A*Star ERM Day 2017 - Innovation & Risk Management - Marc Ronez presentation

1. ARiMI – Asia Risk Management Institute By MARC RONEZ Chief Risk Strategist ARIMI – Asia Risk Management Institute NOTES A*STAR ERM Day – Singapore 20th October 2017 Risk Management: An essential Toolbox to Support Innovation & Growth

2. Agenda for this Session þ Clarifying the Concept of Innovation & the link with Risk management. þ Understand the practical implications of the risk of changes and the challenges of generating & implementing Innovations þ Learn how Risk Management can help Organization recognize & manage different types of changes and Innovations þ The negative unintended consequences of Human Driven Innovations. þ List of some good practices to follow to cope with Change and be an Effective Risk Manager Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 3

8. Example of INNOVATIONS: Changes in Land Transportation from Horses to Modern Vehicles Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 9 In the beginning 1880s 1910s 2000s Horse drawn vehicle First Cars Modern Vehicles Mass Production On foot ESSENTIAL to Make the world SMALLER On horse

9. Example of INNOVATIONS: The invention & evolution of MONEY Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 10 In the beginning 8,000 BC 2000 BC 1700s 1950s 2000s Precious Metals Barter Paper Money Internet Banking / Mobile Payment / Cashless Sea shells & beans Credit cards Payment ESSENTIAL to facilitate TRADE

12. YOU can INNOVATE about any aspect of your Business Model Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 13 Product/ Service Features Distribution Channels Customer Relationship Revenue Model Costs Structure Brand/ Package Product/ Service Ecosystem Resources Mix Process Structure & System Partnerships ORGANIZATION

13. INNOVATION can occur in any aspect of your Business Model: EXAMPLES Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 14 PROFIT MODEL Razor & Blades Model Gilette PROCESS ‘Lean’ Production Process Toyota MULTIPLE Station-Free Bike Sharing System OFO

18. RISK-Taking can Lead to either Negative or Positive results depending how it is MANAGED & what happens in the environment 19 - + Target Performance Expected Potential Losses Expected Potential Opportunities Unexpected Catastrophic Losses Transformational Blue swans Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Catastrophic Losses Black swans Unexpected Opportunities LOSS GAIN

19. TAKING RISK is NECESSARY to answer THREATS, NEEDS & achieve REWARDS However Taking Risk WITHOUT proper Risk Management .. … is GAMBLING! 20Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017

25. Organizations face a COMPLEX, UNCERTAIN & always CHANGING environment climate: Key Drivers Domestic Global Human & Social Factors Political & Regulatory Climate Resources & environmental Factors Economic Environment & market Forces Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 26 Technological innovations Source of both Risks & Opportunities

26. 27 GLOBALIZATION of Production & Markets & COMPETITION – The GROWTH OBJECTIVE Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Global Competition for Investments, Talents, and others Resources, Markets, Products and Services

27. 28 SHORTENING technology/business Cycles Product Time Length Cycle (TCL): how much time do you have to ‘milk the cow’ before another cycle start. 1930 1940 1950 1960 1970 1980 1990 2000 2008 TLC: 25 years TCL: < 15 years TLC: < 5 years Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 28

28. DISRUPTIVE Technological Innovations Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 29 Impact TRANSFORMATIONAL Onset Speed within 15 Years Mobile Banking & Cashless Payments Self-drive cars & automated systems AI to support Decision- Making

31. Increased PRESURES on Resources, human communities & Environment 32Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Business has also been viewed increasingly as a major cause of Social, Environmental and Economic problems.

34. QUESTION: Are Organizations 'Good' at Managing CHANGE and the RISKS associated with it? Many CEOs think that they are already EFFECTIVE at managing the RISKS of their organizations .. in the best interest of their Shareholders ( that they have a track record of performance success to ‘prove’it!). BUT is it really the case? Let the data Speak! Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 35

38. It has to do with the TYPES of Innovations Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 39 Business optimization (incremental) Product, market, method innovation Business model innovation You can convince BoD of this because some of it is familiar. This terrifies BoD because of uncertainty & it cannibalise the current business. SUSTAINING INCREMENTAL SUSTAINING RADICAL DISRUPTIVE RADICAL Next Year’s car model Electric car model On-demand self drive car

39. The Challenge posed by INNOVATION for Established Organizations Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 40 proven Unproven Unknown High Uncertainty Growth Potential Cannibalization Risk of Failure Known Business High certainty Efficiency/Profit Complementarity Predictability Business Model OPTIMISE EXPLORE Shareholders Prefers this SUSTAINING INCREMENTAL Innovations RADICAL or DISRUPTIVE Innovations Ideas

41. Short Time Horizon = Short Term Focus Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 42 Horizon 1 Horizon 2 Horizon 3 Businesses typically have many projects in this horizon, which require limited resource invementment and deliver quickly Businesses support fewer H2 projects against stage gates and killings off under performers Seen as an expensive distraction or pipe dream H3 usually neglected Profit Time (years) ?

42. 43 Risk Averse Risk Taker Cautious Administrator Conservative Player Anxious Loser Victim of Life Smart Expert Effective Risk Taker Gambler Relying on Luck Risk-Taking & Management Life-cycle Source: “Risk-Taking & Management ”, Marc Ronez, ARiMI, 2006 Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 High Expertise in Risk Management Low Expertise in Risk Management ARiMI

44. Imperialism of internal controls Obsession with numbers Inability to think out of the box Lack of creativity & innovation Result of FOCUS on Protection & Sustaining Innovations The effect will often be deceiving and only provide pseudo-comfort about risk. Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Defensive Risk Management Which consists of overloading in structures, processes, systems and technologies. 45

45. 46 Illusion of Control – Getting fooled by Track Record Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 "It's only when the tide goes out that … you learn who's been swimming naked." Warren Buffett, Berkshire Hathaway

46. Example of Disruptive Innovations – Smartphone Cameras vs Stand alone Digital Cameras Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 47 Cheaper, Simpler, Smaller & More convenient •  No need to buy a digital camera •  Cheap: Eg built in phones •  Store many pictures on memory •  Can edit and share digital picture •  Low picture quality •  Low resolution •  Low file size capacity Initial Inferior Performance Technology Progression Potential •  On going improvements in image quality, resolution, memory capacity and so on to the point of threatening highest end markets Disrupted Markets: Camera manufacturers

47. DISRUPTIVE Innovations Examples Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 48 Internet Subscription Service for videos Online Free Encyclopedia Free Long Distance Calls on Internet Online Retailer Online Accommodation reservation Online Private car with Driver Booking

48. Quiz on Innovation: What is special about the Top 20 Most Innovative Companies Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 49 Forbes, Fast Company, BCG, MIT and so on, publish a yearly listing of the most INNOVATIVE companies. Nvidia SpaceX Amazon 23andMe AlphabetiFlytek Kite PharmaTencent Regeneron Spark Therapeutics Face ++ First Solar Intel Quanergy Systems Vestas Wind Systems Apple Merck Carbon Desktop Metal Ionis Pharmaceuticals 75% are Young Companies

52. Industry ERM & BCM Standards / Frameworks Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 53 þ COSO:2017 - Revised ERM Framework (US) þ ISO 31000:2009 - Risk Management Guideline (International) þ ISO 22301:2012 - Societal security – Business continuity management systems (International) þ AS/NZS 4360:2004 - Risk Management Standard (Australia/NZ) þ Rating Agencies Frameworks (S&P, Moodys) þ Consultants Frameworks (SAP, KPMG, Marsh, etc)

53. 54 Financial & Hazard ERM STANDARDS: Expanding the OBJECTIVES from Value PROTECTION to Value CREATION Finance Losses Protect & Sustain Operations Create Value with effective Risk-taking & ManagementValue increase Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 1980/90s1960/70s 2000/10s Operational Strategic

55. Risk – Threats, Opportunities & Uncertainty 56 - + Target Performance Expected Potential Losses Expected Potential Opportunities Unexpected Catastrophic Losses Transformational Blue swans Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Catastrophic Losses Black swans Unexpected Opportunities LOSS GAIN Risk Can Lead to either Negative or Positive impact depending how it is managed.. ERM – Create Shared Sustainable Value

56. SP – Strategic Planning Develop opportunities & create value BCM – Ensure Business Continuity & Societal Security ERM vs Strategic Planning, Operational & BCM 57 - + Target Performance Expected Potential Losses Expected Potential Opportunities Unexpected Catastrophic Losses Transformational Blue swans Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Catastrophic Losses Black swans Unexpected Opportunities ERM – Enterprise Risk Management LOSS Operational Management GAIN

57. The Objective of Risk Management is that … .. an organisation takes risk KNOWINGLY and manage risk exposure INTELLIGENTLY .. in a controlled (or balanced) manner so that the business is viable for a longer term (SUSTAINABILITY) while meeting the expectation of all the relevant stakeholders by CREATING SHARED VALUE Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 58

58. In a World full of Uncertainties, Managing Risks & Opportunity Effectively means THAT... 59 Deliver DESIRED Business RESULTS Make Sound Strategic & Operational DECISIONS ? We NEED PEOPLE to be able to.. In order to be able to.. Question is.. HOW? Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017

59. Risk & Value Model The DECISION-MAKERS Profile The ORGANIZATION Context skills Understanding the FACTORS: Personal & Environmental that support Sound Strategic & Operational DECISION-MAKING organizational structure management systems culture & values experiences moral values Knowledge network attitude behavior Processes Tools & Resources Social networks What are the areas of Strengths & Weaknesses..? Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 60

60. Understanding the FACTORS: Personal & Environmental that support Sound Strategic & Operational DECISION-MAKING Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 61 1- The DECISION- MAKERS PROFILE Strengths & weaknesses in terms of Knowledge, skills experience, network, moral values, attitude and behaviors 2 - The ORGANIZATION CONTEXT Strengths & weaknesses in terms of organizational structure management systems & of the cultural setting.

61. 62 ARiMI ERM Framework - The Keys Components Risk CULTURE: Guiding Principles & Values Building commitment to principles & ethical values essential for ERM effectiveness Risk GOVERNANCE: Structure & Oversight Extend of role, responsibilities and oversight for ERM throughout an organization ERM Philosophy & MATURITY Level of Awareness of ERM Benefits and resulting commitment from the top management to ERM initiatives Risk PROCESS: Methodology & Tools Quality of assessment, quantification, treatment & monitoring methodologies and tools Risk RESOURCES Range, quality and level of resources (people, financial & IT) allocated to support the ERM efforts ERM SCOPE & ACTIVITIES Categories of Risks covered & level of integration of ERM in strategic and operational decision-making throughout an organization Risk & Performance System Level of integration between Risk and Performance Management system to support effective risk-taking Risk CAPITAL Structure Range and level of risk financing strategies and practices including capital/debt management and Insurance ERM COMPETENCE Quality and range of L&D programs to build strong ERM competencies among the people of an organization Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 ARiMI

62. ARiMI Process for Managing Risk – The Key Steps Understand the Organization & its Context Risk Assessment Risk Quantification & Aggregation 2. Evaluation & DECISIONS about Risk 3. SOLUTIONS Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 63 Plan & Implement Exercise & Test 1. DIAGNOSTIC 4. MONITOR, MANAGE & REVIEW CONSULT, COMMUNICATE & COORDINATE Recovery Management Intervention & Containment Monitor, Report & Recognize Analysis & Learning ARiMI

63. Understanding CURRENT REALITY and Projecting Forward to Identify the Possible FUTURE(S) TODAY CURRENT Reality Where are you Now? Time Range of Possible FUTURE(S) Threats Performance Opportunities 64Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017

64. So You need to use a Business Model Analysis Tools such as the ARiMI-CCS Model Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 65 1 2 3 The Customer(s) How to CREATE VALUE for the Customer? How do we SUSTAIN the above VALUE creation process over time? How to CAPTURE a fair share for our Organizations? ARiMI

66. Changes in the Tranportation Industry: What is NEXT to come? Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 67 YESTERDAY TODAY TOMORROW Horse drawn vehicle Modern Cars ? Where are we coming from ? Where are we Now ? Where are we Going to be ? On-demand Self-drive car

67. Understanding your Value Chain & Competitive Context Key Partners: (Supply Chain) Raw Materials, Goods & Services Competitors & New Entrants YOUR ORGANIZATION Key Partners: (Routes to Markets, Channels) Distributors, Complementors, Vendors, etc. Customers (Segments & Profiles) Prospectivecustomers Substitutes Source: Marc Ronez – Asia Risk Management Institute Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 68 External Macro Forces…

68. Look a Long-term then Short-term (3 HORIZONS) Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 69 Horizon 1 0 to 3 years Horizon 2 3 to 10 years Horizon 3 10 years & Beyond Profit Time (years) Next Year’s car model Electric car model On-demand self-drive car •  high growth businesses with potential to become core •  may or may not be generating profit today •  portfolio of embryonic businesses and initiatives •  Will grow into H2 or be pruned •  core business, central to company identity •  generating majority of profit today but eventually flattening or declining

69. 70 A STRATEGY is a „Road Map“ that provides a Pathway from CURRENT REALITY to VISION Time Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 VISION Where you want to Be? (Possible Future) INGREDIENTS Capital, People, Systems, Processes, assetsSTRATEGY How to get There? RECIPE Culture, Structure, Marketing, Products, Pricing, Distribution TODAY CURRENT Reality Where are you Now? RISKS Building Critical Success Factors Capabilities

70. INNOVATION : What do you need to Change in your Business Model Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 71 Channels PROFIT FORMULACUSTOMER VALUE PROPOSAL RelationshipProduct/ Service Features Revenue Model Costs Structure Brand/ Package Process Structure & System Resources Mix Partnerships SUSTAINABILITY ENGINE Product/ Service Ecosystem

71. INNOVATION Process: It can be CLOSED or OPEN! Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 72 CLOSED Innovation Model Our current market Internal/external venture handling External technology insourcing External technology base Other firm’s market Our new market License, spin out, divest Internal technology base Our current market External technology base Internal technology base OPEN Innovation Model

72. Enterprise-Wide Risk Management (ARiMI) Performance Management Risk Management Knowledge & Information Management 73Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Linking Risk & Performance Management ARiMI

73. Performance Management Organization Mission, Vision & Shared Values Determine Business Model (Value Creation, Value Capture, Value Sustenance) Drives Strategy Map Key Resources & Processes to Identify Critical Success Factors Financial Customer Internal processes Employee / HR Community and Environment Key Performance Indicators Risk Management Critical Success vs Failure Causes / Factors Financial Customer Internal processes Employee / HR Community and Environment What FACTORS influence our objectives and ability to succeed by disrupting key resources & processes What CONTROLS we need to put in place to mitigate our risks Knowledge & Information Management Enterprise-Wide Risk Management (ARiMI Model) Drives Key Objectives Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 74 Key Risk Indicators Key Control Indicators Processes, Results, Incident & Loss Events Learn from the PAST Risks & Returns Profile & quantification Analysis Manage the NOW Predictive Scenario Analysis Anticipate the FUTURE Communication , Training & Guidance ARiMI

74. Build RESILIENCE & SUSTAINABILITY into your Systems & Culture 75 1.  Continuous Strategic Anticipation 2.  Organizational Agility & Capability Responsiveness 3.  Continuous Learning Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017

78. There are more Disruptive Technologies in the pipeline.. Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 79 Source: Mc Kinsey Global Institute While the benefits of New Technologies may seem obvious to many..

79. Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 80 It is also important to consider the NEGATIVE effects so that they can be managed properly. Otherwise the consequences could be DISASTROUS for us..

82. Best Countries to Go to INNOVATE Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 83 Cornell University, INSEAD and the World Intellectual Property Organization. The full report is available at http://www.wipo.int/ publications/en/details.jsp?id=4064 #3 UK #13 Iceland #7 Ireland #2 Sweden #5 Finland #4 USA #15 Canada #6 Singapore #14 HK (China) #1 Switzerland # 9 Holland #10 Germany #8 Denmark #12 Luxemburg

83. Risk Managing Change - Don’t Swim Naked! þ  Think Long-term if you want to build something sustainable. And Keep Reframing. (business model & environmental scanning) þ  Assume that what can Happen will Happen! So Prepare Accordingly þ  Nurture a Risk-Aware Culture to support resilience and capacity to Learn and Change þ  Recruit and promote people who are risk-smart and ethical þ  Develop a real Risk-adjusted Performance Management system – to motive people to take risk effectively þ  Build in Redundancy for important resources and processes in your system þ  Save for Rainy Days & Opportunistic investment (create capital buffers in ‘good times’) þ  Strengthen your crisis management & Business continuity programs & Stress-test your systems regularly 84Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017

84. ✓ RISK QUIZ FOR YOU! Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 85 What Kind of Risk-Taker and Manager are YOU? 20 quick QUESTIONS and You will find the ANSWER TAKE QUIZ NOW at www.arimi.org

85. Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 86 A recognized expert with more than 20 years of experience both as a practitioner & trainer for large MNCs, Governments & Charities. Areas of expertise include ERM, risk decision-making processes, Data Analytics, Corporate Governance, Business Ethics, Social Responsibility, risk-aware culture, risk communication and crisis management, Business Model/Strategy Risk Management, corporate learning systems development. MBA from the University of Chicago Booth, an MSc in Insurance & a LLM from the University of La Sorbonne, Master Degree in Advance Business Research from UNISA – University of South Australia Marc has an MBA from the University of Chicago Booth GSB, MSc in Insurance from the Université De Paris I - Panthéon-Sorbonne, LL.M. from Université Panthéon-Assas (Paris II) and Master’s Degree in Advanced Business Practice from University of South Australia. He is a Fellow in Applied Risk Management (FARM) from the CARM Institute. ARiMI – Asia Risk Management Institute, ESSEC Business School Work Education

86. What do I do? I help managers & leaders to use Risk Management to: þ RESOLVE difficult operational and business challenges þ TAKE & MANAGE risks effectively to build sustainable & profitable growth models Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 87

87. Risk Management is a continuous journey, not a destination! Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Marc Ronez is on Linkedin & WordPress You can find his profile & read his blogs at: P: www.linkedin.com/in/marc-ronez B: theriskmanagementparadox.com B: riskmanagementdemystified.com 88

89. 90 For more information on ARiMI, check our website at: www.arimi.org Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 Developing Effective Leaders & Decision- makers for complex & volatile times

90. Important Note: Please note that that this presentation and its contents, is the intellectual property of the Asia Risk Management Institute Pte Ltd. It has been prepared for this A*Star ERM Day 2017 event and it cannot be used for any other purposes without the specific written consent of the Asia Risk Management Institute. Whilst any third party information contained in this document has been obtained from sources believed to be reliable, no representations are made as to its accuracy or completeness. Further, ARiMI expressly disclaims any responsibility for liability or loss arising from use of such information or from any of ARiMI's comments upon it. 91Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017