In the light of recent natural disasters, many companies have embraced risk management as part of the decision-making process. In Hagen's opinion, many have failed. A major reason is the respect - or lack of it - that the discipline tends to receive from top management. "Anyone who is a practitioner of risk management feels like they're a second-class function in a company," he says. The reason: risk management can't deliver measurable results, in terms of value versus investment.
"Risk management grew up differently," explains Hagen. "Typically, that justification isn't brought to the table. Therefore, it doesn't compete well with other decisions going on in organizations."
Hagen acknowledges that it's difficult to quantify the value of a successful risk-management effort. How, after all, can managers put a price on something that didn't happen? Still, he believes that coming up with a return-on-investment calculation for risk management is "very doable." Managers must learn to "account for and embrace uncertainty with probability." They should be able to compare the amount spent on resolving a problem with the savings generated by mitigating a risk. As an example, Hagen cites the life-sciences supply chain, where companies must balance the risk of stockouts for a valuable item with the cost of expediting a product launch.
Coming up with the right answer requires sophisticated analytics. "It's not something you can do on the back of an envelope," says Hagen. He recommends the exercise known as PRO Enterprise Management, the acronym standing for problems, risks and opportunities. A number of software applications support the process, he says.
A wide variety of industries can benefit from it. PRO Enterprise Management, says Hagen, can be tied back into risk management as a means of selecting projects for improvement, or Lean or Six Sigma projects to be launched - well beyond the areas with which risk managers have been traditionally concerned.
