Dr Michael Adam, Global Head of Risk & Compliance Solutions, SAP, discusses recent opportunities and challenges faced by organisations when it comes to integrating risk and finance functions.
The past five years have drastically changed the way in which the financial services industry reviews the roles of risk and finance. Prior to the financial crisis several projects were underway across many organisations looking to integrate these functions. Largely based on encouragement from regulators, consultants and shareholders, the vast majority of such projects were abandoned due to a lack of commitment or practical barriers thrown up by the business. Suffice to say, the path to achieving integration of risk and finance functions is not easy but it is increasingly becoming a necessity for the industry.
Financial services organisations have spent approximately $17 billion on risk and finance projects in the last five years but haven’t yet reached the level of transformation they need. A recent survey of risk and finance professionals commissioned by SAP revealed just 8% had not yet begun risk and finance integration projects. As a result, and understandably, there’s a lot of uncertainty around the effectiveness of such projects because the majority of businesses have made substantial investments already.
The impetus behind the integration
Today, risk is seen as a strategic partner to the overall business; a significant supporting structure for growth. The integration of risk with finance greatly enhances decision making, capital allocation and the opportunity to stress test; crucial for financial services organisations today. Another driver for risk and finance integration projects includes the national and international regulatory requirements, particularly Basel 3, EMIR and IFRS. Typically the approach to achieving compliance has been fragmented; integrating the two functions will unify the response from financial services organisations as new pressures from regulations are applied.
Some organisations are absolutely on the ball when it comes to the integration of risk and finance because they have implemented a top down approach. Without buy-in from the c-suite, the demise of such projects is inevitable. It must be a strategic decision from the board with a clearly defined roadmap to achieve overall integration. Such a transformation project is not a two or three month job, it’s a long-term journey which requires support.
The benefits of integrating the risk and finance functions will be realised through a step-by-step approach. It’s not necessarily a finite process and there will be a significant requirement to re-evaluate company culture. For example, language is critical but can be a barrier to success. Different functions use different terms to describe the same thing, which can easily cause confusion and therefore lead to resistance. Encouraging the use of a common language between risk and finance people will help ease the transition to an integrated approach. Part of this cultural change, of course, is all about educating the business and specific areas involved at certain points during the journey in order to be clear to them how and why the changes will affect them and ultimately the overall success of the business.
If there was a secret ingredient to making it work, it would be to understand the changes in technology and how these can greatly enhance the project – from planning to implementation. In-memory computing is a huge asset for any organisation looking to take on tasks that involve big data processing at a granular level. This not only alleviates a considerable amount of pressure on the project but will greatly reduce the time it takes to run reports and obtain the information required at each point. Essentially, in-memory computing creates a layer between risk and finance so that each team can access the information they require from the data at any point, within a matter of seconds.
During in-depth follow-up interviews with respondents to the survey by SAP, it was suggested that new technology systems would not remain cutting edge for long and would need to be replaced fairly soon after implementation. This can be true of some technologies but there are those designed to grow with the business and project at different stages. Agility is a priority when it comes to any technology implementation and will also be important in ensuring the project doesn’t become a drain on resource.
Failure to comply
The long and short of it is that without the integration of risk and finance in the next few years, financial services organisations will inevitably lose out as competitors gain the advantage. Moreover, new regulations will come into play which will require this integration as a basic level of compliance. It’s a case of plan for the project and implementation now, or wait until you are legally required to do so and spend a lot more money in the process with a lesser chance of success.
The role of the risk function within financial services organisations has significantly shifted in the past few years to become more of a strategic partner to the overall business. As regulatory requirements continue to put pressure on the industry to comply through greater integration of risk and finance, it’s more important than ever that projects are delivering on the transformation required. In order to achieve success and realise the benefits from such projects – which are long-term investments and not quick solutions – an education process must occur. Not only is a dedicated roadmap required, which both the board and c-suite fully support, but the entire organisation needs to be educated to understand the need for such a change.
The education must also stretch to recognising which technologies will be agile enough to support the business through the duration of the project, whilst delivering operational efficiencies and, ultimately, potential competitive advantages through which the entire organisation can benefit.