Returning to appetite

In a few of these blog posts I’ve referred to a risk appetite. There’s no way I’m going to try to sell you that an appetite of risk is comparable to a tasty morsel of any sort. All businesses carry some degree of risk – the risk appetite is how much you’re prepared to carry in your business. The risk you’re prepared to carry is called the residual risk and the risk that exists assuming you do nothing about it is called the inherent risk. It’s very rare that you would find (or should accept) that the risk in the environment (inherent) is what you’re prepared to accept – because it means you’ve either underestimated that risk or you’re over-exposed. To bring the risk down from inherent to residual requires you to invest time or money in planning or building contingency and controls for your business. The work associated in doing that is often called a “Return to Appetite” plan – because you’re bringing the risk to within your acceptable appetite.

A ”Return to Appetite” plan (or RTA) usually includes outlining some key measures or metrics that will be tracked to tell you when you have achieved your return and are now within appetite.

In my experience chasing the numbers is a horrible strategy because once you achieve the numbers it can often result in complacency where you linger under the false belief that the numbers are good, so everything is fine – but what if the numbers have missed something. Don’t misunderstand me – you absolutely need the numbers to keep you honest and help you to monitor progress, but it’s a far better strategy to build a good framework, implement discipline and a strong risk culture – start doing the right thing and the numbers will gradually start to improve organically. Chasing numbers for numbers sake means the depth of culture and improvement is not there and your return is superficial. You’ll end up in a constant cycle of being within appetite and then dropping out and then returning and then dropping out again.

Building discipline around frameworks, processes and systems, is a much more enduring strategy and with that increased rigour you’ll see the numbers improve on their own. Manage risk appropriately because you want to manage it well for your business, not because you’re just trying to make some box on a chart turn green.

To be honest, that oversimplifies what’s involved in a good RTA. A good RTA requires a thorough understanding of not only the risks of the business, the appetite settings, but also the controls, the state of those controls and reporting. Essentially an RTA is a litmus test of the entire end to end risk management environment within a business and then on top of that, identifying the work or tasks required to improve the environment. All of this sounds like a lot of work and expense – and it can be – but how much work is up to you. You can adjust the appetite to say do less work, but be prepared to accept more risk, so if an event were to occur, you’d rather absorb the impact of that event on your business. Ultimately the appetite setting is yours and the RTA should be integrated to your business risk profile. So how well do you understand either of those for your business?

Remember it’s quite possible that not all risks will be out of appetite for your business at the same time. The first time you do the exercise, yes, it may be a lot of work and could be expensive. There’s a peace of mind that comes with that and following that initial success, an annual review and minor tweaking should be all that’s required. It’s really only inaction or material change to your business or environment that would lead to a major piece of work like that again.

Risk Strata specialise in helping businesses understand their risk profile and implementing processes, controls and frameworks to effectively manage those risks so that you can make informed decisions to keep your business safe and healthy. We can tailor a package of services to meet your needs from basic profiling right through to the design and implementation of control frameworks, reporting metrics and appetites and training for yourself and staff. If you want to understand your business better, “let’s talk”.