Introduction to Risk Based Performance Management Feb 6th 2014 Webinar
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Transcript of Introduction to Risk Based Performance Management Feb 6th 2014 Webinar
Integrating Strategy & Risk Managementan Introduction to Risk-Based Performance Management
Manigent webinar6 February 2014
Page 2
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 3
The credit crunch and its subsequent fall-out has rewritten the rules on strategy execution and risk management
Page 4
Post credit crunch, regulatory bodies have been more aggressive and active
Page 5
As we enter the recovery and growth phase, managing risk to drive and sustain competitive advantage will be critical
Page 6
Risk-Based Performance Management (RBPM) is a holistic and integrated approach to strategy execution and risk management
Performance Management
Risk Management
Strategy Management
Appetite
What are we trying to achieve?
Are we on track?
What is our Risk Appetite?
Are we operating within appetite?
Governance & Communications
Culture
Integrating Strategy Execution and Risk management approaches
Page 8
Since its inception, the Balanced Scorecard has continued to evolve.
Raison d'être for Balanced Scorecard was to provide a ‘balanced’ set of performance measurements.
“What you measure is what you get” - Kaplan & Norton, 1992
Performance Measurement
With adoption, the Balanced Scorecard evolved to become more focused on strategy.
Introduced the 5 principles1. Translate the Strategy into operational
terms
2. Mobilise change through executive leadership
3. Make Strategy a continual process
4. Make Strategy everyone’s everyday job
5. Align the organisation to the Strategy
Performance Management
The Balanced Scorecard is now positioned as a framework for enhancing strategic execution.
A closed loop system of strategic execution1. Develop the Strategy
2. Plan the Strategy
3. Align the organisation
4. Plan operations
5. Monitor and Learn
6. Test and Adapt the Strategy
Strategy Execution
Page 9
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
Unlike the Balanced Scorecard, Risk Management has evolved via a series of standards.
COSO
Various standards were created, often influenced by the COSO frameworks.
The Risk Management Standard, 2002 (IRM, AIRMIC, ALARM)
Orange Book, 2004 (HM Treasury)
AS/NZS 4360:2004
BS31100, 2008 (British Standards)
Various Government standards
ISO 31000:2009
Provides principles and generic guidelines on risk management.
ISO 31010:2009
Provides guidance on selection and application of systematic techniques for risk assessment.
ISO 31000 & ISO 31010
Various
Page 10
We believe that Integrating strategy and risk management is the next, natural evolution
Risk-based performance Management enables executives to manage with one eye on strategy & one eye on risk.
Comprehensive strategic execution framework• Aligns strategic intent with risk rppetite
• Integrated performance and risk reporting and analytics
• Embedded governance and ownership model
Risk-Based Performance Management
Page 11
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
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.”
Now is the time to enhance the BSC with Key Risk Indicators
(KRIs) and integrate performance and risk
management.
Dr Robert Kaplan is focusing on measurement of riskE&Y suggested a ‘re-balanced’ scorecard
Page 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 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
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.”
Now is the time to enhance the BSC with Key Risk Indicators
(KRIs) and integrate performance and risk
management.
Dr Robert Kaplan is focusing on measurement of riskE&Y suggested a ‘re-balanced’ scorecard
However the focus is measurement via
indicators ... where is the strategic
alignment?
Page 13
Kaplan & Norton on Risk and the Balanced ScorecardHBR June 2012
• Three categories of Risk– Preventable Risks– Strategy Risks– External Risks
Managing Risk is very different from managing
Strategy
Page 14
Risk and the Balanced Scorecard - What we think…
Managing Risk is not different to, but a fundamental part of,
managing strategy
Integrating Strategy & Risk Management based on Risk-Based Performance Management
Page 16
Risk-Based Performance Management (RBPM) is a holistic and integrated approach to strategy execution and risk management
Performance Management
Risk Management
Strategy Management
Appetite
What are we trying to achieve?
Are we on track?
What is our Risk Appetite?
Are we operating within appetite?
Governance & Communications
Culture
Page 17
The Risk-Based Performance Management (RBPM) methodology is based on seven management disciplines
Business Drivers
Shareholder Value
2. Manage Performance
3. Manage Risk
1. Set Strategy
5.Governance
6.Communications
7.Culture
Capital ?Income
Share Price ?Economic value add
4. Appetite Alignment
Reputation
Profit
Appetite Appetite
Page 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
Page 19
“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.”
Discipline 2: Manage Performance
KPIs
Processes Initiatives
Objectives
Page 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”
Page 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?”
Page 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.”
Page 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. Clarify2. Credible3. Concise4. Context 5. Consistent
“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
Page 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 Culture1. Driven by a compelling vision2. Live by a clear set of values3. Led with integrity4. Align risk-taking to strategy5. Established clear accountabilities6. Engage in high quality conversations7. Incentives are aligned to appetite
Culture is perhaps the ultimate strategy and risk management tool
Page 25
Underpinning the Risk-Based Performance Management approach is a clear change process
Define Strategic
Goals
Define Strengths & Weaknesses
Define Business Drivers
Define the Strategy
Define Processes
Define Initiatives
Define Operational
Risks
Define Operational
Controls
Define Indicators
Assess Risks & Controls
Monitor Appetite
Alignment
Define Strategic
Risks
Define Strategic Controls
Define the Business Model
Define Risk Appetite
Align Risk Appetite &
Strategy
Define Strategic
Objectives
Board Executive
Formulation Execution
Page 26
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.
Page 27
Implementing a Risk-Based Performance Management approach brings a range of benefits
“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
"Coupled with the implementation of a new risk management framework, significant business benefits are emerging“ – Source: Annual accounts of a Financial Services client
“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
“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
Page 28
Central to this integrated model for Strategy and Risk Management is the Strategy Map
Page 29
The Strategy Map articulates how an organisation creates valueFi
nanc
ial
Cust
omer
Inte
rnal
Pr
oces
sLe
arni
ng &
G
row
th
Drive sales execution
Sustainable Growth
“We align our incentives to our
appetite & desired behaviours”
“Their fees are clear and fair”
Deliver Revenue Growth
Objective KPIs InitiativesTargets
Drive sales execution
YTD % Increase in income 25%
Implement new sales process
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
Page 30
However, to create value, risk-taking must be aligned to strategyFi
nanc
ial
Cust
omer
Inte
rnal
Pr
oces
sLe
arni
ng &
G
row
th
Sustainable Growth Objective Appetite AlignmentExposure
Drive sales execution
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?
ExposureHow much risk
are we currently running?
Alignment Is our current risk-taking aligned to
appetite?
Moderate High Over-exposedDrive sales execution
“We align our incentives to our
appetite & desired behaviours”
“Their fees are clear and fair”
Deliver Revenue Growth
Page 31
Effective risk management supports value creation and value protectionFi
nanc
ial
Cust
omer
Inte
rnal
Pr
oces
sLe
arni
ng &
G
row
th
Sustainable Growth Objective Risks MitigationThresholds
Drive sales execution
Mis-selling resulting in reputation loss
Appetite Tolerances
Controls Initiatives Policy &
procedures Processes
Objective Statement of what
strategy must achieve and what’s
critical to its success
RisksThe threats and
opportunities (risks) exist which may
impact achievement of objectives
ThresholdsThe appetite and
tolerance thresholds used to monitor risk
Mitigation The activities undertaken to manage risk
Drive sales execution
“We align our incentives to our
appetite & desired behaviours”
“Their fees are clear and fair”
Deliver Revenue Growth
Page 32
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
Page 33
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 risk-taking to strategy
Enables the monitoring of risks which are outside of appetite
Also shows where we are taking too much and not enough risk
Changes the risk conversation
Are we operating within Appetite?
Over-exposed
Under-exposedAligned
Page 34
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 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
Over-exposed
Under-exposedAligned
Page 35
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
Income
Reputation
Capital
?
Capital@Risk
Reputation @Risk
Risk Assessments
Key Business Drivers
Appetite Alignment Matrix
Page 36
Brining together these three powerful tools, and the underlying methodology provide the foundation for effective strategy execution
Strategy Map Risk Map
Appetite Alignment Matrix
Risk Appetite
Page 37
Brining together these three powerful tools, and the underlying methodology provide the foundation for effective strategy execution
Strategy Map Risk Map
Appetite Alignment Matrix
What are we trying to achieve?
How much risk are we running?
Risk Appetite
How much risk are we willing to
take?
So What? Are we taking
the right amount of risk?
Page 38
Risk-Based Performance Management is proven to enable better execution, better risk management and deliver tangible business benefits
http://www.hml.co.uk/blog/2011/09/23/risk-management-driving-value-from-a-long-game-approach
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.
Page 39
Risk-Based Performance Management is proven to enable better execution, better risk management and deliver tangible business benefits
http://www.hml.co.uk/blog/2011/09/23/risk-management-driving-value-from-a-long-game-approach
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.
Page 40
Questions
Page 41
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
A thought-leadership consultancy firm focused on strategy execution and risk management
We wrote the book on integrating strategy and risk management
Page 42
Manigent works with clients in the financial services and other regulated industries globally.
Our Services
Manigent 90 Day Change Roadmap
Known cost /Low risk Time-bound delivery Proven methodology Focus on 80% Known & 20% Unknown
Integrated Strategy & Risk
Information Risk (Cyber) Management
Conduct Risk Management
Balanced Scorecard & Strategy Map
Enterprise & Operational Risk Management
Page 43
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 deploymentOur clients shaped our approach &
methodology
Page 44
Contact details
Andrew SmartCEOManigent & StratexSystems
Email: [email protected]: www.riskbasedperformance.comWeb: www.manigent.com |
www.stratexsystems.com LinkedIn: http://uk.linkedin.com/in/ajsmartTwitter:@AndrewJSmart