Every large financial services company has instituted risk management, but that hasn’t prevented risky behavior in the form of office politics and personality conflict — as the JPMorgan trading debacle has demonstrated. Recent reports in the New York Times cited organizational discord at JPMorgan Chase as a contributor to the company’s multibillion dollar trading loss.
Risk management isn’t exclusive to banking. Pharmaceutical manufacturers, insurers and retailers invest millions in risk avoidance. But in the era of Big Data and decision making at the desktop, it’s vexing to think that any company with significant technology investments would allow the all-too-human traits of ownership debates and subjective opinion to override robust data analysis.
Time for governance
Put simply, risk management is the combination of business processes, technologies and skills that allow companies to balance short- and long-term risk exposure, understand the organizational tolerance for failure, pinpoint areas of vulnerability, gauge the costs of precarious business decisions, and forecast the outcomes of these decisions in advance of making them. But all too often those safeguards are ignored.
Every business day, companies cede hard evidence to the political agendas of a willful manager or department, and these companies span geographies, industries, revenues and market segments. As people from different departments with different ideas and goals work together, philosophical differences are almost guaranteed. You can imagine the closed-door debates between a cavalier merchandiser and a wary data analyst played out at a retailer.
“I know it’s a big inventory order, Charlie, but don’t worry. We can cover it.”
“But Dan, every supply chain model we’ve run shows that the quantities are way too large. And the pricing models … ”
“Oh, your models, your models. Where do you guys get that data, anyway? By the time we build all the models our shelves will be empty!”
“It’s our own sales data, Dan. You know that. And we compare it with research, third- party sources, climate data, and historical purchase trends … ”
“Charlie, don’t talk to me about historical purchase trends, I’ve been doing this for 30 years. Go ahead and do your analysis. But we’re gonna pull the trigger.”
Substitute merchandiser in retail for the product manager at a pharma company or the brand manager at a packaged goods firm, and it’s tempting to dredge up the “man versus machine” metaphor. But it’s really the clash of two fundamental preferences: fact-based decision making versus gut feel. And humans’ tendency to “trust their gut” is as old as the caveman and the spear.
Leadership – the missing piece
The amount of data that companies collect every two years — five exabytes — now surpasses the digitization of anything anyone’s ever said. Investments in database software, servers, storage and business intelligence tools continue apace. But optimizing the use of these and other technologies remains a challenge. It takes leadership to establish decision management and closed-loop measurement practices. Through decisive leadership and consistent measurement, plenty of companies have shown it can be done.
Savvy managers understand that weaving data-driven decisions into the fabric of corporate governance can obviate organizational infighting and drive progress. By establishing clear accountability measures, managers can determine whether and how corporate goals are being achieved and hold people accountable for how they are achieving those goals. This motivates business people to rely less on hunches and more on hard data.
Of course, establishing strategic objectives and measuring their execution requires leaders to adopt deliberate planning and a clear strategic view. And, linking employee performance to business results calls for transparency and expectation setting. But faced with a rigorous reward system, business people will choose hard facts and numbers over anecdotes and guesswork, eliminating finger-in-the-wind guessing games in favor of a data-to-decision cycle. This cycle, over time, becomes part of the company’s DNA. Until this happens, many companies continue to place their biggest bets on the fallout from turf wars and power plays. And the hard reality is that no one is too big to fail.
NOTE: Originally published by Harvard Business Review in 2012. Copyright 2012 Harvard Business Review. All rights reserved. Reprinted by permission.