The disruption caused by a global pandemic has unsettled business operations, reduced profits, and lowered share prices. But those are just the most visible challenges. A new report from consultancy firm McKinsey shows that COVID-19 has also raised the cost of running a risk management function by between 10 to 30%. Reasons for this rise include new cyber risks triggered by the pandemic, the move to working from home, and an inability to visit new clients to verify their creditworthiness.
Companies are looking to cut costs in light of COVID-19’s impact. But scaling down risk management operations is simply not an option. In fact, the pandemic has made risk management more important because the risks facing businesses have grown—from heightened financial risks of key suppliers facing bankruptcy to reputational risks of appearing more concerned about profits than the health and welfare of employees and customers. So, what should companies do?
Technology enhances risk management
Part of the answer lies in the use of technology and big data. The McKinsey report, called ’A fast-track to risk-management transformation to counter the COVID-19 crisis”, says that businesses should see the pandemic as a reason “to make processes as efficient and effective as possible”. The key to this is to use technology, which supports risk management in the following ways:
Technology applications like Natural Language Processing can reduce the manual data entry required by a compliance function by 15 to 20%.
Robotic Process Automation can reduce data reporting errors by 50%, which improves the quality of monitoring and frees up the time needed by employees to make manual corrections.
Technology can also improve processes for reporting financial crimes. Predictive data analytics can lead to a 40% increase in the accuracy of screening and due diligence processes and an 80% improvement in the accuracy of risk alerts.
The report singled out risk management functions in the financial services industry as ripe for technological transformation. Monitoring third parties credit histories is an important part of risk management for banks, and algorithms could be used to support 40% of all credit monitoring decisions. The report found that using technology in this way can reduce credit losses by 20 to 30% and cut monitoring costs by 30 to 40%.
Effective risk management needs strong leadership
Overhauling a risk management operation might seem a daunting task for a company already struggling to cope with the effects of COVID-19. But the report says that these changes can be implemented more quickly than expected by demonstrating that some companies’ risk management functions have improved their processes in three months. “When these changes are successful, we estimate that they can improve efficiency and effectiveness enough to raise the productivity of specific activities by 40% or more,” the report concludes.
But companies should bear in mind that simply acquiring the right technology is not enough for an effective risk management process. The C-suite of an organisation must set a clear tone from the top that risk management is a priority. The report warns that risk management functions can create lasting change if they are “supported by top leaders” and “part of a well-conceived, well-executed plan.” Are you prepared to drive this change in your company?
If the answer is yes, Nexis® Solutions is a good place to start. Check out these resources: