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Enterprise Risk Management– Fad or Fact?

Wolfgang F. Friedel President and CEO Zurich IC Squared. Enterprise Risk Management– Fad or Fact?. “Insanity is doing the same thing and expecting different results” Albert Einstein. Enterprise Risk Management - Fad or Fact?. ?.

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Enterprise Risk Management– Fad or Fact?

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  1. Wolfgang F. Friedel President and CEO Zurich IC Squared Enterprise Risk Management– Fad or Fact?

  2. “Insanity is doing the same thing and expecting different results” Albert Einstein Enterprise Risk Management - Fad or Fact? ?

  3. Fad if we do the same thing and…… Fact if we are creating value for stakeholders Enterprise Risk Management– Fad or Fact?

  4. What do you do to create value? What can happen to destroy value? What degree of confidence do you have in the estimated distribution of outcomes? Source: The Value Reporting Revolution Creating Stakeholder Value – Fad or Fact? Risk is an Investment

  5. The “Risk is an Investment” Paradigm Increased Stakeholder Value Communicate Risks, Opportunities and Actions Create sustainable Competitive Advantage (identify, quantify and model risks and opportunities) Risks can create value Risk is an Investment Risks can destroy value

  6. Stakeholder Value Creation Process Identification Stakeholder Value Creation Measurement/Prioritization Operational Strategic Cultural Buy - in PerformanceCommunication Financial Hazard Execution Plans Implementation/ Measurements

  7. The IC2 “Reward - Risk Continuum” COO, CFO, Treasurer Reward Board, CEO, CRO Risk Mgmt. / Int. Audit Uncertainty (Variance) Hazard Financial Operational Strategic Risk Adopted from PWC

  8. Enterprise Risk Management – The Challenge High Operational Strategic Financial Impact Hazard Financial Low Easy Difficult Complexity to Manage

  9. Example: Strategic Alliance

  10. Example: Strategic Alliance AMEX/National West Announcement Share Price Movement 1990-1996 Harvard/Yale Study of 1000 Alliances Showed Statistical Evidence of Positive Share Price Movement Share Price SAMPLE - VALUE CREATION ON DAY OF ANNOUNCEMENT $Billions Alliance Mobil/BP $5.7 Merck/RPR $5.3 HP/Microsoft/ Oracle/Netscape $3.8 GE/Pratt & Whitney $1.9 Millennium/AHP $1.0 December, 1996 Sources: WSJ & Booz Allen & Hamilton

  11. Example: Strategic Alliance 100% SUCCESS RATES IN ALLIANCES 90% 80% 70% 60% Alliances 50% 40% Leveraging Risks 30% 20% 10% 0% Low Skilled Alliance Firm High Skilled Alliance 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

  12. Example: Business Model 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

  13. Business Profile Business Profile XYZ Co Analysis Date Company: Corp Level Business Objectives 14.04.2000 Scope: High A 3 2 B 7 1 C Likelihood 4 D 8 5 E 6 F Low High IV III II I Financial Impact

  14. 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. Collaboration is an innovator

  15. 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. Collaboration is an innovator

  16. Dynamic Modeling: 40 - 80 High Operational Strategic Financial Impact Hazard Financial Low Easy Difficult Complexity to Manage

  17. Economy Competition Customers Dynamic Modeling - Structural View Identification, simplification Modelinginteractions Number crunching Evaluation Model = Selected Variables Improved decision speed & capability Simulation = Evolution over time … and their dependence EXTERNAL, e.g. • Stochastic Dependence • Functional Dependence • Correlation • path by path (Monte Carlo) • or all paths at once (Markov Chain) • high performance software (speed is essential) • Optimal reward / risk trade-off • Evaluating alternative business models • Break even analysis • etc... INTERNAL, e.g. • Strategy • Resources • Cash Flow

  18. “Insanity is doing the same thing and expecting different results” Albert Einstein Data, data, data, data! so what!

  19. Projected Year End Profit Strategy 3 Strategy 2 Strategy 1 Probability Strategy 1 Strategy 2 Strategy 3 -300 -100 100 300 500 Profit (US $ ‘000) = 90% Confidence outcomes Dynamic modeling

  20. Optimize Risk/Reward Trade Off

  21. 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

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