1IC²

Zurich IC Squared

Enterprise Risk Management– Fad or Fact?

Wolfgang F. FriedelWolfgang F. Friedel

President and CEOPresident and CEO Zurich IC SquaredZurich IC Squared

2IC²

Zurich IC Squared

Enterprise Risk Management - Fad or Fact?

“ “Insanity is doing the same thing and Insanity is doing the same thing and expecting different results”expecting different results”

Albert EinsteinAlbert Einstein

?

3IC²

Zurich IC Squared

Enterprise Risk Management– Fad or Fact?

FadFad if we do the same if we do the same thing and……thing and……

FactFact if we are creating if we are creating value for stakeholdersvalue for stakeholders

4IC²

Zurich IC Squared

Creating Stakeholder Value – Fad or Fact?

• What do you do to create value?What do you do to create value?• What can happen to destroy value?What can happen to destroy value?• What degree of confidence do you What degree of confidence do you

have in the estimated distribution have in the estimated distribution of outcomes?of outcomes?

Source: The Value Reporting Revolution

Risk is an Investment

5IC²

Zurich IC Squared

The “Risk is an Investment” Paradigm

Risk is an InvestmentRisks can create value

Risks can destroy value

Create sustainable Competitive AdvantageCreate sustainable Competitive Advantage(identify, quantify and model risks(identify, quantify and model risks and opportunities)and opportunities)

Communicate Risks, Opportunities and ActionsCommunicate Risks, Opportunities and Actions

Increased Stakeholder ValueIncreased Stakeholder Value

6IC²

Zurich IC Squared

Stakeholder Value Creation Process

IdentificationIdentification

StakeholderStakeholderValue CreationValue Creation

Implementation/Implementation/MeasurementsMeasurements

Cultural Cultural Buy - inBuy - in

Operational

Operational

Hazard

Hazard

Strateg

ic

Strateg

ic

Financial

Financial

PerformancePerformanceCommunicationCommunication

Measurement/Measurement/PrioritizationPrioritization

Execution PlansExecution Plans

7IC²

Zurich IC Squared

The IC2 “Reward - Risk Continuum”

Adopted from PWC

Risk Mgmt. / Int. Audit

COO,CFO,

Treasurer

Board, CEO,CRO

Uncertainty(Variance)

Reward

Risk Hazard Financial Operational Strategic

8IC²

Zurich IC Squared

Enterprise Risk Management – The Challenge

Operational Strategic

Hazard Financial

Easy DifficultComplexity to Manage

High

Low

Fina

ncia

l Im

pact

9IC²

Zurich IC Squared

Example: Strategic Alliance

10IC²

Zurich IC Squared

$48

$50

$52

$54

$56

$58

$60

Alliance Announcement

ShareSharePricePrice

December, 1996 December, 1996

AMEX/National West AnnouncementAMEX/National West AnnouncementShare Price MovementShare Price Movement

1990-1996 Harvard/Yale Study 1990-1996 Harvard/Yale Study of 1000 Alliances Showedof 1000 Alliances Showed

Statistical Evidence of Positive Statistical Evidence of Positive Share Price MovementShare Price Movement

SAMPLE - VALUE CREATIONSAMPLE - VALUE CREATIONON DAY OF ANNOUNCEMENTON DAY OF ANNOUNCEMENT

Mobil/BP Mobil/BP $5.7$5.7

Merck/RPR Merck/RPR $5.3$5.3

HP/Microsoft/HP/Microsoft/ Oracle/Netscape Oracle/Netscape $3.8$3.8

GE/Pratt & Whitney GE/Pratt & Whitney $1.9$1.9

Millennium/AHP $1.0Millennium/AHP $1.0

AllianceAlliance $Billions$Billions

Sources: WSJ & Booz Allen & Hamilton Sources: WSJ & Booz Allen & Hamilton

Example: Strategic Alliance

11IC²

Zurich IC Squared

SUCCESS RATES IN ALLIANCESSUCCESS RATES IN ALLIANCES

0%0%

10%10%

20%20%

30%30%

40%40%

50%50%

60%60%

70%70%

80%80%

90%90%

100%100%

Low SkilledLow SkilledAlliance FirmAlliance Firm

High SkilledHigh SkilledAlliance FirmAlliance Firm

Source: Booz Allen & Hamilton studies of 2000 U.S. firms 1993 to 1998 (covering 10,000 alliances) & Association of Corporate Growth January 2000 survey of alliance practices at 1300 companies

Alliances

Example: Strategic Alliance

Levera

ging Risk

s

12IC²

Zurich IC Squared

Based on Perception

60 to 20 in 12 = ($38b)39 to 19 in 9 = ($150b)

-42% in 1

It’s the business model, stupid!Geoffrey Colvin, Fortune Magazine

Example: Business Model

13IC²

Zurich IC Squared

Business ProfileBusiness Profile

Financial Impact

Like

lihoo

d

A

B

C

D

E

F

IV III II I

Company:

Scope:

Analysis Date

Low High

High14.04.2000

XYZ Co

Corp Level Business Objectives

2233

11

44

55

66

77

88

14IC²

Zurich IC Squared

Collaboration is an innovator

60% Rule

For over 60% of identified issues,

common - sense based action plans

can be agreed upon without any need

for further costly research or time

consuming and file filling

documentation.

15IC²

Zurich IC Squared

Collaboration is an innovator

40 % Rule

The balance of issues requires additional input, data, information or consideration before execution plans are developed.

Most frequent issue is the inability of the team to conclusively quantify financial impact and likely hood of occurrence.

16IC²

Zurich IC Squared

Dynamic Modeling: 40 - 80

Operational Strategic

Hazard Financial

Easy DifficultComplexity to Manage

High

Low

Fina

ncia

l Im

pact

17IC²

Zurich IC Squared

Dynamic Modeling - Structural View

Model =

Selected Variables

Identification,Identification,simplificationsimplification

… and their dependence

ModelingModelinginteractionsinteractions

Simulation =

Evolution over time

NumberNumbercrunchingcrunching

Improved decision speed & capability

EvaluationEvaluation

• EconomyEconomy• CompetitionCompetition• CustomersCustomers

• StrategyStrategy• ResourcesResources• Cash FlowCash Flow

INTERNAL, e.g.INTERNAL, e.g.

EXTERNAL, e.g.EXTERNAL, e.g. • Stochastic Stochastic DependenceDependence

• Functional Functional DependenceDependence

• CorrelationCorrelation

• path by path path by path (Monte Carlo)(Monte Carlo)

• or all paths at once or all paths at once (Markov Chain)(Markov Chain)

• high performance high performance software software (speed is essential)(speed is essential)

• Optimal reward / Optimal reward / risk trade-offrisk trade-off

• Evaluating Evaluating alternative alternative business modelsbusiness models

• Break even Break even analysisanalysis

• etc...etc...

18IC²

Zurich IC Squared

Data, data, data, data!

“ “Insanity is doing the same thing and Insanity is doing the same thing and expecting different results”expecting different results”

Albert EinsteinAlbert Einstein

so what!

19IC²

Zurich IC Squared

Dynamic modeling

-300 -100 100 300 500

Projected Year End Profit

Profit (US $ ‘000)

Prob

abili

ty

Strategy 2Strategy 1

Strategy 3

Strategy 1

Strategy 2

Strategy 3

= 90% Confidence outcomes

20IC²

Zurich IC Squared

Optimize Risk/Reward Trade Off

Efficient Frontier

0

5

10

15

20

25

30

0 5 10 15 20Standard Deviation of Return [%]

Ret

urn

[%]

21IC²

Zurich IC Squared

Risk is an Investment

The New Game

Creating exponential results through understanding rewards and their risks and communicating related strategies to achieve sustainable value for stakeholders. FAST!

Time is an Ally