relating risk measurements to strategy management

C LARITASASIA‘FOCUS ON THE FUTURE’

Claritas Asia Pte Ltd 2010

Relating Risk Measurement to Strategy Management

Effective business management in volatile times

N.S. Penny

Managing Director, ClaritasAsia Pte Ltd

July, 2010



Contents

Crisis – What Crisis??? What is the Risk Balanced Scorecard? The ‘Survive’ theme The ‘Execute’ theme The ‘Capitalise’ theme Effective reporting with the Risk Balanced Scorecard Final Conclusions And Wrap-up

C LARITASASIA‘FOCUS ON THE FUTURE’The World has changed and we have yet to

understand the full long term implications

We have never seen such volatile times – every organisation and individual is impacted in some way


C LARITASASIA‘FOCUS ON THE FUTURE’The impact on business management process

Claritas Asia Pte Ltd 2007Claritas Asia Pte Ltd 2010

• Current reporting techniques assume:

• A relatively static and predictable world

• Look mostly at financial numbers which are a view of past

performance

• Still concentrate on comparisons with budgets

• Have little or no predictive information

• Do not incorporate any risk management assessment

• Do not have ‘action triggers’

Its evident that existing management reporting approaches have proved woefully inadequate during the recent downturn

C LARITASASIA‘FOCUS ON THE FUTURE’Typically monthly budget reporting


The standard monthly management report is neither intuitive nor predictive

C LARITASASIA‘FOCUS ON THE FUTURE’Categorising and managing risk


Historically organisations have assessed risk and their response to it, in a largely standalone process, reviewed separately from normal business performance reveiws

C LARITASASIA‘FOCUS ON THE FUTURE’So where is the correlation?

On one side, we have a set of financial results which reflect an ‘after the event’ statement of financial performance. On the other side we have a set of identified risks prioritised as to overall seriousness per risk. Nothing seems to integrate these two approaches, so management is left to ‘second guess’ the impact of realised risks on business results




Some conclusions

• Senior executives do not have access to the information they need to manage the business

• Information focus is largely historical and financial

• There is little concept of íssues based reportíng

• Its easy to miss big items affecting the organisation’s survival

What does this all mean?



• Balanced Scorecard is a management process for driving the execution of the organization's strategy

• It recognizes that it is just as important to measure the drivers of tomorrow’s success as well as today’s results

• Balanced Scorecard provides a basis for developing many of the key factors of successful strategy execution such as resource allocation, personal goal setting, effective communication etc

• It provides a quantitative framework for measuring progress

Where does the Balanced Scorecard fit?

Balanced Scorecard is currently the leading approach to monitoring organisational performance. It is a start point in our quest for integrated performance and risk KPIs,…… BUT in its original form it does not explicitly address risk issues. Lets understand how we can expand it into an integrated risk and performance management system



Contents




Managing risk

• Risk management is not about eliminating risk, it is about managing risk

• Risk is associated with negative and positive outcomes

• Risk is about being prepared with thought out recovery plans

We must drive our organisation strategy forward aggressively but never loose sight of emerging dangers

C LARITASASIA‘FOCUS ON THE FUTURE’What is the Risk Balanced Scorecard?


The Risk Balanced Scorecard is a new approach using core Balanced Scorecard thinking to give you a new way to create management information that is relevant to managing in today’s volatile business environment

Survive

Execute Capitalise

Risk Balanced Scorecard reporting enables you to achieve enhanced business results during periods of exceptional marketplace volatility

• Establish critical survival parameters

• Understand key ‘tolerance thresholds’

• Raise awareness and understanding

• Recognise opportunities presented by competitors’ problems

• Understand requirements for new internal capabilities

• Prioritise and resource opportunities

• Keep focus on your long term strategy• Understand that changing targets does not mean abandoning strategic objectives• Better manage your marketplace achievement• Minimise ‘knee jerk’ reactions


The 3 components of the Risk Balanced Scorecard


• The Survive wave provides insight into changing underlying assumptions (internal and external) on which strategic plans have been built

• The Execute wave monitors progress against the chosen strategic plan

• The Capitalise wave ensures windfall opportunities are identified and progresses

Using Balanced Scorecard design principles, three macro components are used to identify the full spectrum of management issues

C LARITASASIA‘FOCUS ON THE FUTURE’In brief – Survive


Survive

• Identifies critical parameters that could affect business success e.g. oil price for an airline; market availability of staff for an IT outsourcing business

• Covers parameters that could be related to external shifts in our business environment, or could relate to internal issues encountered when executing our strategy

• Defines, for each identified parameter, what is the critical key performance indicator that we will need to keep in view

• Sets tolerance thresholds for critical event monitoring for each critical key performance indicator

• Establishes, in advance, likely action plans to be deployed for the occurrence of each critical event

C LARITASASIA‘FOCUS ON THE FUTURE’In brief – Execute


• Keeps focus on your long term strategy by monitoring progress against strategic objectives and their associated key performance indicators

• Checks need for readjustment in key areas such as resource allocation

• Monitors implementation of key strategic projects

• Checks ongoing validity of strategy based on emerging business results

Execute

C LARITASASIA‘FOCUS ON THE FUTURE’In brief – Capitalise


• Recognises opportunities presented by competitors problems

• Understands requirements for new internal capabilities

• Prioritises allocation of resources against new opportunities

• Tracks results from new opportunity

Capitalise



The ‘Risk Balanced Scorecard’ creates a model based around 3 overarching ‘macro strategy waves’ and using the existing four perspectives of the balanced scorecard

• Focuses on company specific indicators where adverse movements can threaten the organization's continued existence

• Establishes tolerances for each indicator at which criticality is reached

• Develops mitigating actions in advance, thus allowing for considered, but speedy response to crisis

A new model for Performance Management

• Recognises that strategy implementation is still the key priority even in times of economic downturn

• Develops a balanced scorecard strategy map framework as before to monitor implementation progress

• Resets targets where appropriate to recognise changed external circumstances

• Identifies emerging opportunities

• Creates action plans and charts progress on rapid reaction to such opportunities

Survive Execute Capitalise


How would a strategy map look for a Risk Balanced Scorecard?


An indicative Risk Balanced Scorecard strategy map for an IT outsourcer



Contents




The ‘Survive’ wave starts with the creation of an organization specific ‘driver tree’ from which key areas with the potential to threaten survival are identified

Value driver tree for a manufacturing business

FOR ILLUSTRATION ONLY

C LARITASASIA‘FOCUS ON THE FUTURE’Using Value Driver Trees to establish risk


Source: SAP-SEM software

By developing such a value driver tree for your business it becomes possible to quantify the level of impact (effect) of various business drivers


Some far sighted organisations are already using driver trees to identify risk areas


Driver trees have identified risk at an Australian government insurance organisation. With trees in place, the extent of risk in individual areas can be better assessed



Creating your Survive metrics

The outputs from the value tree analysis can be grouped within the balanced scorecard’s four perspective framework

Perspective Objective Measure

Financial Manage cost of funding Average cost of borrowing

Customer Minimise dependency on major customers

% of total revenue from top 5 customers

Internal Secure continuous raw material sourcing

% of key parts sourced from single supplier only

Learning & growth Protect key accounts Turnover rate in key account managers

C LARITASASIA‘FOCUS ON THE FUTURE’The Survive theme on the strategy map


Based on our prior analysis we can construct the Survive theme of our strategy map



Setting corrective actions

With objectives and measures in place, you can then set critical thresholds that trigger pre determined corrective action

Measure Critical threshold Corrective action

Average cost of borrowing

Base rate + 2% TBD

% of total revenue from top 5 customers

60% TBD

% of key parts sourced from single supplier only

25% TBD

Turnover rate in key account managers

15% TBD



Contents




The Execute theme focuses on making the chosen strategy happen

• Track progress against the plan focusing on the key strategic issues

• Identify variances to plan on an exception basis

• Determine whether the issue is execution or one of underlying strategy

• Determine corrective action plans and assign responsibility

• Follow up and monitor on a monthly basis

In the previous model we examined how to manage underlying and external factors that might affect business continuity. In the Execute theme we manage achievement of our chosen strategy. This is the traditional area of focus for a Balanced Scorecard

C LARITASASIA‘FOCUS ON THE FUTURE’The Execute theme on the strategy map


Based on our prior analysis we can construct the Execute theme. This may be done in a summarised form for high level clarity



Contents




The Capitalise theme focuses on windfall or new business opportunities

• Institute a monitoring process to track competitors and market activity

• Use techniques like Blue Ocean Strategy to uncover new value opportunities

In a crisis its easy to forget that opportunity still exists. The Capitalise theme provides a model for ensuring that this important component of long term success is not forgotten

C LARITASASIA‘FOCUS ON THE FUTURE’The Capitalise theme on the strategy map


Based on our prior analysis we can construct the Capitalise theme of our strategy map



Contents

Crisis – What Crisis??? What is the Risk Balanced Scorecard? The ‘Survive’ theme The ‘Execute’ theme The ‘Capitalise’ theme Effective reporting with the Risk Balanced

Scorecard Final Conclusions And Wrap-up



Emerging from the ‘Risk Balanced Scorecard’ development is a newly designed monthly reporting format built around ‘SEC’

A new model for Balanced Scorecard

1. Opening Remarks & Confirmation of Minutes2. Update on Critical Prior Month Issues3. Current month CMS Review

‘Survive’ Review Critical Tolerances Breached Critical Tolerances Under Threat New Criticalities Detected

‘Execute’ Review Key Issues from Strategy Waves

‘Capitialise’ Review Progress on Prior Opportunities Newly Emerging Opportunities

4. Update on Other Prior Month Issues5. Summary of Agreed Meeting Actions and Responsibilities6. AOB

1. Opening Remarks & Confirmation of Minutes2. Update on Critical Prior Month Issues3. Current month CMS Review

‘Survive’ Review Critical Tolerances Breached Critical Tolerances Under Threat New Criticalities Detected

‘Execute’ Review Key Issues from Strategy Waves

‘Capitialise’ Review Progress on Prior Opportunities Newly Emerging Opportunities

4. Update on Other Prior Month Issues5. Summary of Agreed Meeting Actions and Responsibilities6. AOB


The CMS strategy map is the guiding document for the report


Each objective is colour coded to indicate positive or negative performance against the pre determined key performance indicators and targets



Critical issues analysis is prepared from each review meeting

Ref(REFERS

TO RELEVANT

REPORT PAGE)

Strategy Map

objective(s)

impacted

Key Issues (1)

(INDICATIVE)

Analysis Impact (2) Proposed actions (3) Due Date for

resolution

Responsibility

YTD sales performance adversely impacted by failure to grow business from XXXXXXX key account

Growth from XXXXXXX is expected to continue below forecast for current year. Other key accounts are on target, but offer little further scope for expansion beyond existing targets

- USD 10m revenue impact on current year results

Sales team requested to identify other short term opportunities in existing Tier 2 accounts; regional sales heads to review opportunity for fast track sales closing based on existing opportunity lists; regional çlose teams established to facilitate fast track close at identified accounts

(1) Refers to any performance issue adversely impacting , or likely to impact, the achievement of highest level business results

(2) Quantified year end sales and/or profit impact where available if problem is not resolved or continues at current levels

(3) Initial proposed actions from responsible executive (to be debated at review meeting)

Typically one page per issue. Issues should be identified by relevant business executives in advance in conjunction with an internal strategy management team. The issues should relate to strategy map ‘red’ items and should set the agenda for a major part of the discussion at the meeting. Progress on any item raised as critical will be reviewed at start of next meeting



The new monthly reporting format should be supported by highly intuitive graphic delivery of information

A new model for reporting

Source:Metapraxis Ltd.




Contents




• The Risk Balanced Scorecard extends current thinking on performance reporting

• It integrates risk management with strategy execution• It requires a newly re engineered monthly

management process• It builds on the proven approach of the Balanced

Scorecard• It helps prevent unforeseen shocks

Some final thoughts

Lets talk



For more information, contact us at:

ClaritasAsia Pte Ltd391B Orchard Road#23-01 Ngee Ann City Tower BSingapore 238874

Tel: +65 6832 8050 Mobile +65 9815 7830

www.claritas-asia.com

www.nigelpenny.com

email: [email protected]

Material used in this workshop is based on original ground breaking work by Chan Kim and Mauborgne (Blue Ocean Strategy) and Norton and Kaplan (Balanced Scorecard). Additional material regarding strategy waves and risk balanced scorecard is based on original work by

Nigel Penny. The opinions expressed in these slides and in the workshop do not necessarily represent the views of the founders of either of the business approaches referred to, neither does it imply any endorsement of ClaritasAsia Pte Ltd or Nigel Penny by any of the aforenamed

or their official agents or partners.

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