risk and complexity in 21 st century organisations saturday 4 october 2014 cima conference:...

Risk and Complexity in 21st Century Organisations

Saturday 4 October 2014

CIMA Conference: Essential management accounting tools

Why do people matter?

Human nature is …Individualist … or … collectivist

What do you believe … ?

I or C? Which do you think?

The way we live …“superiors” tell “inferiors” … or … “equals” negotiate the “rules”

Prescribed/In-equal … versus … Prescribing/Equal

Tell or Negotiate? T or N? Which way does it work?

©AndersonRisk, 2014

And cultural theory...

Fatalist

Individualist

Egalitarian

Hierarchist

Richard BransonPhilip GreenEntrepreneur

GreenpeaceEnvironmentalist

Prince Charles

Typical Government Chief Scientist

What will be will be

I C

Tell

Negotiate©AndersonRisk, 2014

How do we spot them?

to me…

to my competitor

to someone else

to me

It happened…

It happened…

It happened…

It might happen…


The extended enterprise

Joint Endeavour

Outcom

es

Multiple Economies in Multiple Societies


Multiple Economies in Multiple Societies

The extended enterprise

Joint Endeavour

Outcom

es

Customer 1

Customer 2

Customer 3

IP OwnerRegulator

Sub-Contractor 1

Sub-Contractor 2

IT Outsource Provider

Government

Supplier 1

Supplier 2

AgentsPrime Contractor

Labour


The extended enterprise economy

• A complex system is one in which even knowing everything there is to know about the system is not sufficient to predict precisely what will happen.

• Complex systems cannot be controlled – only influenced.

• Simple systems behave more like complex systems when under stress.


Paradox: not susceptible to logical analysis

Chaos &ParadoxVolatility

Uncertainty

Complexity

Ambiguity

VUCA!


Single enterprise or joint endeavour?


The Social Dynamics of the extended enterprise

Joint Endeavour

Outcom

es

Multiple Civil Societies

Extent of Shared Values

Allocation of Incentives

Relative Power

Regu

lato

ry

Influ

ence


What can we manage?


Assurance and the risk manager

• Scale of the problem:• Simple Them Complex

•Nature of the issue• Operational Strategic

•Approach• Tools for Risk Management Conversations in risk


Risk Appetite and Tolerance

Risk Culture

Two management disciplines that must be “extended”


Risk Appetite

Level Propensity to take risk

Propensity to exercise

control

Strategic

Tactical

Project/ Operational

Measurement

Stakeholder Value

Risk Metrics

Control Metrics

Risk Taking

Exercising Control

Dele

gatio

nEscalation


So what does this mean in practice?

A

B

t0 t1

Perf

orm

ance

Time

Current direction of travel for performance

A

B

t0 t1

Perf

orm

ance

Time

Where you might get to if everything goes right

D

CWhere you might get to if everything goes wrong

A

B

t0 t1

Perf

orm

ance

Time

D

C

Risk U

niverse

t0 t1

Perf

orm

ance

Time

Tolerance

t0 t1

Perf

orm

ance

Time

Appetite


What do risks have in common?

Directly Discernible

Visible through Science

Virtual

Not a lot of prior institutional or individual experience

Lots of perspectives or possible outcomes

People liberated to argue from their own preconceptions

Directly experienced in day to day activities

Cannot imagine life without balancing these risks

Manageable through science

For example treasury, foreign exchange, some IT

risks


Achieving objectives depends on...

– risk of taking on too much risk which becomes unmanageable

Avoiding unnecessary problems

– risk of avoiding everything, resulting in total inaction

– risk of over-stretch resulting in burn-out

Creating the right performance culture

Setting appropriate corporate “ethics” and behaviours

– risk of sclerosis as every stakeholder of every decision is consulted

Taking more managed risk


Zone

3De

ad Z

one

Zone

1De

ad Z

one

Zone

2Pe

rfor

man

ceZo

ne

Long

Term

Per

form

ance

Low

High

Low High(i) Managed Risk Taking or (ii) Avoiding Pitfalls or (iii) Performance Culture or (iv) Corporate Ethics

and BehavioursAttribute:

And doing the right amount of each


Balanced Risk

PerformanceCulture

CorporateEthics

AvoidingPitfalls

More ManagedRisk

PerformanceZone

DeadZones


Enron? Or the Big Banks?

PerformanceCulture

CorporateEthics

AvoidingPitfalls

More ManagedRisk

PerformanceZone

DeadZones


UK plc?

PerformanceCulture

CorporateEthics

AvoidingPitfalls

More ManagedRisk

PerformanceZone

DeadZones


The objective

PerformanceCulture

CorporateEthics

AvoidingPitfalls

More ManagedRisk

PerformanceZone

DeadZones


And you…?

PerformanceCulture

CorporateEthics

AvoidingPitfalls

More ManagedRisk

PerformanceZone

DeadZones


So what?

PerformanceCulture

CorporateEthics

AvoidingPitfalls

More ManagedRisk

We want to create the mechanisms by

which these risks can be taken to your

advantage

We need to avoid these without

squashing your whole purpose and

spirit

Your’ culture has to be supportive of RM. We cannot cut across the

corporate culture or go against the grain

Do you have a can do/will do culture:

this needs to be supported by

appropriate, but not stifling, RM


So what does this mean in practice?

A

B

t0 t1

Perf

orm

ance

Time

Current direction of travel for performance

A

B

t0 t1

Perf

orm

ance

Time

Where you might get to if everything goes right

D

CWhere you might get to if everything goes wrong

A

B

t0 t1

Perf

orm

ance

Time

D

C

Risk U

niverse

t0 t1

Perf

orm

ance

Time

Tolerance

t0 t1

Perf

orm

ance

Time

Appetite


The bottom line for risk management?

Start here...

Get it right =>

Shareholder value growth

Get it wrong=>

Shareholder value destruction

Bridgin

g the ga

p

Exce

llent

com

pete

ncy

in ri

sk

man

agem

ent

•Managing more risk taking•Avoiding pitfalls•Excellent performance culture•Great corporate ethics and behaviours


Six components

Risk Appetite1

Business Context

Stra

tegy

Risk

s

Geog

raph

y

Segm

ents

2Risk

Capab-ility

Capa

city

Mat

urity

3Risk and Control

Risk

Taki

ng

Cont

rol

4Measurement

SH/H

Val

Key

Data

Gove

rnan

ce

mod

el

5Assurance

Sour

ces

Alig

nmen

t

Risk

Bas

ed

6Board

Report-ing

Inte

rnal

Exte

rnal


DATA

Risk DataBoard and Senior

Management

Vision

Risk Assurance Risk AppetiteStrategy

Operating Model

PolicyProcess

Controls


Risk Capability

A function of1. Capacity (how much

you can carry?); and 2. Maturity (how much

can your people cope?)


IRM Risk Culture Framework

IRM’s risk culture framework looks at component parts making up an organisation’s risk culture• How will I react?• How will I respond in recognition of

other competing needs?• What will I do?• What will we do?• Our overall risk culture

Risk Culture

Organisational Culture

Behaviours

Personal Ethics

Personal Predisposition to

Risk


Risk culture aspects model

Risk CultureTone at the

Top

Risk

Lea

ders

hip

Deal

ing

with

Ba

d N

ews

Governance

Acco

unta

bilit

y

Tran

spar

ency

Decisions

Info

rmed

Risk

De

cisio

ns

Rew

ard

Competency

Risk

Res

ourc

es

Risk

Ski

lls


Leadership in complex systems

Relationships & behaviours

Draw on widely diverse perspectives

Adopt open enquiring mindset

Go out of your way to

make connections

Tasks& ideas

Be Clear

Be Curious

Be Courageous

Invest in promoting

values

Establish compelling

vision

Embrace uncertainty

Distribute leadership &

decisions


Conversations in risk management

You

CEO EE Partners

Suppliers Clients

IP ownerBack Office


Management campaign

Take Stock

ParticipantsPurposeRolesValuesRewardsCultureAppetite

Target Operating Model

Rules of engagementDesired outcomesGovernanceInformation sharingRisk Management

Gap Analysis

Shortfalls from TOMRoute map to achievementAddress information asymmetries Next steps

Action

ImplementCheckImplementCheckImplementCheck

Assurance

ConfirmationHarvest benefitsShare lessons

Desired Outcom

es


An approach to starting

1. Articulate strategy in terms of value drivers2. Identify relevance and urgency of objectives, plans

and projects3. Identify both what needs to go right and what might

go wrong4. Develop responses5. Document, keep fresh and share with staff (ie make it

cultural)


Value drivers

Hard financial drivers• Profitable turnover growth• EBITDA• Cash tax• Interest• Capital expenditure• Changes in working capital• Competitive advantage period

Soft drivers• Human capital• Intellectual property• Innovation• Partnerships• Joint ventures• Reputation


Some questions for the board

• How complex is our business operating model?• What additional risks does complexity pose?• Do we understand the risk tolerance associated with the

complexity?• How do we manage these risks?• How do we get helpful risk information?• How do we get sufficient assurance on our risk management

investment?


We use our knowledge, skills and experience, combined with proven tools, techniques and approaches, which we leave behind for them to carry on using long after we have

finished, to transform their business. As a consequence they

will face the future with more familiarity, they will feel more confident about their current

position and they will be organised to go forward into these uncertain

futures.

This means that we must work with our organisations

to re-imagine how they manage themselves, to

make sure that they know where they are on important matters and to be confident

that they know how to address uncertain futures.

I passionately believe that we

can make uncertain futures

much more manageable...


The bottom line

Risk Management should be the disruptive intelligence that pierces

perfect-place arrogance


THANK YOU

Richard AndersonMob: +44 (0)7807 780284Email: [email protected]: www.AndersonRisk.comBlog: http://andersonrisk.com/conversations/

©CIMA

mailto:[email protected]

http://www.AndersonRisk.com/

http://andersonrisk.com/conversations/

http://andersonrisk.com/conversations/

risk and complexity in 21 st century organisations saturday 4 october 2014 cima conference:...

Documents