Strategic Planning Society Webinar- Integrating Strategy and Risk Management

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• The credit crunch and its subsequent fall-out has rewritten the rules on strategy execution and risk management.
• The balanced scorecard and risk management approaches have evolved as silo processes over approximately 20 years – an approach that integrates both is a natural evolution.
• To effectively streamline management and regulatory reporting, organisations need to adopt an integrated framework, which covers strategy execution, risk management & compliance.

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  • Unfortunately, Andrew Smart's concept diagram on the page 13 of the slide deck does not make any sense. Besides the fact that it's highly unlikely that Strategy Management, Performance Management and Risk Management would have no other better job but to revolve around the 'Appetite', the three components are invalidly disjunctive, at least in what regards Strategy Management and Performance Management, which are partially overlapping. If you create a model with separate components, you cannot have in the real life some of them part of others. Otherwise your model would be just modeling an artificial fantasy construct.
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  • The 3 categories are just a relatively simple risk taxonomyno direction on how to integrate Risk in the BSC
  • Strategic Planning Society Webinar- Integrating Strategy and Risk Management

    1. 1. Integrating Strategy and Risk Management Strategic Webinar Series 20 February 2014
    2. 2. Agenda 1. Opening remarks - Fiona Carter, Chief Executive Officer, SPS 2. Integrating Strategy and Risk Management – Andrew Smart CEO of Manigent and StratexSystems will talk about: • The need for new approaches • Seven management disciplines • The strategy map and risk appetite 3. Q&A session - moderated by Fiona Carter 2
    3. 3. The Strategic Planning Society SPS was formed in 1967 and is a global network dedicated to the development of strategic thinking, strategic management and strategic leadership (www.sps.org.uk). Our Members are individuals, corporate organizations and business schools. SPS supports Members to develop their strategic management and leadership capabilities Our Vision a dynamic, global strategic management community Our Mission improve the practice, development and recognition of strategic management 3
    4. 4. SPS Strategic Webinar series A monthly series of Webinars launched in 2013 for SPS Members worldwide To share knowledge and best practice, provide insight and practical recommendations for strategic managers and leaders Speakers are from both business and academia Become a Member: www.sps.org.uk/join-sps/ 4
    5. 5. Integrating Strategy and Risk Management • The credit crunch and its subsequent fall-out has rewritten the rules on strategy execution and risk management. • The regulatory environment has become more intense and intrusive. • The balanced scorecard and risk management approaches have evolved as silo processes over approximately 20 years – an approach that integrates both is a natural evolution. • To effectively streamline management and regulatory reporting, organisations need to adopt an integrated framework, which covers strategy execution, risk management & compliance. • In this webinar, Andrew will expand on these arguments, illustrating the changes through how he sees seven key characteristics of a strategy-focused, risk-aware culture. 5
    6. 6. Our speaker Andrew Smart • Andrew Smart is the Co-Founder and CEO of Manigent, a specialist strategy execution and risk management consultancy based in London, UK. He is also the Co-Founder and CEO of StratexSystems, a technology firm that develops and sells an integrated strategy and risk management solutions. • He is the architect of the Risk-Based Performance Management methodology and has more than 15 years experience delivering strategy execution and risk management solutions in the UK, Europe and the Middle East. • His professional focus over the last two years has been delivering Risk & Control Frameworks and RMP/Section 166 projects, primarily in the City of London. • He holds an MBA from Henley Business School and is a Professional member of the Institute of Operational Risk. 6
    7. 7. Integrating Strategy & Risk Management an Introduction to Risk-Based Performance Management SPS webinar 20 February 2014
    8. 8. 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  8
    9. 9. Poll question Do you integrate risk management into your strategic execution process?
    10. 10. The credit crunch and its subsequent fall-out has rewritten the rules on strategy execution and risk management Page  10
    11. 11. Post credit crunch, the regulatory environment has become more intensive and more intrusive Page  11
    12. 12. As we enter the recovery and growth phase, managing risk to drive and sustain competitive advantage will be critical Page  12
    13. 13. 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  13 Are we operating within appetite?
    14. 14. Integrating Strategy Execution and Risk management approaches
    15. 15. 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  15 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
    16. 16. Unlike the Balanced Scorecard, Risk Management has evolved via a series of standards. COSO Various Government standards ISO 31000 & ISO 31010 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. Various standards were created, often influenced by the COSO frameworks. ISO 31000:2009 The Risk Management Standard, 2002 (IRM, AIRMIC, ALARM) ISO 31010:2009 COSO – ERM framework (2004) The framework defines essential enterprise risk management components, discusses key ERM principles and concepts AS/NZS 4360:2004 Orange Book, 2004 (HM Treasury) BS31100, 2008 (British Standards) Various Page  16 Provides principles and generic guidelines on risk management. Provides guidance on selection and application of systematic techniques for risk assessment.
    17. 17. We believe that Integrating strategy and risk management is the next, natural evolution Risk-Based Performance Management Risk-BasedPerformance Management enables executives to take an integrated approach and operate their business within appetite. Comprehensive strategic execution framework • • Integrated performance and risk reporting and analytics • Page  17 Aligns strategic intent with risk rppetite Embedded governance and ownership model
    18. 18. 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  18 E&Y suggested a ‘rebalanced’ scorecard
    19. 19. 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  19 E&Y suggested a ‘rebalanced’ scorecard
    20. 20. Kaplan 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  20
    21. 21. Risk and the Balanced Scorecard - What we think… Managing Risk is not different to, but a fundamental part of, managing strategy Page  21
    22. 22. 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  22 Are we operating within appetite?
    23. 23. 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  23 Share Price ? 5.Governance 4. Appetite Alignment 3. Manage Risk Shareholder Value Reputation Appetite 7.Culture 6.Communications Economic value add Profit ?
    24. 24. 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  24
    25. 25. 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  25
    26. 26. 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  26
    27. 27. 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  27
    28. 28. 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  28
    29. 29. 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  29 “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
    30. 30. 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  30
    31. 31. 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  31 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
    32. 32. Organisational progress in implementing the approach can be reviewed using the a Maturity Model Page  32 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
    33. 33. Poll question Who defines your organizational risk appetite?
    34. 34. Central to this integrated model for Strategy and Risk Management is the Strategy Map Page  34
    35. 35. Financial Customer Internal Process Learning & Growth Page  35 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
    36. 36. Financial Customer Internal Process Learning & Growth Page  36 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”
    37. 37. Financial Customer Internal Process Learning & Growth Page  37 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
    38. 38. Financial Learning & Growth Internal Process Customer Increase Shareholder value Page  38 Many different types of risks make up the organisational risk universe Strategic Risk Sustainable Growth Increase Investment Returns by 25% Finance Risk Increase Investment Returns by 25% Operational Risk Insurance Risk Hazard Risk Increase Retention of competent staff by 10%
    39. 39. Unexpected changes in interest rates Learning & Growth Internal Process Customer Financial Increase Shareholder value Page  39 Many different types of risks make up the organisational risk universe Strategic Risk Sustainable Growth Increase Investment Returns by 25% Unexpected Equity movements Finance Risk Increase Investment Returns by 25% Operational Risk Insurance Risk Hazard Risk Increase Retention of competent staff by 10%
    40. 40. 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  40 Risk Assessments Capital @Risk Reputation @Risk Appetite Alignment Matrix
    41. 41. Poll question Does your organization use any tools - such as the appetite alignment matrix - to monitor the alignment of risk taking to strategy?
    42. 42. Bringing 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  42 How much risk are we running?
    43. 43. 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  43
    44. 44. 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  44
    45. 45. Questions Page  45
    46. 46. Next on the SPS Calendar The webinar series continues: 13 March 2014 - The Execution Shortcut Members can catch up on recordings of previous SPS webinars at www.sps.org.uk/sps-webinars/
    47. 47. 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  47
    48. 48. Thank-you

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