Risk Management

Better Data, Better Decisions

Risk-based analytics enables CFOs to improve efficiency and keep exposures acceptable.
February 6, 2017
Better Data, Better Decisions

Finance chiefs are responsible for minimizing the risks that their organizations face in all facets of business—from supply chain operations and fixed-asset investment to payment processing and cybersecurity.

While analytics has played a greater role in risk reduction over the past decade, many organizations acknowledge that they still need to step up their efforts to leverage data within their risk management programs. That was one of the insights culled from a recent survey on the evolving role of data and analytics in mitigating risk, conducted by CFO Research in collaboration with PwC.

Most of the 154 senior finance executives surveyed say that their companies should spend more on risk management, including supplying managers with such tools as risk dashboards and data visualizations, as well as training them to use risk analytics. Barely 1 in 10 respondents (12%) believes that his or her company has an “excellent” risk management program—41% rated their company’s efforts as good, 31% as fair, and 11% as poor.

Currently, half of the C-suite and other senior managers at the companies surveyed do not use risk analytics in their decision making.

Identifying Data Gaps

How can finance executives become more adept at managing risk? The answer, according to most of the surveyed executives, is that the finance team should do more to improve the quality of risk data and analytics at their company. Survey respondents point to four areas for improvement: reliability, relevance, timeliness, and the cost of providing the data.

Just 18% of respondents are confident in the reliability of their company’s risk data. While data relevance and timeliness were also barriers to making effective use of data and analytics, if there’s a lack of confidence in the data, its significance and prompt delivery become moot points.

17JanFeb_FieldNotes_Fig1Fifty-seven percent of survey respondents report that their companies have developed risk-specific metrics. But 36% say that their biggest challenge is dealing with too many metrics (see Figure 1). That reflects an opinion voiced in comments from survey respondents and executives interviewed for the study: It’s important to not simply throw money at a risk management issue and to not use data just because it’s available.

While organizations often collect large amounts of data, that doesn’t necessarily help improve operational efficiency or productivity. If not carefully orchestrated, much of the data and analysis effort can add unnecessary costs without yielding sufficient results.

Consequences of Inaction

As finance chiefs make the case to their CEOs and boards for greater investment in data and analytics to bolster decision making, they can highlight the negative impact of poor data management on performance and operational efficiencies. By partnering more effectively with other departments on risk data and analytics, survey respondents note, they would be able to substantially improve their decision making.

Twenty-eight percent of respondents say the most serious consequence of not effectively using risk analytics is that decisions result in unacceptable risk exposures (see Figure 2). Not far behind, 25% cite decisions that result in operational inefficiencies and higher costs as the most serious consequence. Managers are also at risk for making uninformed decisions (21%) and making decisions too late (11%). In the age of real-time access and cross-functional visibility, companies that do not master data management and analytics are destined to fall behind.

17JanFeb_FieldNotes_Fig2The Role of Finance

Finance chiefs are at the forefront when it comes to the use of data and analytics to manage risk in their organizations. They are looking to apply better quantitative risk management techniques and more advanced analytics than they currently do, across all types of risk.

Partnering with business function leaders to understand how to measure risk is an important step in improving overall risk management practices. Seventy-five percent of respondents acknowledge that decision making could be improved if finance partnered more effectively with other functional areas when it comes to using risk-specific metrics. The wider adoption of cloud-based accounting and finance systems is expected to make it easier to share and view data going forward, giving all departments greater access to risk analysis.

Finance executives see themselves as potential agents of change when it comes to influencing how other business functions view risk analytics. Two-thirds say decision making could be substantially improved if finance took the lead role in helping other managers use risk-specific metrics and understand risk analytics. They also note that their own teams could do a better job of gathering and sharing risk-based data. Nearly two-thirds agree that providing better risk analytics and metrics for others to use could result in substantially better decision making.

17JanFeb_FieldNotes_Fig3Future Value

For senior finance executives seeking improved risk management systems, positive changes can come from investing in more and better risk analytics and data. According to 34% of respondents, the top benefit of risk analytics will be improved operational efficiency (see Figure 3). When a company has a clear view of where things could go wrong and how to avoid or minimize problems, the result is typically higher productivity and lower costs. In addition, high-performing business functions can share best practices with others in the organization, further mitigating risk.

As risk management evolves with more proactive approaches, and analytics becomes an integral part of strategic decision making (i.e., not just raising red flags), senior finance executives have to take more responsibility for improving the quality of risk data and analytics.

Finance chiefs play a unique role in positioning their companies to extract the maximum value from risk analytics. With this knowledge in hand, progressive CFOs can partner with C-level executives, IT, and business unit leaders to make smart investments in technology and provide access to risk analytics on a company-wide basis.

While progress may be slow and may involve a great deal of collaboration, organizations risk losing their competitive advantage if they do not implement tools to enhance their decision-making capabilities.

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