In many companies, risk management remains a tactical activity that focuses on identifying and mitigating operational threats. Even in companies that have put in place enterprise risk management programmes, the focus tends to be on internal issues, rather than a broader strategic discussion of risks and opportunities.
Eli Lilly & Co, the US-based pharmaceuticals company, is one of the few companies to have embarked on the next stage of the journey—to connect and integrate risk management with the company's long-term strategic decision-making. Given the long-term nature of the pharmaceutical industry, with its multi-decade drug development timetables, it is unsurprising that Lilly recognises the importance of a long-term perspective. "Looking at risks more than a decade into the future is an inherent part of our business," says Peter Johnson, the company's vice-president of strategic planning. "We have to make choices today about the kinds of diseases that we want to focus on and the value that we think we could get from developing a product that would be launched 12 years from now."
The company encourages managers to think not just about the downsides of risk, but the opportunities that may be inherent in those risks as well. "It's a hard concept for people to grasp initially," says Mr Johnson. "But when they think about it, they can understand that we are trying to imagine a changing situation that may look like it's a downside, but in fact represents an opportunity to change the way we do business."
Taking a longer-term perspective on risks helps to challenge assumptions about what the future may bring. Mr Johnson believes that this is important, because our beliefs about the future are rarely explicit. "These implicit beliefs can create a lot of dissonance when you're making strategic decisions," he says. "The very process of talking about the future will help a management team to understand that their current strategy is dependent on a set of beliefs about the way the world is going to work."
Lilly's approach to dealing with strategic risk has become more qualitative over time. The aim is to understand the four or five "seminal beliefs" that are the lynchpin of the company's strategic choices. "By identifying these beliefs, we can think about what would happen if they were different or wrong," says Mr Johnson. "Even if you don't make any explicit changes, you start to understand the choices you've made in a deeper way."
While Lilly's strategy team is centralised, the risk function operates as a virtual team. Anne Nobles, the company's chief ethics and compliance officer and senior vice-president of enterprise risk management, stresses that it is important to get input from different parts of the organisation rather than rely on an overly centralised risk function. "Our approach is to pull people together from across the business who have a range of expertise and knowledge," she explains. "This enables us to draw on the backgrounds of a diverse team who understand the business dynamics but from slightly different perspectives. This is a vital tool for helping us to think strategically about the long term."
