What is most important – strategy, people or processes?
Hubert Roslund joined FCG on 2nd May. He has more than 24 years’ experience from both the Business and Strategy & Risk side at sophisticated financial institutions. Some of his previous roles include those of Global Head of Strategic Portfolio Management at RBS Non-Core Division and Head of Russian Desk at Nordea.
You have a long experience from both the business and risk side, but I’d like to focus on risk management today. What is most important to become a truly successful risk management unit – strategy, people or processes?
Companies that wish to capitalise fully on investments made in the risk management area need to adopt an ambitious, holistic approach.
To achieve this, they don’t need processes or bright strategic minds. They need both.
They need to start by clearly defining what they want to achieve. Having a well-oiled machinery in terms of systems and processes is important but for many it becomes an end in itself. It shouldn’t be. Risk management shouldn’t be a series of tick-box exercises with a sole purpose to please regulators – it has so much more to offer.
For instance, I believe a risk unit should make sure their company doesn’t assume any unidentified risks and – to be truly successful – it should, jointly with other units within the organisation, ensure optionality and first mover advantage is maintained.
What do you mean by optionality and first mover advantage?
Optionality and first mover advantage is important to any organisation, but let’s take the example of a Bank with a corporate loan book. A modern financial institution cannot simply pile on loans without a plan as to what it should do if the corporate strategy or the market environment changes substantially, for instance due to geopolitical instability or something as mundane as a change in accounting standards, capital requirements or rating models.
It needs to have a number of options, which could include straightforward loan repayments, loan sales, securitisations, insurance and hedging. In a difficult market environment, many of these will have to be pursued simultaneously, as the preferred route could suddenly be closed.
However, in financial markets, just as in the real economy, there is often a significant first mover advantage, i.e. the first organisation to enter or exit a specific niche can secure pricing and liquidity that no one else will even be close to achieving.
How does a company in such case secure optionality and first mover advantage?
Well, it is all well and good to have identified these options at a theoretical level, but to gain first mover advantage they should ideally have been tried and tested in good times. If loan sales and insurance, for instance, are part of your tool kit, systems and processes should be in place, approvals obtained and a responsible team identified and briefed. I’d also strongly recommend that they have already tested the market.
However, apart from having the machinery in place, there is another crucial building block.
And which one is that?
The organisation cannot be reactive, it needs to be a fast-moving outfit, constantly scanning the market and initiating timely, strategic discussions.
To do this, both process and bright strategic minds are required. Discipline and process ensures that the loan book is correctly captured. This is crucial, as any decisions made based on a faulty understanding of the loan book will be – at best – less than perfect.
The strategy side is all about considering potential or developing changes in the environment and assessing how they can impact the organisation and what – if any – actions should be taken. As there tends to be a certain herd mentality in modern society, it is important to include people with different skill sets and experiences. Apart from analytical prowess, intellectual curiosity is important, and the team should at least include someone who has a leaning for adopting contrarian views.
It is an ambitious agenda you outline, how many companies fulfill all of these requirements?
None. And I don’t think it is useful to aim for one perfect model, it is more important to understand the direction and make sure you have the right people in the right places and that they understand the end target and share the ambitions of a journey of continuous improvement.
Can diversity support the process?
Diversity is definitely an important part on the journey to progress, but not in the shallow form that it tends to be used in. A fully functioning unit ideally includes people with different capabilities and experiences. For instance, people skilled at modelling and working with big data, people with highly developed attention to detail, people with experiences from previous market movements, people with an interest and understanding of the real economy etc.
But true diversity is difficult to manage and most companies manage their staff as if it was one very homogeneous group, with the same desires, beliefs and even the same way of absorbing information. At worst, this leads to disengagement and a lack of buy-in from otherwise capable team members. Managers need to understand that managing people takes time and passion, a lot of it, and that there is no single way of interaction that works for everyone.