IC² Zurich IC Squared 1 Enterprise Risk Management– Fad or Fact? Wolfgang F. Friedel Wolfgang F....
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Transcript of IC² Zurich IC Squared 1 Enterprise Risk Management– Fad or Fact? Wolfgang F. Friedel Wolfgang F....
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
StakeholderStakeholder
Value CreationValue Creation
Implementation/Implementation/
MeasurementsMeasurements
Cultural Cultural Buy - inBuy - in
Operational
Operational
Hazar
d
Hazar
d
Strate
gic
Strate
gic
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 Difficult
Complexity to Manage
High
Low
Fin
an
cial
Imp
act
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
AlliancesAlliances
Example: Strategic Alliance
Lever
agin
g Ris
ks
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 Profile
Business Profile
Financial Impact
Lik
elih
ood
A
B
C
D
E
F
IV III II I
Company:
Scope:
Analysis Date
Low High
High
14.04.2000
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 Difficult
Complexity to Manage
High
Low
Fin
an
cial
Imp
act
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)
Pro
bab
ility
Strategy 2
Strategy 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 20
Standard 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