A whole world of risk

By Fiona Czerniawska.

The Hitchhiker's Guide to the Galaxy begins with Arthur Dent's house (and the rest of Planet Earth) being mown down by a Vogon Constructor Fleet, clearing the way for a new intergalactic highway.  That's perhaps not a risk that many businesses consider, but we can be fairly sure that they're considering just about everything else. Risk, like space, is big.

Today's risk market is worth somewhere between $22bn and $40bn globally, depending on your definition, roughly half of which is in the US, and a further 25% in Europe (where the UK is by far the largest market, generating a third of all revenue for risk advisory and consulting firms, courtesy of its very large financial services sector). And it's only going to get bigger: we estimate that the market will grow by half as much again over the next five years.

But if risk services firms think it's going to be a bed of roses, they need to think again. Growth is likely to be unevenly distributed across the different areas of risk. Traditional risk management and internal audit look set to suffer the most, not because the volume of work will fall but because clients, having spent so much in this area in recent years, are keen to invest elsewhere and will therefore put pressure on fee rates. Both are classic examples of what we've described as "low-cost" markets, those characterised–in clients' eyes–by familiarity on the demand side and lack of innovation on the supply side. At the other end of the spectrum, is cybersecurity. Constantly reinventing itself to cope with the latest threat, cybersecurity demands both innovation and scarce capabilities, and therefore not only generates an increasing volume of work for risk firms but also premium rates. Sitting between the two are a range of risk-related services that may acquire greater traction in the marketplace but need investment in new tools and techniques.

And that points to the central conundrum of risk consulting and advice. Client demand has grown on the back of a whole series of outside triggers–regulation, cyber attacks, etc.,–rather than supply side innovation. Now, in at least some areas of risk, there's a real possibility that the low-cost parts of the market could flatline, perhaps even shrink slightly, because there's nothing new to stimulate interest and shore up margins there. "I'm finding it increasingly hard to understand why I should spend more in these areas," a CFO recently told us. "We're already spending a lot. I'd really need to see a very different proposition from a risk advisory firm before I could be persuaded otherwise." 

Not quite a Vogon Constructor Fleet perhaps, but there is a sense out there that the business of risk is getting just a bit–well–riskier.

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