"You're only young once, but you can be immature forever." - Germaine Greer.
Have you ever benchmarked where your organization sits on a risk maturity scale?
David Hillson devised a useful scale listing four increasing levels of risk maturity: Naïve, Novice, Normalized and Natural.
In order to deliver best practice commodity and financial risk management it is important to benchmark where you sit on the scale and understand the steps needed to improve your risk management capability.
At Forge aHedge we are producing tools and services to help you achieve best practice price risk management, help protect volatile supply chains and margins, and help you add strategic value to your business.
In a series of concise, action oriented guides we will help you progress up the risk maturity ladder.
To benchmark yourself and understand where you currently sit here are some characteristics that define each risk maturity level.
Level 1 - Naive
Unaware of the need for risk management
Lack structured approach for monitoring commodity prices and related risks
Risk management processes are reactive
Little or no attempt to learn from past commodity price volatility or prepare for the future
No commodity risk processes or experience
Senior management fearful of using derivatives for commodity hedging
Level 2 - Novice
Begun to experiment with commodity risk management
No formal or structured generic processes to manage commodity price risk are in place
Awareness of the potential benefits of managing risk exists
Ad hoc risk management processes depend on key individuals with limited experience
Spreadsheet based commodity risk management by procurement or treasury
No formal governance structure in place for commodity risk management
Level 3 - Normalized
Management of commodity risk integrated into routine business practices
Governance structure for commodity risk in place with designated departments or individuals
Formalized and widespread commodity risk processes with regular reporting
Benefits of risk management understood at all levels of the organization
Culture recognizes the existence of risk and expects benefits from managing it
Full benefits of commodity price risk management not always realized
Level 4 - Natural
Risk-aware organizational culture with a proactive approach to commodity risk management
Uses commodity risk management and data to improve business processes and gain a competitive advantage
Pro-active commodity risk processes both reduce impact of adverse price movements and take advantage of favourable opportunities
Best-practice processes and tools implemented in procurement, finance or treasury
Processes are fully automated subject to control requirements
Flexible reporting delivers oversight to risk managers and insight to senior management
In the next article we will outline practical suggestions for those who have categorized their organizations as Naïve to move up the risk maturity ladder. We do not want you be the next commodity risk disaster case study or fulfill the words of Carroll Bryant when she said “Everyone in life has a purpose, even if it’s to serve as a bad example.”
Let’s Forge aHedge!
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