters most and remove pain points for the business. Eliminating unneeded activities frees up a scarce and precious resource—management bandwidth—while yielding some direct efficiency benefits. Most critically, rationalized governance sets the foundation for streamlining processes as well as for digitization.
- By streamlining and strengthening processes, institutions can take dramatic steps on the efficiency–effectiveness curve while creating better employee and customer experiences. Streamlined processes are also easier to digitize, either in targeted ways or in full.
- Finally, digitization and advanced analytics augment and magnify the effect of process redesign, allowing for full impact to both risk-management effectiveness and efficiency. Appropriately automated processes are less error prone and less costly. Perhaps even more important, digitization permits institutions to embed automated real-time (or near-real-time) risk controls within core processes. This reduces control failures and makes far more efficient use of resources.
Secrets of transformative success
End-to-end risk transformations can reduce the cost base while meaningfully improving the quality of risk management. Four initial steps are essential to success.
- Define the scope of transformation. Banks seeking to improve productivity face a choice of risk-focused transformation or broader cross-enterprise transformation in which the risk function is a component. Given the cross-enterprise nature of the risk function, an enterprise-wide approach tends to create greater value, both throughout the enterprise and within the risk function.
- Set the ambition. In this step, banks determine the size of the available opportunity. Only after identifying the full potential of the transformation can institutions proceed to a detailed plan, with the risk leadership ensuring that the plan is designed to capture the full potential. Some leaders may shy away from ambitious goals, wanting instead to make more incremental changes. The trade-offs will need to be understood and discussed among the executive team beforehand, to ensure alignment.
- Establish appropriate governance and focus. The potential value in the transformation is realized through strict governance with clearly defined roles. A transformation officer is one key role, responsible for drawing together the threads of the transformation and keeping things moving. This is a senior, strategic role, rather than a project manager. Next, initiative owners are responsible for designing the initiatives, including the financial case, implementation timeline and resourcing, and impact on risk effectiveness. Finally, executive involvement is a must to maintain organizational discipline. A common feature of successful efforts is a weekly meeting between executives, the transformation officer, and initiative owners to understand recent progress, remove potential obstructions, and help ensure that the transformation stays on track to achieve its goals.
- Communicate a transformational narrative. Risk transformations have a lot in common with other change efforts. Managing organizational buy-in and maintaining momentum is essentially important and requires as much, if not more, senior-leadership attention as the substance of the work.
Transformations involve significant behavioral shifts. Addressing new demands and building new skills requires careful change management and patient leadership sustained over a multiyear time horizon. Successfully transformed organizations know, however, that the rewards—greater risk-management effectiveness at lower cost—are well worth the challenge.