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The Pitfalls of a Siloed Risk Management Approach

Governance, Risk and Compliance

Modified April 11, 2022 By Resolver

Businesses generally operate with a multitude of different departments. Although siloed operations can be an effective practice for multiple reasons (notably, they let these different business units become specialists in their specific area of expertise), they can also be detrimental in the long term. This is especially the case with risk management.

CFO magazine explained that a siloed approach to risk assessment and management can, at worst, lead to companies with completely different risk practices and cultures. At best, it simply inhibits collaboration and may hinder an organization's ability to identify common goals as a whole and accomplish those objectives.

"Managing risks in a siloed way can lead to a host of other problems, including duplication of risk-mitigation efforts, gaps in the analysis of risks, lack of a process to aggregate critical risks, and an absence of sharing risk information across the organization," explained CFO contributor John Bugall.

"All of those problems make it extremely difficult to understand and manage the key risks facing an organization fully. While companies can operate in separate business units, a single risk is capable of affecting many different parts of the organization."

Smashing Silo Walls

A siloed business culture can be difficult to change, particularly if it's been that way for a while. In fact, even in cases where risk managers understand that changes need to be made, they may face resistance from other executives, mainly if the company in question has been successful despite a siloed risk management strategy.

The key in these situations is effectively showing how eliminating a departmental approach to risk management can effectively improve the return on investment of risk management budgets. There is no denying that siloed risk management can hinder growth. For example, suppose product design units launch a new product without considering the risks this action poses to manufacturing and customer service departments. In that case, the new item may end up costing more customers and sales than it generates.

Risk managers will need to work with other business units to develop new ways of communicating risk across business units. This shared methodology and communication will help promote greater collaboration and enable firms to take a better strategic, company-wide approach to prevent threats and capitalize on opportunities.

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