Unlearn what you know about risk management, do your due diligence and don’t dumb down uncertainty

Risk managers must “unlearn” what they know about risk management, challenge the status quo and traditional approaches, so that they can get closer to making “better decisions with risks in mind”.

This was the advice from Alex Sidorenko, chief executive of Risk Academy, upon opening this year’s inaugural Risk Awareness Week 2019 – a five-day virtual conference running from 14 to 18 October.

In his welcoming address, he says: “You will learn over the course of this week that risk management is not about managing risk, it is about making better decisions with risks in mind, or changing your business processes with risk in mind, or planning and forecasting with risk in mind.

“Unless you unlearn what you know about risk management… you will not be able to appreciate the solutions… [presented over the course of #RAW2019], you will think it’s a maturity issue, but it is not.”

Of traditional risk management models, approaches, tools and frameworks, he says: “If you are going to make an idea your own and sell it to decision-makers in your company, you better do your due diligence. It’s your responsibility, as risk professionals, to do your due diligence on the approaches and techniques that you bring to the decision-makers.

“Thinking about future, and uncertain future is difficult. So, do you due diligence”.

Sidorenko presented his philosophy for how risk management should be approached in four steps.

Point 1: Life is complex, don’t dumb uncertainty to a single number or word: uncertainty cannot be viewed in terms of a ‘single number’ or ‘word’, says Sidorenko. For example, uncertainty cannot be described as a ‘low’, ‘medium’ or ‘high’: “Uncertainty is complex, and it deserves more respect than just a number that suggests that the risk level is ‘17’, or that it is ‘high’,” says Sidorenko.

“The effect of uncertainties on objectives is not a number. If anything, it is a range. And that’s how we should start thinking and talking about risk.

“Talking about risk as a single possible scenario that will give you a possible loss of about £1m and the probability of that happening is 15% is unhelpful. Volatility and range are what gives us the insight for good decision-making.”

Point 2: Focus on effect of uncertainty, not the risks and their mitigations: the only people who care about risk management are risk managers and internal auditors. It is not the focal point for the rest of the business, says Sidorenko.

“The rest of the company are more concerned about the effects of uncertainty on something,” he says. “What this means is that when you communicate risks, don’t say ‘we have seven risks and they are high, or the aggregate risk exposure is £15m. That is not useful. What you should be saying, for example, is ‘you have X budget and you’ve budget for £1.5m but due to the risk that may affect this budget, you should budget somewhere between £1.3 to 1.7m.

“Risk managers should talk in ranges and how that range can change your decisions.”

Point 3: Most uncertain problems have been attempted before and some techniques work better than others: “We don’t have to recreate the wheel,” advices Sidorenko. “There is probably a solution out there. Its about reaching out to the community and asking for help and advice.”

Point 4; Learn from probability theory decision science and risk psychology: “Don’t learn about risk management from ‘marketing brochures’, or thought leadership reports,” says Sidorenko. “There are 500 years of research in probability theory, close to 100 years in decision science and about 70 years in risk psychology. And these concepts have all the answers,” he says.

Sidorenko’s workshop, Latest trends in Risk Management 2.0 has been recorded and can be viewed, here: https://2019.riskawarenessweek.com/talks/welcome/?ah=hP3hqvf2