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Risk Review Process. July 18,2003. NCMA Conference, Los Angeles. James L. Sanford Corporate Vice President and Treasurer. Background. In 1997/1998 Northrop Grumman and Lockheed Martin compared risk management review processes
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Risk Review Process July 18,2003 NCMA Conference, Los Angeles James L. Sanford Corporate Vice President and Treasurer
Background • In 1997/1998 Northrop Grumman and Lockheed Martin compared risk management review processes • The evaluation addressed 10 major programs that had adversely impacted performance and concluded that these programs generally included the following1: • Fixed price development • Unrealistic pricing • No independent, non-advocate review • Inadequate funding or funding volatility • Requirements not well defined or understood • Requirements not flowed down to subcontractors • Inexperienced personnel in key positions • No recent development experience • Functional processes lacking or not implemented • No periodic reviews • Poor subcontract management 1 Not present on all programs
Background (continued) • Based on this evaluation NGC revised its risk review process to include the following: Proper proposal /program formulation – independent non-advocate bid review (NAR) • This front-end review is now required for all proposals requiring Corporate approval. The non-advocate reviews will be commissioned by Sector presidents using off-program talent. Rigorous development, selection and training of program management key personnel • Sector presidents have primary responsibility for selection and developing program management talent. Comprehensive sector training in program management now exists. Independent cost evaluation (ICE) • The ICE process is used in conjunction with the NAR to provide management with a consistent independent assessment of the cost proposal
Rules of Sound Risk Management • BE TRANSPARENT Risk should be fully understood. • COMMUNICATE Risk should be discussed openly. • SEEK EXPERIENCE Risk is measured and managed by people, not mathematical models. • KNOW WHAT YOU DON’T KNOW Question the assumptions you make. • DIVERSITY Multiple risks will produce more consistent rewards • SHOW DISCIPLINE A consistent and rigorous approach will beat a constantly changing strategy. • USE COMMON SENSE It is better to be approximately right than to be precisely wrong. • RETURN IS ONLY HALF THE EQUATION Decisions should be made only by considering the risk and return of the possibilities. • THERE IS NO RETRUN WITHOUT SOME RISK Rewards go to those who take risks.
The Four Phases of Risk Identification Phase 1 Identify the nature of the risk – the likely vulnerabilities of a given process, facility, or sector of activity. Assessment Phase 2: Estimate the probability that these vulnerabilities might lead to a disruption, and the types of losses – both expected and worst case – that might arise. Prioritization Phase 3 Look at the different consequences and their likelihood of occurrence and ask yourself how you should deal with the risks and what priority you should attach to mitigating them. Response Phase 4: Plan how you will respond if, despite your best efforts, something were to occur.
Corporate Review Process - Philosophy Sectors are responsible for managing a portfolio of programs to achieve financial strategic goals Considerations: current and projected financial performance - Cash flow - Profitability - Volatility - Size • Risk review thresholds are not the same for all sectors • Sector presidents are responsible for documented, repeatable risk review processes at the Sector and Business Unit level
Corporate Review Process • Processes are updated to reflect “lessons learned” • Sectors perform periodic review of their risk management process • Sector presidents formally acknowledge that their risk management processes are in-place, functioning and prepared for a corporate-level review. • Internal Audit and Corporate Contracts and Pricing periodically review sector and business unit processes.
Corporate Risk Review Process - Key Elements • Non-advocate review/independent cost assessment • Fixed price development commitments • Commitments which require executive office approval Company policy prohibits the acceptance of any high-risk fixed-price development commitments • Teaming Agreements and legal assessment • Exclusive arrangements • OCI coordination
Corporate Risk Review Business Area Sector Corporate MONTHLY VISIBILITY - Management Reports - Web Based Visibility - Contract Status Reviews - Risk Programs - Program Reviews - Financial Reviews QUARTERLY REVIEWS - Sector Programs - Business Areas - Financial - Contract Status - All Programs j j k RISK REVIEW REQUIREMENTS - Independent Cost Estimates - Non-Advocate Reviews j Corporate Quarterly Reviews Address Program/Business Area Performance and Financial Status k Contract Status is Evaluated at the Corporate Office on an Exception Basis (Risk Programs)
