Risk Consulting Practice: An Entrepreneurial Opportunity
The increasing awareness of risk management also holds scope for risk professionals to establish their own ventures
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Did you know that, in all likelihood, you will outlive most businesses today? According to a McKinsey survey on the longevity of businesses in the US, the life expectancy of companies listed in Standard & Poor's (S&P) had fallen to less than 18 years in 2016, a sharp decline from 61 years in 1958. It is expected to drop further in 2027 with 75 per cent of the companies disappearing from the S&P 500. The coronavirus is likely to bring this number down further. While we don't have definitive figures yet, one of the early COVID surveys estimated that a staggering 74 per cent of small businesses and startups in India may shut down as a result of the pandemic. In the US, for instance, 60 per cent of the COVID-induced business closures are now permanent.
The reasons for this decline can be attributed to factors ranging from technological disruptions and financial mismanagement, to completely unexpected events such as a global pandemic. Some of these risks are par for the course in the growth of any business. However, if managed in time, a business can protect itself from the impact of such uncertainties. It can capitalise on emerging opportunities, minimize risks and eventually, prolong its lifespan. The growing realisation of the importance of risk management provides a perfect opportunity for risk consultants.
Risk management is not just prudent, it is also legally mandatory for specific classes of companies as per the Companies Act 2013, which mandates a risk management policy as part of corporate governance and requires a risk management committee to plan, implement and monitor the policy. The expectation for its proper functioning is placed with the key stakeholders of a company, namely, the board of directors, audit committee and independent directors. The board's report must include the development and implementation of the risk management policy, with disclosure of elements of risk that can threaten the company's existence.
Increasingly, regulatory bodies are also stepping in to enforce risk compliance across various sectors. In 2019, the RBI made it mandatory for NBFCs to appoint a chief risk officer (CRO). The following year, it amended the regulatory framework for housing finance companies to ensure appropriate management of risk. Similarly, SEBI has now expanded the existing provision for setting up risk management committees in the top 500 listed companies, to encompass the top 1,000 listed companies. Apart from formulating a risk management policy, the committee will also be responsible for appointing, removing, and deciding the terms of remuneration for a CRO.
These regulations recognize the importance of risk management in ensuring the stability of a company and, therefore, make the identification, evaluation, and mitigation of risk essential for legal compliance. It has also become necessary for companies to demonstrate robust risk practices, to strengthen stakeholder confidence in the organisation's leadership and its preparedness for uncertain events.
Emergence of risk consultants
There is growing recognition for the necessity of establishing a risk committee across various sectors. While larger organisations can accomplish this with relative ease, small and medium businesses may find this challenging, given their limited resources. However, managing risk adequately is extremely important for them due to the very reason for their resource constraints which intensify their risk liability. Qualified risk consultants can step in as the solution to this dilemma. With their expertise, risk management consultants can help develop the risk practices of companies that are not is a position to create full-fledged risk committees, and lay the foundation of a robust risk culture within their ranks.
Consultants can also work closely with CEOs in developing a business continuity plan based on enterprise risk management (ERM). In fact, ERM is often the bedrock of such plans, as a key component of crisis management that is essential for the stability and survival of a business. Other than crisis management, it also ensures strict compliance with regulations. In the absence of regulators, risk consultants may institute compliance through alternative measures such as environmental, social and governance (ESG) reporting and other disclosures. This ensures better transparency, and improves corporate governance and long-term risk management.
An entrepreneurial opportunity
The increasing awareness of risk management also holds scope for risk professionals to establish their own ventures. They can start a consultancy, either as an individual practice or in partnership with other consultants. The first step, however, must be a detailed plan that includes financials, the scope of services offered, potential clients, and of course, the risks. It is absolutely essential that one starts off by clearly articulating the breadth of the services offered and their value proposition. Another important element is building a network. With a new business, a consultant has to create and constantly develop a network of peers and clients, to ensure a steady flow of revenue.
As the stakes are high, given the potential fallout of a failure of the risk management process, it is imperative for risk consultants to deliver unimpeachable and cost-effective service. In today's highly digitised world, there is also great potential for tech-based risk consultancy solutions. Technology Risk Consultants can evaluate an organisation's tech-risk preparedness, and help clients manage tech-based risks across digital services, mobile applications, data storage and more.
To be a successful and well-regarded consultant, it is also important to be au courant of the latest trends and developments in the domain, and be current and competent with recognised professional qualifications. For example, the Institute of Risk Management (IRM) provides 5-level qualifications in ERM which are recognised around the globe, and equip risk practitioners with in-depth knowledge of risk frameworks and international best practices, and the process and tools for identifying, evaluating and mitigating risks along with a formal recognition as a Certified Fellow and risk practitioner.
Risk consultants can play a critical role in building a risk-compliant post-COVID economy, especially in strengthening the critical MSME sector. They can help build an agile risk ecosystem that lays emphasis on risk-preparedness, transparency, and strong corporate governance. For risk professionals, this is the right opportunity to make a difference in India's economic recovery.