Empowering Unit Managers with Cost Allocation

Visualization of workflow

Our recent post, “How to Tackle Total Cost of Risk (TCOR)”, discussed the roadblocks and best practices to consider when calculating TCOR. It takes cost allocation, however, to realize the benefits of a TCOR program at the unit level. Through a cost allocation model, each unit sees the direct effects of their individual strategies on TCOR at the same time that the overall success of the risk management program is evaluated.

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How to Tackle Total Cost of Risk (TCOR)

Flowing TCOR data

Calculating Total Cost of Risk (TCOR) for many organizations is a formidable task. Even agreeing on what the term means can be challenging. The Port of Houston Authority offered a concise yet effective definition in a 2016 presentation at Texas PRIMA, “A metric used to evaluate the success of your risk management process.” This definition underscores how critical TCOR is to understanding the effectiveness of risk management strategies across the entire organization.

The articleTotal Cost of Risk (TCOR) – What Does It Mean to You?” notes that this valuable metric allows organizations to:

  1. Benchmark the costs (flexibly) against similar organizations
  2. Benchmark allocated risk expenses against other internal costs allocated to products and services
  3. Summarize risk management policies, procedures and appetites

Given the widespread acknowledgment of how essential this indicator is, why are most organizations unable to fully deploy it? Many organizations struggle to develop a sustainable process for generating TCOR component values. For example, one survey states that only 44% of respondents managed and tracked all components of TCOR. This post examines some of the barriers to more widespread adoption and outlines how the right RMIS can remove those roadblocks. 

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