By Alan White
All organizations, including credit unions, are exposed to risk. Risk is simply another word for “uncertainty” or “unexpected events,” and threatens your objectives whether it is acknowledged and measured or not. And, risk management is not about managing expectations; it's about managing everything else.
Smart organizations understand risks, manage them and create advantages over their competitors through cost efficiencies, reduced exposure and better decision-making. With the right mindset and tools, you can create value and increase financial stability for your members and employees.
Getting started means understanding your credit union is always exposed to both operational risk (the smaller, easily managed issues) as well as strategic risk (the larger issues, which have the biggest impact on your credit union).
Operational Risk
To manage operational risk, focus on operational excellence. This allows you to address both the small processing errors, including misapplied payments, incorrect loan rates or lost sales opportunities, as well as the traditional sources of risk like fraud and compliance. It is also very helpful to develop process metrics as part of this initiative. These metrics give you critical information when processes are breaking and risks are coming to fruition. When problems are identified quickly, the impact can be greatly reduced.
This can seem like an overwhelming task, so it's often best to start with one area of your credit union, such as consumer lending or collections, before trying to implement risk management across the entire organization. Once your processes are sounder, you’ll enjoy greater operational efficiencies in addition to lower risk.
Strategic Risk
Managing strategic risk is a very different discipline. To be effective, executives must understand all strategic decisions come with risk. Failure to understand, monitor and react to those risks can be catastrophic. Managing strategic risk means looking for things you wouldn't normally expect, and thinking about things that have not happened. This requires input from many people, monitoring of key risk metrics and the ability to change your mind later if new information comes to light.
It’s also critical to promote a culture that challenges ideas and allows the team to learn from failure without embarrassing the project sponsors. It may seem counter-intuitive, but allowing failure actually reduces risk because executives are more willing to “pull the plug” on a project that’s not producing the expected results before the damage is allowed to grow and become unrecoverable. Effective metrics provide the early warning signs that make these decisions easier.
Conclusion
Remember, losses that result from poor decisions, over-commitment to ineffective strategies or operational problems can quickly wipe out all the gains and successes you've worked hard to achieve. By implementing sound risk management principles at your credit union, you’ll increase efficiency and make better strategic decisions that work for you and your members.
Alan White is CEO of Vital Insight.
Learn more about how CUES Enterprise Risk Management, Presented by Vital Insight can help you today.
