Integrating Strategy and Risk Management
 

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"A Holistic Approach to Managing Risk amidst Global Uncertainty" ...

"A Holistic Approach to Managing Risk amidst Global Uncertainty"
The RMA/Cass Business School
10–14 February 2013
Advanced Risk Management Programme

Organised by Andrew Smart & Nicholas Hawke

In today’s fast-moving, complex environment, risk executives must cultivate an understanding across all risks and businesses. Business problems are multifaceted, interrelated, and increasingly global. Executives must possess enhanced skills to identify and address a wide range of risks with an integrated approach and enterprise-wide perspective.
The RMA/Cass Advanced Risk Management Programme, led by the faculty at Cass, one of the UK’s top business schools, exposes participants to a rigorous, yet inspiring blend of theory, practice and cutting-edge research, instilling knowledge and skills applicable to the real world of global business. In addition to its focus on the known and quantifiable risks of credit, market, and operational, the programme concentrates on the unknowable and difficult to measure risks, including business, strategic, and reputation. Cass has excellent links to the City of London firms and institutions and is able to complement Cass faculty with guest faculty and senior level business practitioners, considered by their peers to be industry thought leaders

Areas of focus for The RMA/Cass Advanced Risk Management Programme include:

• Risk management as a strategic competitive strength

• An integrated approach to risk management

• Fostering a culture and climate that openly communicates risk

• A framework for rapidly responding to known risks and unraveling the complexities of the unknown

• A focus on risk informed by global perspectives.

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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

Integrating Strategy and Risk Management Presentation Transcript

  • 1. Advanced Risk Management Programme 9th - 13th February 2014 Integrating Strategy and Risk Management Nicholas Hawke and Andrew Smart www.cass.city.ac.uk
  • 2. Integrating Strategy & Risk Management an Introduction to Risk-Based Performance Management Workshop for the RMA 12 February 2014 www.cass.city.ac.uk
  • 3. 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 www.cass.city.ac.uk
  • 4. The credit crunch and its subsequent fall-out has rewritten the rules on strategy execution and risk management www.cass.city.ac.uk
  • 5. Post credit crunch, regulatory bodies have been more aggressive and active www.cass.city.ac.uk
  • 6. As we enter the recovery and growth phase, managing risk (and Risk Appetite) to drive and sustain competitive advantage will be critical www.cass.city.ac.uk
  • 7. 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 www.cass.city.ac.uk Are we operating within appetite?
  • 8. Integrating Strategy Execution and Risk management approaches www.cass.city.ac.uk
  • 9. Since its inception, the Balanced Scorecard has continued to evolve. Performance Measurement Performance Management 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. www.cass.city.ac.uk Mobilise change through executive leadership Align the organisation to the Strategy Strategy Execution 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
  • 10. 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 www.cass.city.ac.uk ISO 31000 & ISO 31010 Provides principles and generic guidelines on risk management. Provides guidance on selection and application of systematic techniques for risk assessment.
  • 11. 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 • www.cass.city.ac.uk Aligns strategic intent with risk rppetite Embedded governance and ownership model
  • 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 Value-at-Risk Calculation typically assumes global ones that probability of gains and losses follows a 5. Treating risk management as a normal distribution. compliance issue, not a strategic What about Black Swan events? one 6. Taking big bets that unlikely events VaR does not account for liquidity risk; it will not occur assumes you can get out of a position overnight. 7. Senior executives and boards striving for short-term gains while VaR is like “an airbag that works all the ignoring the risk exposure time, except when you have an accident.” associated with generating high profits Dr Robert Kaplan is focusing on measurement of risk www.cass.city.ac.uk Now is the time to enhance the BSC with Key Risk Indicators (KRIs) and integrate performance and risk management. E&Y suggested a ‘re-balanced’ scorecard
  • 13. Kaplan on Risk and the Balanced Scorecard HBR June 2012 Three categories of Risk 1. Preventable Risks 2. Strategy Risks 3. External Risks Managing Risk is very different from managing Strategy www.cass.city.ac.uk
  • 14. Risk and the Balanced Scorecard - What we think… Managing Risk is not different to, but a fundamental part of, managing strategy www.cass.city.ac.uk
  • 15. Integrating Strategy & Risk Management based on Risk-Based Performance Management www.cass.city.ac.uk
  • 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 www.cass.city.ac.uk 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 www.cass.city.ac.uk ? 5.Governance 4. Appetite Alignment 3. Manage Risk Shareholder Value Share Price Reputation Appetite 7.Culture 6.Communicatio ns 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 www.cass.city.ac.uk
  • 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 www.cass.city.ac.uk
  • 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” www.cass.city.ac.uk
  • 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?” www.cass.city.ac.uk
  • 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.” www.cass.city.ac.uk
  • 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 enterprise-wide risk and enhances overall business and financial performance” The Five C’s: 1. Clarify 2. Credible 3. Concise 4. Context 5. Consistent www.cass.city.ac.uk “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 www.cass.city.ac.uk
  • 25. Underpinning the Risk-Based Performance Management approach is a clear change process Execution Formulation Define Strengths & Weaknesse s Define Strategic Goals Define Business Drivers Define Strategic Risks Define Risk Appetite Define Strategic Objectives Define the Strategy Define the Business Model Align Risk Appetite & Strategy Board www.cass.city.ac.uk Define Strategic Controls Define Indicators Define Processes Define Initiatives Define Operational Risks Define Operational Controls Executive Assess Risks & Controls Monitor Appetite Alignment
  • 26. Organisational progress in implementing the approach can be measured using the a Maturity Model www.cass.city.ac.uk Manage Operationalise Monitor Culture Communications Governance Appetite Alignment Risk Management Improve Performance Management “How mature is your integrated strategy & risk management approach?” Exemplary Expert Proficient Competent Initial Strategy • Based on the RBPM Seven disciplines • Provides a snapshot of your organisational Strategy & Risk maturity • Provides a ‘slice’ by organisation behaviour
  • 27. 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. www.cass.city.ac.uk
  • 28. 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 www.cass.city.ac.uk
  • 29. Central to this integrated model for Strategy and Risk Management is the Strategy Map www.cass.city.ac.uk
  • 30. Financial Customer Deliver Revenue Growth “Their fees are clear and fair” Learning & Growth Internal Process Sustainable Growth Drive sales execution “We align our incentives to our appetite & desired behaviours” www.cass.city.ac.uk 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 Objective KPIs Targets Initiatives Drive sales execution YTD % Increase in income 25%  Implement new sales process
  • 31. Financial Customer Deliver Revenue Growth “Their fees are clear and fair” Learning & Growth Internal Process Sustainable Growth Drive sales execution “We align our incentives to our appetite & desired behaviours” www.cass.city.ac.uk However, to create value, risk-taking 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? Objective Appetite Exposure Alignment Drive sales execution Moderate High Overexposed
  • 32. Financial Customer Deliver Revenue Growth “Their fees are clear and fair” Learning & Growth Internal Process Sustainable Growth Drive sales execution “We align our incentives to our appetite & desired behaviours” www.cass.city.ac.uk Effective risk management supports value creation and value protection Objective Statement of what strategy must achieve and what’s critical to its success Objective Drive sales execution Risks The threats and opportunities (risks) exist which may impact achievement of objectives 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
  • 33. Financial Customer Increase Shareholder value Many different types of risks make up the organisational risk universe Strategic Risk Internal Process Sustainable Growth Increase Investment Returns by 25% Finance Risk Increase Investment Returns by 25% Operational Risk Learning & Growth Insurance Risk Hazard Risk Increase Retention of competent staff by 10% www.cass.city.ac.uk
  • 34. Financial Customer Increase Shareholder value Many different types of risks make up the organisational risk universe Unexpected changes in interest rates Strategic Risk Internal Process Sustainable Growth Increase Investment Returns by 25% Unexpected Equity movements Finance Risk Increase Investment Returns by 25% Operational Risk Learning & Growth Insurance Risk Hazard Risk Increase Retention of competent staff by 10% www.cass.city.ac.uk
  • 35. 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 www.cass.city.ac.uk
  • 36. 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  Also shows where we are taking too much and not enough risk Are we operating within Appetite? www.cass.city.ac.uk  Changes the risk conversation
  • 37. 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      www.cass.city.ac.uk 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
  • 38. 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 www.cass.city.ac.uk Risk Assessments Capital @Risk Reputation @Risk Appetite Alignment Matrix
  • 39. 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 www.cass.city.ac.uk
  • 40. 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? www.cass.city.ac.uk Risk Map How much risk are we willing to take? Appetite Alignment Matrix So What? Are we taking the right amount of risk? How much risk are we running?
  • 41. 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-drivingvalue-from-a-long-game-approach www.cass.city.ac.uk
  • 42. Questions www.cass.city.ac.uk
  • 43. 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 www.cass.city.ac.uk We wrote the book on integrating strategy and risk management
  • 44. Our Services Manigent works with clients in the financial services and other regulated industries globally. Integrated Strategy & Risk Manigent 90 Day Change Roadmap     Known cost /Low risk Time-bound delivery Proven methodology Focus on 80% Known & 20% Unknown Balanced Scorecard & Strategy Map Enterprise & Operational Risk Management Information Risk (Cyber) Management Conduct Risk Management www.cass.city.ac.uk
  • 45. 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 www.cass.city.ac.uk Our clients shaped our approach & methodology
  • 46. 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 www.cass.city.ac.uk