In the previous section, the risk control construct is identified by five items and the review of the theory showed that financial institutions moved from a traditional risk control by silos to an integral view of risk across the organisation. To get to that point there are many steps to follow and one of the steps is to identify the possible benefits that an ERM program can bring to the organisation. Thus, this section is related to the work of different authors, particularly the work of Abrams et al. (2007).
The value of ERM is associated with two research circumstances. First, the risk management organisation in the current environment is based on risk types and the related areas have independent work groups. The review of operational benefits provides value given the possible different perception of a program that is across the organisation.
Second, the operational benefits of ERM are not clearly identified with the same strength as the strategic benefits are. The reason is that, according to the previous chapter, the financial institutions are organizing their RM governance based on ERM principles, but the implementation is a work in progress. Probably the most important reason is that the operation of risk management, support and capacity of increasing interdisciplinary work, require the understanding of the people who are performing the basic work of risk measuring, assessment, control and support.
The competition in financial institutions is based on customer service developed under an integral view, which needs a risk aggregation analysis. Then, from the macro perspective, the purpose is to identify how the organisation uses ERM as an advantage to compete. ERM is expected to contribute to supporting the coordination of the financial institution offer based on the aggregated risk exposure that is accumulated in customers of the organisation. From the operational point of view, the aim is to identify which product definitions, trade-offs between risk and return and capital allocation represent actions that are improved by ERM implementation. ERM actions that need to be supported by people, risk management processes and risk information systems.
In measuring the value of ERM implementation, this research includes the position that this can only be answered by an individual, and not for an organisation. Because of the cost of ERM systems, it would be very difficult for an organisation to declare an ERM
implementation as anything less than a complete success, especially in the current climate. However, anonymous individual RM practitioners can express their opinions more freely, and this is the basis on which the measures have been developed.
Based on the Abrams et al. (2007) reflection of the synergetic capacity benefit that requires a solid structure of information and quantitative capacity, the concentration, in this research, has been on Peterson‟s and Nocco‟s and Stultz‟s (2006) points of view (See for details section 2.2.5). These micro view points are bases on which to built risk management systems and alignment to connect the different RM silos as it was explained by Chrouhy et al. (2001). This means these benefits exist and are perceived as benefits because the ERM actions might support the implementation of risk management across the organisation in order to gain synergies.
Finally, Abrams et al. (2007) indicate that there are three critical characteristics of the ERM: developed integration, comprehensive and strategic. This idea complements the importance of the operational view of the ERM benefits if the purpose is to gain synergetic capacity in RM. The authors point out that data governance, policy simplification, standardization and optimization are part of the ERM design. In summary, there are components of ERM that are required to develop the desired synergy based on the better capacity in areas of people interactions, data, models and problem solving. In this research, there have been included items that describe benefits related to people, information management and specific capacity for problem solving. The variable perceived value of ERM implementation (perm) was constructed based on the following 9 items:
• The holistic view involves many people with a focus on the RM problem. Bowling and Lawrence (2005) expressed the view that all the stakeholders share a common interest that in particular is to monitor risk in order to reach a proper understanding of risk management. This has a meaning in the need of collaboration and sharing capacity among different risk management areas and development of governance. Or even better, as Matyjewicz and D‟Arcangelo (2004) point out, more collaborative work is needed, and an ERM program needs to develop communication, knowledge sharing improvement and sharing of risk management values within the corporate
culture. Although there is the need of some collaboration activities among people, it is not clear what the perception is from the members of the group. Hence, the item used was: ERM improves collaboration.
• Likewise, the understanding and improvement of collaboration is not enough. In ERM, a problem can require the solution and participation of various people from different RM areas. In particular, a problem that involves several risks needs more experience sharing for its solution. Matyjewicz and D‟arcangelo (2004) describe that compliance needs to use experience from different areas in order to develop capacity for the integral understanding of risk, however what is not identified is the perception about the organisational promotion of risk knowledge sharing. Then the item used was:
ERM program promotes our experience sharing.
• According to Oshri (2008): “By reusing knowledge, organisations may also avoid
“reinventing the wheel” in terms of products, components, templates, and processes, thus freeing up resources to other core activities, be these customer responsiveness or innovation.” The above point relates problem solving to experience. The experience is an aggregation of knowledge that can be used in RM problems. The silo culture in a financial institution can produce isolation of solutions that could be used in similar problems in other areas. An integral view allows discovering solutions to similar problems with the same tools; however, it is not clear if the organisations have the capacity to share the accumulated experience and know-how across the organisation to solve emergent problems.
Waldvogel and Whelan (2008) point out that learning in risk management has to move ahead of basic risk business concepts towards the creation of “integrating risk awareness”. They state: “Attaining this degree of risk knowledge requires innovative learning approaches drawn from technical communication, presentation, knowledge management and training...” Then, the item used was: ERM reduces the number of times we reinvent the wheel.
• The introduction to this section indicates the importance of data and information bases for the ERM program. The integration of risk analysis and control needs
consistency and some common standards. Therefore, managing the same data repository implies more people reviewing data quality. Peterson (2006) identifies the need of data quality across the organisation as an important step for ERM; however, the perception of the possible data quality improvement is not known once an ERM program has started. Then, the item used was: ERM improves the quality of data.
• Now, the possible improvement in data quality is not only a component to determine ERM as beneficial to the organisation, but also is required to study people work given the need of analysing different risks simultaneously. Thus, the interdisciplinary and interdepartmental work is required given the dissemination of roles based on risk types and analysis actions. Bowling and Rieger (2005) remark that managers and employees need to think in a broad sense about how risk in their areas, functions, and departments affect what the overall company is looking to achieve. This shared work is more than communication; it is a joint problem solving process where the perception of the interdisciplinary work can be taken into account. Then, the item used was: ERM improves our interdisciplinary work.
• The concepts behind interdisciplinary and inter-departmental work go further than communication among groups. They include the capacity for problem solving that requires complementary knowledge; for example, the development of risk rating involves people‟s criteria that complement the outcome of Decision Support Systems.
Thus, as Bowling and Rieger (2005) introduce the concept of the possible risk of interdepartmental work, in this research, a point to understand is the question of whether the ERM policies will contribute to developing the participation of different organisational areas in order to accomplish tasks. Then the item used was: ERM improves our interdepartmental work.
• Whalen and Samaddar (2003) indicate that: “Wise organisations manage and husband their knowledge resources in order to provide an environment for their members to make well-informed decisions and to take problem solving actions.”
Complementing the two previous points, the specific concept of mathematical modelling is included. This is selected because of the search for more quantitative support in RM, as was required by the regulation in the financial sector at the same
Remeikiene (2007) talk about the risk management processes and the need for actions regarding the risk modelling process, and in particular, the quantitative modelling process. Then the item used was: ERM program is expected to improve the capacity of mathematical risk modelling.
• In the previous items, the possible risk knowledge sharing, integrity of data and multi and inter disciplinary work, were analysed; however, there was no review of a specific application of working together where people can share knowledge; for example, developing models. The modelling process in risk management requires assumptions and their validation, which come from external and internal sources, and from the business understanding and capacity to predict effects of the business environment.
Similarly, creation and improvement of the models can come from experiences in different areas.
ERM improves the understanding of model results (Startiene and Remeikiene, 2007).
The stages of the risk analysis (Crouhy et al., 2001; Ong, 2006; Abrams et al., 2007) process include modelling, evaluation, estimation and verification. Therefore, the interest in modelling capacity and possibly the improvement because of the synergetic ERM approach, could be a value for the organisation. However, what is not clear is the perception of work in risk modelling. Then the item used was: ERM improves our understanding of model results.
• Modelling is a specific problem to solve, as was presented in the previous point.
There are more problems to solve, such as the interpretation and application of ratings or analysis of exposure according to different segments of markets or products. Thus, Nocco and Stultz (2006) indicate that ERM is not an academic exercise, but a way to manage the strategy of the business based on risk management. This is a concept that illustrates how ERM is involved in the problem solution of business dimensions from a strategic view. Thus, there is not a clear perception of ERM contributing to the general problem solving process. Then, the item used was: the integration of risk management view (ERM) improves our problem solving process.
Furthermore, the search for relationships KM and ERM is based on the understanding of the participation of multiple areas and it is in agreement with Mitchell‟s work (2006) when he said that a: “...higher project performance was associated with knowledge transfer mechanisms that actively encouraged the exchange of information across organisational units and across organisational boundaries.” Thus, in this section two dependent variables were introduced, as were the items used for constructing the meaning of these variables.
Sections 3,4 and 3.5 introduced the variables and items used to describe the perceived quality of risk control and the perceived value of ERM. The variables and items were selected based on the literature review of KM and RM, and the particular approaches of ERM surveys performed by different organisations. Additional literature that is specifically related to each item has been included in order to clarify its meaning and relationship to the variable that is being built.
The next sections bring the identification of the independent variables according to the items used and the formulation of the hypotheses (See Figure 3-1). These hypotheses have been formulated in order to determine relationships of the KM variables and the RM ones. The organisation points related to KM in this research are expressed through the review of the eight variables. Additionally, this research includes the three components:
people, process and technology (Edwards, 2009) in order to categorize the hypotheses and to identify the KMS components as was indicated in section 2.3.5. Morgan and Liker (2006) used the concept of a socio-technical system including these three categories to represent product development as a system outcome. In this research it is aligned with the concept of KMS and considered a socio-technical system that could support the ERM implementation (See Section 2.3.5).
The basis of the KMS design will be supported by the relationships of the variables and the requirement that the literature has shown (Section 1.4). The KMS as a socio-technical system includes components from the people, process and technology variables that in this research will be analysed. The observation of a KMS as a competitive advantage (Halawi et al. 2007) opens the need to observe the KMS structure
for RM in order to contribute to the system success supporting the organisational knowledge management processes and the achievement of improved knowledge and service quality perceptions, intention to use and user satisfaction looking to support and enhance the organisational processes of knowledge. Thus, in this research the Halawi et al. (2007) work is complemented with the understanding of the relationships between KM and RM variables that can contribute to supporting a better and successful KMS. This KMS is expected to be used as the support for RM processes.
Research Model Hypotheses
Three hypotheses are formulated regarding people variables and they are presented in this section. These variables are: organisation capacity for work coordination, communication among groups, and people interaction in the risk information system design.