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Introduction to Risk Based Performance Management Feb 6th 2014 Webinar

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Introduction to Risk-Based Performance Management Webinar …

Introduction to Risk-Based Performance Management Webinar

6th February 2014

Webinar Overview:

To effectively streamline management and regulatory reporting, organisations need to adopt an integrated framework, which covers strategy (performance management), Risk & Compliance.

By attending this webinar, attendees will gain insights into the Risk-Based Performance Management methodology. This methodology, which builds on, and integrates the Balanced Scorecard, COSO and ISO31000 frameworks, provides a proven approach which enables organisations to streamline their management and regulatory reporting while delivering real business value.

Webinar Objectives:

Understand the scale of management and regulatory reporting required, and therefore the opportunity to streamline the process and reduce costs.
To gain an understanding of the Risk-Based Performance Management methodology.
To develop an understanding of risk appetite and develop a clear, actionable framework for defining your risk appetite.
To understand the relationship between strategic objectives, risk appetite and risk exposure, and tools for managing this relationship.
To understand the role of strategic objectives and key risks, how to define, integrate and align these.
To understand the role of initiatives and actions, and how they are aligned to drive your complete change agenda.
To understand the role of risk and control assessment, key indicators and how assessment and indicator data can be used together to drive better decision-making.
To gain an understanding of the Risk-Based Performance Management Maturity Model and how it can be used before, during and after implementation of a new strategy and risk framework.

About Risk Based Performance:

Risk-Based Performance Management (RBPM) is a strategic management methodology that integrates enterprise strategy, performance and risk management to enable organisations to align risk-taking to strategy to drive sustainable strategic execution. The RBPM methodology is designed to place risk management and specifically, risk appetite at the core of organisational strategy execution.

Building on existing management frameworks, such as the Balanced Scorecard, COSO and ISO31000 frameworks, RBPM developed as a result of a series of engagements completed with clients in the UK financial services industry in 2006/07. The methodology was further refined during a year-long academic research project involving 21 financial services organisations in the city of London.

Links:

Video of presentation: http://www.youtube.com/watch?v=br15778Hpfg

www.manigent.com

www.riskbasedperformance.com

http://www.amazon.co.uk/Risk-Based-Performance-Management-Integrating-Strategy/

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  • The 3 categories are just a relatively simple risk taxonomyno direction on how to integrate Risk in the BSC
  • Key pointsExample of the benefits we have delivered with the Risk-Based Performance Management approach
  • Transcript

    • 1. Integrating Strategy & Risk Management an Introduction to Risk-Based Performance Management Manigent webinar 6 February 2014
    • 2. Introductions  CEO & Co-founder of Manigent, a thought-leadership consultancy firm focused on strategy execution and risk management  15 years plus in strategy and risk management  2006/07 -12 month / 21 organisation research project into the integration of strategy and risk management  2008 - Created the Risk-Based Performance Management methodology during various strategy and risk related engagements in the city Page  2
    • 3. The credit crunch and its subsequent fall-out has rewritten the rules on strategy execution and risk management Page  3
    • 4. Post credit crunch, regulatory bodies have been more aggressive and active Page  4
    • 5. As we enter the recovery and growth phase, managing risk to drive and sustain competitive advantage will be critical Page  5
    • 6. Risk-Based Performance Management (RBPM) is a holistic and integrated approach to strategy execution and risk management What are we trying to achieve? What is our Risk Appetite? Strategy Management Appetite Are we on track? Performance Management Risk Management Governance & Communications Culture Page  6 Are we operating within appetite?
    • 7. Integrating Strategy Execution and Risk management approaches
    • 8. Since its inception, the Balanced Scorecard has continued to evolve. Performance Measurement Performance Management Strategy Execution Raison d'être for Balanced Scorecard was to provide a ‘balanced’ set of performance measurements. With adoption, the Balanced Scorecard evolved to become more focused on strategy. The Balanced Scorecard is now positioned as a framework for enhancing strategic execution. “What you measure is what you get” - Kaplan & Norton, 1992 Introduced the 5 principles A closed loop system of strategic execution 1. Translate the Strategy into operational terms 2. 3. Make Strategy a continual process 4. Make Strategy everyone’s everyday job 5. Page  8 Mobilise change through executive leadership Align the organisation to the Strategy 1. Develop the Strategy 2. Plan the Strategy 3. Align the organisation 4. Plan operations 5. Monitor and Learn 6. Test and Adapt the Strategy
    • 9. Unlike the Balanced Scorecard, Risk Management has evolved via a series of standards. COSO COSO - Internal Controls framework (1994) Provided a common definition of internal control and a framework against which internal control systems can be assessed and improved. COSO – ERM framework (2004) The framework defines essential enterprise risk management components, discusses key ERM principles and concepts Various Government standards Various standards were created, often influenced by the COSO frameworks. ISO 31000:2009 The Risk Management Standard, 2002 (IRM, AIRMIC, ALARM) ISO 31010:2009 Orange Book, 2004 (HM Treasury) AS/NZS 4360:2004 BS31100, 2008 (British Standards) Various Page  9 ISO 31000 & ISO 31010 Provides principles and generic guidelines on risk management. Provides guidance on selection and application of systematic techniques for risk assessment.
    • 10. We believe that Integrating strategy and risk management is the next, natural evolution Risk-Based Performance Management Risk-based performance Management enables executives to manage with one eye on strategy & one eye on risk. Comprehensive strategic execution framework • • Integrated performance and risk reporting and analytics • Page  10 Aligns strategic intent with risk rppetite Embedded governance and ownership model
    • 11. Other experts also recognise the need for new approaches, and are looking at the integration of performance and risk management ... What went wrong in Financial Services? 1. Wrong measures of risk or, at least, very limited understanding of the properties of the risk measures being used 2. Incorrect data used to estimate risk measures 3. Failure to understand correlations across risk measures 4. Managing local risks and ignoring global ones 5. Treating risk management as a compliance issue, not a strategic one 6. Taking big bets that unlikely events will not occur 7. Senior executives and boards striving for short-term gains while ignoring the risk exposure associated with generating high profits Now is the time to enhance the BSC with Key Risk Indicators (KRIs) and integrate performance and risk management. Value-at-Risk Calculation typically assumes that probability of gains and losses follows a normal distribution. What about Black Swan events? VaR does not account for liquidity risk; it assumes you can get out of a position overnight. VaR is like “an airbag that works all the time, except when you have an accident.” Dr Robert Kaplan is focusing on measurement of risk Page  11 E&Y suggested a ‘rebalanced’ scorecard
    • 12. Other experts also recognise the need for new approaches, and are looking at the integration of performance and risk management ... What went wrong in Financial Services? 1. Wrong measures of risk or, at least, very limited understanding of the properties of the risk measures being used 2. Incorrect data used to estimate risk measures 3. Failure to understand correlations across risk measures 4. Managing local risks and ignoring global ones 5. Treating risk management as a compliance issue, not a strategic one 6. Taking big bets that unlikely events will not occur 7. Senior executives and boards striving for short-term gains while ignoring the risk exposure associated with generating high profits Now is the time to enhance the BSC with Key Risk Indicators (KRIs) and integrate performance and risk management. Value-at-Risk Calculation typically assumes that probability of gains and losses follows a normal distribution. What about Black Swan events? VaR does not account for liquidity risk; it assumes you can get out of a position overnight. VaR is like “an airbag that works all the time, except when you have an accident.” Dr Robert Kaplan is focusing on measurement of risk Page  12 E&Y suggested a ‘rebalanced’ scorecard
    • 13. Kaplan & Norton on Risk and the Balanced Scorecard HBR June 2012 • Three categories of Risk – Preventable Risks – Strategy Risks – External Risks Managing Risk is very different from managing Strategy Page  13
    • 14. Risk and the Balanced Scorecard - What we think… Managing Risk is not different to, but a fundamental part of, managing strategy Page  14
    • 15. Integrating Strategy & Risk Management based on Risk-Based Performance Management
    • 16. Risk-Based Performance Management (RBPM) is a holistic and integrated approach to strategy execution and risk management What are we trying to achieve? What is our Risk Appetite? Strategy Management Appetite Are we on track? Performance Management Risk Management Governance & Communications Culture Page  16 Are we operating within appetite?
    • 17. The Risk-Based Performance Management (RBPM) methodology is based on seven management disciplines Business Drivers Capital Income 2. Manage Performance 1. Set Strategy Appetite Page  17 Share Price ? 5.Governance 4. Appetite Alignment 3. Manage Risk Shareholder Value Reputation Appetite 7.Culture 6.Communications Economic value add Profit ?
    • 18. Discipline 1: Set Strategy Strategy: “to develop a sustainable (and defendable) position which enables the organisation to achieve its objectives while operating within defined risk appetite boundaries” “One major problem that led to the current financial crisis was that although objectives had been created, there was no articulation of risk appetite or identification of those responsible when risks were incurred” A clear articulation of strategy is important but it must include an expression of the amount and type of risk that the organisation is willing to accept Page  18
    • 19. Discipline 2: Manage Performance “Within the RBPM approach, we define „manage performance‟ as the continuous process of monitoring objectives and their KPIs, identifying root causes of underperformance and making adjustments.” Objectives Processes Initiatives KPIs Page  19
    • 20. Discipline 3: Manage Risk “In the context of Risk-Based Performance Management, Risk Management is about understanding and exploiting opportunities and threats (the risk the organisation faces in pursuit of its objectives), and the continuous monitoring and management of those risks to ensure the organisation executes its strategy while operating within appetite” Page  20
    • 21. Discipline 4: Appetite Alignment “Appetite Alignment is the process of continuously aligning current risk exposure to the defined risk appetite, which by implication encapsulates the strategy of the organisation. To translate into simple terms, it is about understanding whether the current level of risk-taking is aligned to the chosen business strategy, i.e. are we operating within appetite?” Page  21
    • 22. Discipline 5: Governance “Governance is the process and practices which define the strategic, operating and decision-making boundaries of an organisation (or organisational unit), and how decisions are made and implemented.” Page  22
    • 23. Discipline 6: Communications “When a firm‟s risk appetite is properly defined and clearly communicated, it becomes a powerful management tool to clarify all dimensions of enterprisewide risk and enhances overall business and financial performance” The Five C‟s: 1. Clarify 2. Credible 3. Concise 4. Context 5. Consistent Page  23 “all the good-to-great companies had a penchant for intense dialogue. Phases like “loud debate”, “heated discussions”, and healthy conflict” peppered the articles and interview transcripts from all the companies. They didn’t use discussion as a sham process to let people “have their say” so they could “buy in” to a predetermined decision. The process was more like a heated scientific debate, with people engaged in a search for the best answers”. Jim Colins
    • 24. Discipline 7: Culture  Culture comprises an organisation‟s widely shared values, symbols, behaviours and assumptions.  “the way we do things around here”  The seven key characteristics of a Strategy-Focused, Risk-Aware Culture 1. 2. 3. 4. 5. 6. 7. Driven by a compelling vision Live by a clear set of values Led with integrity Align risk-taking to strategy Established clear accountabilities Engage in high quality conversations Incentives are aligned to appetite Culture is perhaps the ultimate strategy and risk management tool Page  24
    • 25. Underpinning the Risk-Based Performance Management approach is a clear change process Execution Formulation Define Strengths & Weaknesses Define Strategic Goals Define Business Drivers Align Risk Appetite & Strategy Board Define Strategic Controls Define Strategic Objectives Define the Strategy Define the Business Model Page  25 Define Strategic Risks Define Risk Appetite Define Indicators Define Processes Define Initiatives Define Operational Risks Define Operational Controls Executive Assess Risks & Controls Monitor Appetite Alignment
    • 26. Advantages of integrating strategy management & risk management  Aligning risk appetite and strategy – the board and senior management should evaluate the organisation‟s risk appetite in evaluating strategic alternatives, setting related objectives, and developing mechanisms to manage related risks.  Enhancing risk response decisions – actively managing emerging risk provides the rigor to identify and select among alternative risk responses: risk avoidance, reduction, sharing, and acceptance.  Reducing operational surprises and losses – organisation‟s are able to identify potential events and establish responses, reducing surprises and associated costs or losses.  Seizing opportunities - by considering a full range of potential events, management is positioned to identify and proactively realize opportunities.  Improving deployment of capital - obtaining robust risk information allows management to effectively assess overall capital needs and enhance capital allocation. Page  26
    • 27. Implementing a Risk-Based Performance Management approach brings a range of benefits “Deploying Risk-Based Performance Management has enabled us to realise a 94% reduction in the value of errors and a 63% reduction in the volume of errors.– Head of Operational Risk, Mortgage Services Provider “we were able to reduce our operational losses by over to 50% in the first year of using Risk-Based Performance Management ” – Investment banking client "Coupled with the implementation of a new risk management framework, significant business benefits are emerging“ – Source: Annual accounts of a Financial Services client “Using Risk-Based Performance Management has delivered a more focused, structured Risk framework, enabling us to focus on the vital few – the number of Key Risk dropped from 120+ to just 10! - Investment banking client Page  27
    • 28. Central to this integrated model for Strategy and Risk Management is the Strategy Map Page  28
    • 29. Financial Customer Internal Process Learning & Growth Page  29 Deliver Revenue Growth The Strategy Map articulates how an organisation creates value Objective Statement of what strategy must achieve and what’s critical to its success KPIs How success in achieving the strategy will be measured and tracked Targets The level of performance or rate of improvement needed Initiatives Key action programs required to achieve Priorities Sustainable Growth Objective KPIs Targets Initiatives Drive sales execution Drive sales execution YTD % Increase in income “Their fees are clear and fair” “We align our incentives to our appetite & desired behaviours” 25%  Implement new sales process
    • 30. Financial Customer Internal Process Learning & Growth Page  30 Deliver Revenue Growth However, to create value, risktaking must be aligned to strategy Objective Statement of what strategy must achieve and what’s critical to its success Appetite How much risk are we willing to run to achieve the objective? Exposure How much risk are we currently running? Alignment Is our current risk-taking aligned to appetite? Sustainable Growth Objective Appetite Exposure Alignment Drive sales execution Drive sales execution Moderate High Over-exposed “Their fees are clear and fair” “We align our incentives to our appetite & desired behaviours”
    • 31. Financial Customer Internal Process Learning & Growth Page  31 Deliver Revenue Growth “Their fees are clear and fair” Sustainable Growth Drive sales execution “We align our incentives to our appetite & desired behaviours” Effective risk management supports value creation and value protection Objective Statement of what strategy must achieve and what’s critical to its success The threats and opportunities (risks) exist which may impact achievement of objectives Objective Risks Drive sales execution Risks  Mis-selling resulting in reputation loss Thresholds The appetite and tolerance thresholds used to monitor risk Mitigation The activities undertaken to manage risk Thresholds Mitigation  Appetite  Tolerances  Controls  Initiatives  Policy & procedures  Processes
    • 32. The Risk Map is structured around the 4 perspectives to provide a snapshot of the current level of Risk Exposure („Heat‟)  The 4 perspectives are aligned to the Strategy Map  Often the risks are defined as „impacts‟ not „events‟ i.e. the impact maybe on the customer but the event was operational Page  32
    • 33. Appetite Alignment Matrix is one of our key innovations and a key tool for monitoring the alignment of risk-taking to strategy  Enables monitoring of the alignment of risktaking to strategy  Enables the monitoring of risks which are outside of appetite Are we operating within Appetite?  Also shows where we are taking too much and not enough risk  Changes the risk conversation Page  33
    • 34. The Appetite Alignment Matrix can also guide management responses to mis-alignments Over-Exposed      Reduce the level of risk taking;  Increase / Change Controls environment  Implement Initiatives Stop/review mis-aligned activities Review Objectives / Business outcomes Board to approve a waiver Board to change the risk appetite Aligned   Continue to monitor and manage Focus on trends Under-Exposed      Page  34 Increase the level of risk taking;  Reduce / Change Controls environment  Implement Initiatives Stop/review mis-aligned activities Review Objectives / Business outcomes Board to approve a waiver Board to change the risk appetite
    • 35. Key Business Drivers are used to frame the definition of risk impact levels, used within both Risk Appetite definition and the Risk Assessment process Risk Appetite Levels Capital Income Reputation ? Key Business Drivers Page  35 Risk Assessments Capital @Risk Reputation @Risk Appetite Alignment Matrix
    • 36. Brining together these three powerful tools, and the underlying methodology provide the foundation for effective strategy execution Risk Appetite Strategy Map Risk Map Appetite Alignment Matrix Page  36
    • 37. Brining together these three powerful tools, and the underlying methodology provide the foundation for effective strategy execution Risk Appetite Strategy Map What are we trying to achieve? Risk Map How much risk are we willing to take? Appetite Alignment Matrix So What? Are we taking the right amount of risk? Page  37 How much risk are we running?
    • 38. Risk-Based Performance Management is proven to enable better execution, better risk management and deliver tangible business benefits It [Risk Management] should become part of the firm’s DNA and simply the way business is done – reflected in the effectiveness of management doing the right things. The true output of effective risk management is a successful organisation that delivers on its strategic objectives and satisfies the needs of key stakeholders consistently, year on year. HML started a journey to ingrain a new approach to risk management. In spite of the financial difficulties experienced in our market, significant benefits have been achieved which have made a difference to HML’s bottom line: 94% reduction in the value of errors and a 63% reduction in the volume of errors. http://www.hml.co.uk/blog/2011/09/23/risk-management-driving-valuefrom-a-long-game-approach Page  38
    • 39. Risk-Based Performance Management is proven to enable better execution, better risk management and deliver tangible business benefits It [Risk Management] should become part of the firm’s DNA and simply the way business is done – reflected in the effectiveness of management doing the right things. The true output of effective risk management is a successful organisation that delivers on its strategic objectives and satisfies the needs of key stakeholders consistently, year on year. HML started a journey to ingrain a new approach to risk management. In spite of the financial difficulties experienced in our market, significant benefits have been achieved which have made a difference to HML’s bottom line: 94% reduction in the value of errors and a 63% reduction in the volume of errors. http://www.hml.co.uk/blog/2011/09/23/risk-management-driving-valuefrom-a-long-game-approach Page  39
    • 40. Questions Page  40
    • 41. About Manigent A thought-leadership consultancy firm focused on strategy execution and risk management Thought-Leadership Time-bound, Guaranteed Delivery Pragmatic People, Proven Solutions We leave capability behind Page  41 We wrote the book on integrating strategy and risk management
    • 42. Our Services Manigent works with clients in the financial services and other regulated industries globally. Integrated Strategy & Risk Manigent 90 Day Change Roadmap Balanced Scorecard & Strategy Map     Known cost /Low risk Time-bound delivery Proven methodology Focus on 80% Known & 20% Unknown Enterprise & Operational Risk Management Information Risk (Cyber) Management Conduct Risk Management Page  42
    • 43. Our experience & expertise We typically work with large clients who seek to make lasting and meaningful change in their ability to execute Financial Services  Investment Bank - Risk & Controls framework design and implementation  Investment Bank - Middle Office Op Losses and MI diagnostic  FS Outsourcer - FSA RMP solution design and implementation  Inter-dealer broker - Section 166 response design and implementation Professional Services  Big 4 Audit Firm - Strategy Map/Balanced Scorecard implementation Telecoms  UK Mobile Operator – Balanced Scorecard Design and Deployment Defence  FSTE 100 Defence Company – Cyber Strategy & Risk Management  Global Defence Systems Integrator – Cyber Awareness training & culture change Government  Legal Services Regulator – Developed their internal risk capability, processes and framework  Central Banks / Financial Services Regulators – Regulatory Framework design and deployment Page  43 Our clients shaped our approach & methodology
    • 44. Contact details Andrew Smart CEO Manigent & StratexSystems Email: andrew.smart@manigent.com Blog: www.riskbasedperformance.com Web: www.manigent.com | www.stratexsystems.com LinkedIn: http://uk.linkedin.com/in/ajsmart Twitter:@AndrewJSmart Page  44

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