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ERM!!!

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ERM!!!

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  1. ERM!!! Enterprise Risk Management Not just insurance, auditing, risk analysis A philosophy – A way of business Olson: ERM1

  2. Definition • Systematic, integrated approach • Manage all risks facing organization • External • Economic (market - price, demand change) • Financial (insurance, currency exchange) • Political/Legal • Technological • Demographic • Internal • Human error • Fraud • Systems failure • Disrupted production • Means to anticipate, measure, control risk Olson: ERM1

  3. DIFFERENCES Olson: ERM1

  4. Risk & Business • Taking risk is fundamental to doing business • Insurance • Lloyd’s of London • Hedging • Risk exchange swaps • Derivatives/options • Catastrophe equity puts (cat-e-puts) • ERM seeks to rationally manage these risks • Be a Risk Shaper Olson: ERM1

  5. Types of RiskStroh [2005] • External environment • Competitors; Legal; Medical; Markets • Business strategies & policies • Capital allocation; Product portfolio; Policies • Business process execution • Planning; Technology; Resources • People • Leadership; Skills; Accountability; Fraud • Analysis & reporting • Performance; Budgeting; Accounting; Disclosure • Technology & data • Architecture; Integrity; Security; Recovery Olson: ERM1

  6. Another viewSlywotzky & Drzik, HBR [2005] • Financial • Currency fluctuation • DEFENSE: Hedging • Hazard • Chemical spill • DEFENSE: Insurance • Operational • Computer system failure • DEFENSE: Backup (dispersion, firewalls) • New technology overtaking your product • ACE inhibitors, calcium channel blockers ate into hypertension drug market of beta-blockers & diuretics • Demand shifts • Gradual – Oldsmobile; Rapid - Station wagons to Minivans Olson: ERM1

  7. Industry Margin Squeeze • Pharmaceutical R&D • Cost escalation • Semiconductor industry • Airline deregulation • Suppliers gain upper hand • Flat panel displays, Intel direct marketing • Cycle volatility • DEFENSE: Shift compete/collaborate ratio • Coproduction; supply chain coordination; joint R&D; collaborative marketing • Airlines, Utilities, Textiles, Steel, Music, Autos Olson: ERM1

  8. Technology Shift • Loss of patent protection • Outdated manufacturing process • DEFENSE: Double bet • Invest in multiple versions of technology • Microsoft: OS/2 & Windows • Intel: RISC & CISC • Motorola didn’t – Nokia, Samsung entered Olson: ERM1

  9. Brand Erosion • Perrier – contamination • Firestone – Ford Explorer • GM Saturn – not enough new models • DEFENSE: Redefine scope • Emphasize service, quality • DEFENSE: Reallocate brand investment • AMEX – responded to VISA campaign, reduced transaction fees, sped up payments, more ads Olson: ERM1

  10. One-of-a-kind Competitor • Competitor redefines market • Wal-Mart • DEFENSE: Create new, non-overlapping business design • Target – unique product selection Olson: ERM1

  11. Customer Priority Shift • DEFENSE: Analyze proprietary information • Identify next customer shift • Coach leather goods – competes with Gucci • Went trendy, aggressive in-market testing • Customer interviews, in-store product tests • DEFENSE: Market experiments • Capital One – 65,000 experiments annually • Identify ever-smaller customer segments for credit cards Olson: ERM1

  12. New Project Failure • Edsel • DEFENSE: Initial analysis • Best defense • DEFENSE: Smart sequencing • Do better-controllable projects first • Applied Materials – chip-making • DEFENSE: Develop excess options • Improve odds of eventual success • Toyota – hybrid: proliferation of Prius options • DEFENSE: Stepping-stone method • Create series of projects • Toyota – rolling out Prius Olson: ERM1

  13. Market Stagnation • DEFENSE: Generate demand innovation • House of Quality? • Air Liquide industrial gas • Developed technology allowing customers to establish small gas production facilities on-site Olson: ERM1

  14. Means to Control Enterprise Risk • Honeywell (1997) • Multi-year contract combining property, liability, option hedging risks against adverse currency exchange rates • Dickinson [2001] • Holistic approach • Extend contingency planning with comprehensive internal risk management systems • CRO / CEA • Chief Risk Officer / Chief Auditing Executive Olson: ERM1

  15. COSOCommittee of Sponsoring OrganizationsTreadway Committee – 1990sSmiechewicz [2001] • Assign responsibility • Board of directors • Establish organization’s risk appetite • establish audit & risk management policies • Executives assume ownership • Policies express position on integrity, ethics • Responsibilities for insurance, auditing, loan review, credit, legal compliance, quality, security • Common language • Risk definitions specific to organization • Value-adding framework Olson: ERM1

  16. COSO Integrated Framework 2004Levinsohn [2004]; Bowling & Rieger [2005] • Internal environment – describe domain • Objective setting – objectives consistent with mission, risk appetite • Event identification – risks/opportunities • Risk assessment - analysis • Risk response – based on risk tolerance & appetite • Control activities • Information & communication – to responsible people • Monitoring Olson: ERM1

  17. Risk Management Tools • Simulation (Beneda [2005]) • Monte Carlo – Crystal Ball • Multiple criteria optimization (Dash & Kajiji [2005]) • Goal programming - tradeoffs • SYSTEMS FAILURE METHOD • Information Systems Project Management Olson: ERM1

  18. ERM SoftwareRhoden [2006] Penny [2002] • Algorithmics Incorporated – ERM software, global financial institutions Jane’s Defence Industry [2005] • Strategic Thought – Active Risk Manager – defence industry Rhoden [2006] • Q5AIMS • From Q5 Systems Ltd • Safety audit & corrective action tracking • Mobile devices, Web-link • Preceptor • Learning management system • Regulatory compliance, technical training • PicketdynaQ • Workplace audit & assessment management • Regulatory references built in Olson: ERM1

  19. Experiences with ERM • Walker [2003] • FirstEnergy Corp – auditing, problem-solving • Wal-Mart – best auditing practices, governance • Unoval – auditing to consultation • Canada Post – auditing efficiency • GM – corporate governance • Kleffner et al. [2003] • Canadian risk & insurance • 31% adopted ERM Olson: ERM1

  20. UnitedHealth ManagementStroh [2005] Olson: ERM1

  21. UHM Lessons Learned • ERM value must be apparent to executive sponsors in a timely fashion • Begin the process by focusing on the most important risks, thus avoiding swamping the organization with all possible risks, which would likely discourage participation • Obtain sponsorship, and assign accountability for specific risks to responsible organizational members • Standardize approaches where possible, setting minimum thresholds of execution • Develop a diverse set of ERM team members • Keep ERM implementation simple Olson: ERM1

  22. ERM Research • Mostly descriptive, frameworks • SURVEY • Lynch-Bell [2002] surveyed 52 companies • Examined practices of governance, strategy, processes, technology, functions, culture • Milladge [2005]; Gates [2006] surveyed 271 members of the Conference Board • Skelton & Thamhain [2003]; Thamhain [2004] • 3 year field study R&D product development • Suggest look-ahead simulation, rapid prototyping to anticipate problems • Beasley et al. [2005] • Gathered data on 123 organizations, found ERM implementation positively related to: • Chief risk officer presence • Board independence • Top management support • Big Four auditor presence • Entity size • Banking, Education, Insurance Olson: ERM1