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Enterprise Risk Management: Culture, Vision, Performance
 

Enterprise Risk Management: Culture, Vision, Performance

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There is overwhelming consensus from financial services executives that the current risk environment has become significantly more complex, dynamic, and difficult to navigate. This is evidenced by ...

There is overwhelming consensus from financial services executives that the current risk environment has become significantly more complex, dynamic, and difficult to navigate. This is evidenced by the performance and growth challenges firms face today - caused in part by failures to adequately manage risk from across financial products, operations, and business units.

With this turbulence has come a much greater interest in understanding and managing risk holistically and ensuring Risk Management is truly enterprise-wide, part of the organization's DNA, and much more performance-based.

In this presentation, IDC Financial Insights and Guidon Performance Solutions join to discuss principles and the roadmap for building mature and effective Enterprise Risk Management (ERM) that leads to competitive advantages.

By viewing you will gain perspective on:
- Setting a shared vision for risk management
- Linking Enterprise Risk Management to the culture
- Ensuring performance - efficiency and effectiveness
- Enabling the risk management process with technology

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    Enterprise Risk Management: Culture, Vision, Performance Enterprise Risk Management: Culture, Vision, Performance Presentation Transcript

    • Enterprise Risk Management:Culture, Vision, PerformanceJune 29, 2011
    • Today’s Panel • Dave Potterton (Moderator), Vice President of Research for IDC Financial Insights Global Banking, Insurance, Capital Markets and Risk Management practices. • Michael Versace, Research Director at IDC Financial Insights, focusing on the Global Risk end-user and technology marketplace. • Larry Mead, Vice President and Managing Director for Guidon’s Financial Services and Insurance practice focusing on business improvement and solutions across the financial sector. © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 2
    • Where We Are Regulatory pressures and today’s global business realities are forcing financial firms to re-think and restructure organizations, technologies and business processes used to manage risk. It is increasingly vital for But it is also critical to firms to harness establish agile cultures technology and with repeatable disciplines information to make and processes to manage actionable, optimized, and thru the change and timely decisions … situational complexities … keeping risks at staying ahead of the acceptable levels. competition. © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 3
    • The Organizational Stress 25. Institution has received increased pressure from 18. I am concerned that an increase in regulatory federal regulators queries is straining my compliance team and resources 8% No 8% 25% 42% Completely Disagree Somewhat Disagree Neutral Yes 92% 25% Agree Completely Agree 0.00 0.50 1.00 92% of risk managers interviewed feel 77% of risk managers feel that they are under siege from federal and increased regulatory scrutiny is state regulators. stressing out their teams.Source: IDC Financial Insights 2010 Risk Officer Survey © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 4
    • The Regulatory Complexity European Regulatory Activates US Regulatory Activities Regulatory Macro – Prudential Da Larosiere Supervision Commission report Restructure Obama Administration Plan and Reform Senate Financial House Resolution 4173 Reform Bill (March 15, (Wall Street Reform and European Supervisory 2010) – Restoring Protection Act of 2009) – Authorities (ESAs) European Commission American Financial Regulatory passed in November (micro-prudential) Stability Act Coordination Lisbon treaty Dodd-Frank Wall Street Reform and European System of Consumer Protection Act Financial Supervisors (ESFS) G20 Financial • Federal Reserve Supervisory Board Board • NY Federal Financial Stability Oversights Council - Office of European Systemic Financial Research - Office of Insurance - Reserve Bank Risk Board Banking Agency Reorganization - Increased •SEC ECB and EU Internal •CFTC Capital & Liquidity Requirement - Volker Rule - Markets and Services •FINRA Orderly Liquidity Authority - Orderly Liquidity •FDIC Authority - "Grave Threat" Breakup Ability - European Securities •Treasury Living Wills - Consumer Financial Protection and Market Authority Bureau - Derivatives trade/clear and Swap Dealer (formerly CESR) •FHRA Regulation - ABS and Hedge Fund regulation - Omnibus Directive Governance and Executive Compensation - • Capital requirements Credit Ratings Agencies - Office of the Investor • Financial Advocate - Liabilities Cap on Large Financial European Banking conglomerates Authority Acquisitions - Contingent capital Requirement - • Pensions Simplified Mortgage Disclosures • Market abuse • MiFID European Insurance & • Prospectus Occupational • Settlement Pensions Authority • Transparency Office of Financial Research • AML Source: BNY Mellon, FST Summit, October 2010 © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 5
    • The Cost of ComplianceThe SOX Experience Cost Drivers • THE COST OF COMPLIANCE • The average cost of compliance with the Sarbanes-Oxley Act in Direct Costs 2006 for companies with under • Assessment $1 billion in annual revenue………. $2.8m • Documentation The average cost in 2001…………. $1.1m • Technology • Legal, … Percentage increase in costs between 2005 and 2006………………... 13% The increase in external audit portion Indirect Costs of SOX compliance, 2005-2006………….. 4% • Productivity • Rework The total increase in external audit fees, 2001-2006………………. 271% • Evaluation, … Source: FOLEY & LARDNER LLP © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 6
    • Risk and Innovation Balancing Act Regulatory & Efficiency &Compliance Burden Effectiveness Channels, New Services & Analytics and Revenue Customer Trust Opportunities Operating Disciplines & Culture © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 7
    • Industry Leader Perspective “Risks are an unavoidable consequence of being in business. Efficientrisk management enables an organization to view newly identified risks as opportunities for increased profit as well as cost reductions, impacting shareholder value …. Efficient risk management should become a competitive advantage.” – European Risk Expert“Integrating risk culture into a business takes time, discipline, leadership,and a willingness to be practical in designing and fitting ERM tools andprocess with other management routines … culture is very often quitesimply forgotten by CROs and their risk functions.”– CEO, Large US InsurerSource: IDC Financial Insights and allaboutrisk.com expert survey 2011 © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 8
    • Principle #1 – Map Out the Journey Where are you going and why? What are the stops along the way? 15 14 10 11 13 9 12 8 7 6 5 4 1 2 3 Marketplace Compliance? Advantage? Enterprise Risk Enterprise Risk Performance? Management? © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 9
    • Map Out the JourneyVision and Maturity Fully Recognized Value Strategic ERP High Overall Maturity Curve ERM Desired Business Outcomes Filling Gaps Building/ Operationalizing Reacting Initiating Programs Behind the curve Low Timeline: Cycles-of-Use and Investment Horizon © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 10
    • Map Out the Journey Vision and Maturity Limited ERM Maturing ERM Characteristics Strategic ERP Characteristics High Overall Maturity Curve1. ERM still a promise – 1. Persistent Risk Culture not yet reality - Risk Performance an ERM accountability2. Compliance is the Desired Business emphasis – audits are 2. Performance - the primary tool of Filling Gaps Monitoring and risk Outcomes choice evaluation is part of the company fabric3. Ownership is generally Reacting with a Risk Leader or 3. Ownership is shared by Audit function Leadership; particularly P&Ls4. Solutions are a Low collection of data 4. Solutions are designed, points – little Timeline: Cycles-of-Use and and customer-centric integration Investment Horizon 5. Technology supporting5. Technology, not Launching – Agile - robust metrics, Enterprise Risk analytics Architecture, Shared risks not Scalable, Services, etc. understood, Defensible, and costly approach, Competitively reactive Opportunistic © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 11
    • Principle #2 – How Matters More Than What• Management Disciplines are the “HOW” – Strategic Planning and Deployment – Business reviews – Talent Development – Innovation – Technology Deployment• Strategies, business models and entire industries change rapidly today – business management processes are the key to adaptation and execution © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 12
    • “…The two fundamental forces that drive GE…a common operating system and social architecture…” Jack Welch GE 1999 Annual Report © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 13
    • How Matters More Than What Architecture of the High Performing Enterprise Operating System • Business Intelligence • Technology & MIS Cycles of Use • Innovation & Problem Solving • Business Processes Mission/Strategy Social Architecture • Common language & terminology • Rewards & Recognition • Valued Behaviors Purpose & Values • Purpose Statement • Values Statement High Performing Organizations need a Rosetta Stone to continually and rapidly recognize external change, understand internal capabilities, focus on the exceptions & disagreements and deliberate practice to embed changes in an organization’s DNA. © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 14
    • How Matters More Than What Framework for a Cultural• Begin by clarifying the role of Senior, Middle, “Operating Architecture” Associate-level management• Design the Standard Playbook for all levels of the organization – including the cultural framework for Enterprise Risk Performance• Tools and practices linked to values of the organization © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 15
    • Principle #3 – Compete In Dog YearsA time-compressed company does the same thing as a pilot in anOODA loop… It’s the competitor who acts on information faster who isin the best position to win. George Stalk, Jr. & Tom Hout, Competing Against Time © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 16
    • “At a time when firms in many industries offersimilar products and use comparable technologies,business processes are among the last remainingpoints of differentiation.” – Tom Davenport, Competing on Analytics © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 17
    • Compete in Dog YearsSpeed is Life Wasted Time and Activity Core Process Value Items waiting Excessive Motion and Defective Process “backlog” Handling (Identifying, Handling, Fixing) OPERATIONAL LEAD TIMEMissing, Incomplete, Work audit – Redundant Waiting Overprocessing often by more Information (Customer or Staff) than one “reviewer” Start with the Customer & Process to drive efficiency and effectiveness. The key is to reduce every activity and every effort to “core value.” © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 18
    • Principle #4Simple First-Class Levers 1st Class 2nd Class 3rd Class Least Effort Helpful Forget It Information, Analytics, and Technology are incredible levers that must be designed around the Customer, Culture, Process, and true Information Needs to be most enabling and effective.Image Source - Professor Beaker’s Learning Labs © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 19
    • Simple First Class Levers Analytics Evolution & Maturity Continue Trending from Data to Decisions Data/Content Technology Predictive, Unified Analytics End-Users Collaboration Alerting &Number of people Workflow Dashboards Monitoring and Templates & Data Visualization Awareness Unified IT Staff Ad-hoc Data Scorecards Access & Query Models Analysis Static, ETL & Knowledge Data DW Lifecycle Batch Data capture Warehousing Management Reporting Quality & learning 1975–1989 1990–2004 2005–2020 Query, Reporting, OLAP, Data Mining, Statistical analysis Business intelligence Suites and Analytic Applications Intelligent Process Automation Unified Decision Management Solutions © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 20
    • What are the Risks & Information Needs? Points of Risk Credit Risk Market Risk Operational Risk Default Risk Interest Rate Change Human Capital Credit Rating, Modeling, Optimization Employment Practices, Workplace Safety Counterparty Risk Currency Fluctuation Financial Crime Fraud, Sanctions, PEP, AML Derivatives, Futures, Swaps, Insurance FOREX Compliance Liquidity Risk Commodity Risk Regulations, Policies, Standards, Reporting Asset Liquidity, Liability Funding Technology Asset Liability Management Portfolio Risk Infrastructure, Data Management VaR, EaR, Cash Forecasting Legal Risk Lawsuits, Regulation, Reputation, Liability Business Strategy M&A, R&D Cyber Risk Malware, IAM, IDS, SEVM, Endpoint Sovereign Risk Accounting and Controls Controls, Reconciliations, Exception handling Geopolitical Risk Vendor Risk Public cloud, vendor management, Oversight © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 21
    • Simple First Class LeversCore ERM Solution ComponentsERM Solution DefinitionIT solutions used to establish, analyze, measure, and report enterprise-widerisk activities. It identifies potential risks and prioritizes the tolerance for riskbased on the organizations business objectives. ERM leverages internal Datacontrols to manage and mitigate risk throughout the organization. Applications • Credit and Deposits • Payments • Trading Risk Meta Data • ERP • Security • Core banking • HR Analytics and • Trading • Financial Control Modeling • ERM taxonomy • Settlements • Market Data and • Law, Regulation, • Policy and Claims Content Personalization Policy • Audit and • Leading models • Risk definitions and Compliance • Modeling and attributes • IT Infrastructure testing • Media • Roles and Rule • Scenario • Workflow management • Case Management • Reporting © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 22
    • Map Out the Journey Vision and Maturity Limited ERM Maturing ERM Characteristics Strategic ERP Characteristics High Overall Maturity Curve1. ERM still a promise – 1. Persistent Risk Culture not yet reality - Risk Performance an ERM accountability2. Compliance is the Desired Business emphasis – audits are 2. Performance - the primary tool of Filling Gaps Monitoring and risk Outcomes choice evaluation is part of the company fabric3. Ownership is generally Reacting with a Risk Leader or 3. Ownership is shared by Audit function Leadership; particularly P&Ls4. Solutions are a Low collection of data 4. Solutions are designed, points – little Timeline: Cycles-of-Use and and customer-centric integration Investment Horizon 5. Technology supporting5. Technology, not Launching – Agile - robust metrics, Enterprise Risk analytics Architecture, Shared risks not Scalable, Services, etc. understood, Defensible, and costly approach, Competitively reactive Opportunistic © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 23
    • Take-Aways for Navigating the White Water We are in a world of continuous rapids frequently interrupted by monsoons Four Principles for the Journey Map out the Journey Establish a shared vision that fits your Business Reality & need How is more critical than What Design the cultural framework for Enterprise Risk Performance Speed is life! Start with the Customer & Process to drive efficiency and effectiveness Simple First-Class Levers Enable with Technology; avoid building ERP around it © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 24
    • Questions? © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 25
    • Thank You!Guidon Performance Solutions 866-986-4414 or 480-986-4414 lmead@guidonps.com www.GuidonPS.com IDC Financial Insights 508-620-5533 dpotterton@idc.com mversace@idc.com www.idc-fi.com © 2011 Guidon Performance Solutions, LLC and IDC Financial Insights. All rights reserved. 26