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Enterprise Risk Management (ERM) in the EPC Industry
ECRI Conference
December, 2017
2
One column textJacobs to Acquire CH2M
to Create Premier $15
Billion Global Solutions
Provider Business Wire August 02, 2017
Huge nuclear cost overruns push Toshiba’s Westinghouse into bankruptcy
Reuters March 29, 2017
Is CB&I Hiding A Debt Problem?
Train technology updates delayed by cost, complexity
Positive train control (PTC)
3
With you today
Mike Wilson
Principal, US National Lead for ERM
KPMG
Paul Rajmaira
Commercial Strategies and Risk
Fluor
44
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
ERM maturity in the EPC industry3
ERM at Fluor4
Adapting an ERM Framework5
Key Learnings6
55
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
ERM maturity in the EPC industry3
ERM at Fluor4
Adapting an ERM Framework5
Key Learnings6
6
Enterprise Risk Management – Content and Process
What is ERM?
ERM is a system of processes for the identification, analysis, evaluation and economic control of
existing and potential risks (both threats and opportunities) intended to enhance quality/ safety, protect
reputation and increase the likelihood of achieving corporate / performance objectives.
In practice ERM is about two things - Content and Process...
Identifying, evaluating and
prioritizing enterprise risks
Risk Strategy
and Appetite
Risk
Governance
Risk
Culture
Risk
Assessment &
Measurement
Risk
Management
& Monitoring
Risk
Reporting &
Insights
Data &
Technology
Building and maintaining a dynamic
and sustainable Enterprise Risk
Management program
Creating Content
Creating Process
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
Components of an effective ERM programWhat is ERM?
Risk Strategy and Appetite Risk Governance Risk Culture
Risk Assessment and
Measurement
Risk Management and
Monitoring
Risk Reporting
and InsightsData and
Technology
Linkage to corporate strategy
Board Oversight and Committee
Knowledge and Understanding
Risk Definition and taxonomy
Risk Mitigation, Response and Action Plans
Risk ReportingData Quality
and Governance
Risk StrategyCompany Risk
Operating Structure
Belief and Commitment Risk Identification
Testing, Validation and Management’s
Assurance
Business/Operational
RequirementsRisk Analytics
Risk Appetite and Tolerance
Risk Guidance
Competencies and Context
Assessment and Prioritization
MonitoringBoard and Senior
Management Requirements
Technology Enablement
Roles and Responsibilities
Action and Determination
Quantitative Methods and
Modeling
Risk in Projects/Initiatives
External Requirements
DecisionSupport
Risk Aggregation,Correlation and Concentration
Scenario Analysis and Stress
Testing
Capital and Performance Management
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
Actual risk profile
What does the company’s risk profile look like
given the current state of risk strategies and plans?
Risk appetite and risk capacity
Risk appetite
How much risk is the company willing to accept in
pursuit of value and growth?
Risk-taking capacity
What is the maximum risk that the company can possibly take, given appetite,
linked to available capital or equity, liquid assets, borrowing capacity, resources?
Target risk profile
Given the risk appetite and capacity, what should the company’s risk
profile look like, considering business objectives and external perceptions?
What is ERM?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
99
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
ERM maturity in the EPC industry3
ERM at Fluor4
Adapting an ERM Framework5
Key Learnings6
10
Enterprise Risk Management – Why do it?
By evaluating the threats and opportunities to strategy and objectives, ERM closely links risk,
strategy, and performance, enabling management to make more informed decisions.
Governance
Governance
— Adhere to better practice principles of corporate governance (COSO ERM
Framework, NACD ”core principles” etc.)
— Meet rating agency expectations
— Federal sentencing guidelines principles - foundation for effective corporate
compliance
StrategyStrategy
— Provide a competitive advantage versus industry peers
— Link strategic planning objectives to enterprise risks to align key priorities with
senior management
Operational
Performance
Operational Performance
— Provide greater transparency on events that impact desired performance
— Enhance ability to meet goals through targeted action and clear accountability
— Supports an organization-wide “Risk-Aware” culture
— Better leverage of supporting systems and tools to optimize operational
effectiveness
Why is it a “hot topic”?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1111© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG global survey: “Calibrating strategy and risk”
Why is it a “hot topic”?
If you aren’t constantly assessing
strategy and risk, and adjusting as
you go, there’s no way you’re keeping
pace as a business or a board.
12
ERM capabilities & trends
IDENTIFYING, FOCUSING AND RESPONDING TO THE RIGHT RISKS
— Linking risk to the strategy process
— Understanding risk interconnectivity
— Applying scenario analysis
CONSIDERING BOTH UPSIDE VERSUS DOWNSIDE RISK
— Articulating risk appetite and capacity
— Identifying signals of change
— Moving beyond only protecting downside
RISK MANAGEMENT STRUCTURE AND GOVERNANCE
— Articulating ‘plain English’ risk program strategy
— Clarifying roles and responsibilities to operationalize the risk program
RISK CULTURE
— Understanding risk culture and its impact
— Targeted risk communication, awareness and training
— Performance management
VALUE ADDED RISK AND COMPLIANCE PROCESSES
— Performance versus process effectiveness
— Risk program ‘report card’
— Considering the convergence of governance, risk and compliance
Why is it a “hot topic”?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13
Dynamic risk assessment vs. traditional risk assessment
Why is it a “hot topic”?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
Risks or opportunities?
Megatrends and
disruptive innovations
have emerged that
may pose new risks –
or new opportunities
“Disruptive business
models can change
stable industries in a
heartbeat”
Additive 3D printing
used in supply
chains
Sharing economy –
app-based business
models
Smart materials
reshaping industry
and our lives
Analysis of big data to
predict changes in
consumer preferences
App-based process
re-engineering and
activation
Aerial devices for
deliveries, security,
medical response, etc.
Why is it a “hot topic”?
15
Risk Culture – What is below the surface?Why is it a “hot topic”?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16
Convergence of governance, risk & compliance
Multipurpose
risk assessment
Joint activity planning
and sequencing
Coordinated
control testing
Shared access to data and results Joint risk and
control monitoring
Streamlined, transparent, and focused management reporting
Governance, Risk & Compliance
Why is it a “hot topic”?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1717
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
ERM maturity in the EPC industry3
ERM at Fluor4
Adapting an ERM Framework5
Key Learnings6
18
ERM maturityIntegrated Basic Sustainable Mature Advanced
ERM maturity in the EPC industry
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1919
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
Adapting an ERM Framework5
Key Learnings6
ERM at Fluor4
ERM maturity in the EPC industry3
20
Enterprise Risk Program HistoryERM at Fluor
ERM Practice
Risk Register
Enterprise
Risk
Assessment
Annual
Survey
Risk Profile
Management
Capability
® © 2017 Fluor. All rights reserved.
21
Actual risk profile
What does the company’s risk profile look like
given the current state of risk strategies and plans?
Risk appetite and risk capacity
Risk appetite
How much risk is the company willing to accept in
pursuit of value and growth?
Risk-taking capacity
What is the maximum risk that the company can possibly take, given appetite,
linked to available capital or equity, liquid assets, borrowing capacity, resources?
Target risk profile
Given the risk appetite and capacity, what should the company’s risk
profile look like, considering business objectives and external perceptions?
What is ERM?
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22
Risk Profile - So What?
Top 5 Global Risks in Terms of Impact
ERM at Fluor
Major systemic
financial failureFiscal crises Water crises
Failure of climate-
change mitigation
and adaptation
Weapons of mass
destruction
Water supply crises Climate change
Rapid and massive
spread of infectious
diseases
Weapons of mass
destruction
Extreme weather
events
Chronic fiscal
imbalancesWater crises
Weapons of mass
destructionWater crises Water crises
Diffusion of
weapons of mass
destruction
Unemployment and
underemployment
Interstate conflict
with regional
consequences
Large-scale
involuntary
migration
Major natural
disasters
Failure of climate-
change mitigation
and adaptation
Critical information
infrastructure
breakdown
Failure of climate-
change mitigation
and adaptation
Severe energy
price shock
Failure of climate-
change mitigation
and adaptation
2013 2014 2015 2016 2017
World Economic Forum Global
Risks Report 2017Economic Environmental Geopolitical Societal Technological
® © 2017 Fluor. All rights reserved.
23
Risk Profile - So What?ERM at Fluor
ERM
Practice,
Risk Register
Enterprise
Risk
Assessment
Annual
Survey
Risk Profile,
Management
Capability
ERM Policy,
Feedback
Loop,
Strategic
Linkage
®
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
2424
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
Key Learnings6
Adapting an ERM Framework5
ERM maturity in the EPC industry3
ERM at Fluor4
25
Understanding Various Frameworks
▪ COSO – The Committee of Sponsoring Organizations of the Treadway Commission
▪ RIMS – Risk and Insurance Management Society, Inc.
▪ ISO
▪ EU Regulations
▪ Published Consultant Documents
▪ BOD Guidance (NACD, Conference Board)
▪ Academic Research
Adapting an ERM Framework
A VALUE BASED APPROACH TO ENTERPRISE RISK MANAGEMENT
IN THE ENGINEERING & CONSTRUCTION INDUSTRY
by
Dr. Sean Paul de la Rosa
®
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
26
Fluor’s Definition of ERM
▪ Risks that, either individually or when aggregated across projects or the enterprise, affect any
or a combination of the following:
• Sustainability of the enterprise
• Ability to achieve company objectives
• Ability to implement business strategies
• Fluor’s business model, and
• Fluor’s reputation
Adapting an ERM Framework
®
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
27
Jacobs to Acquire CH2M
to Create Premier $15
Billion Global Solutions
Provider Business Wire August 02,
2017
Train technology updates delayed by cost, complexity
Positive train control (PTC)
ERM Principles in the EPC ContextAdapting an ERM Framework
®
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
Strategies & Business Objectives
▪ Vertical integration
▪ M&A vs. organic growth
▪ Geographic expansion
▪ High-value execution
Business Model
▪ Process Technology
▪ IT
▪ Joint ventures
▪ Commoditization
Huge nuclear cost overruns push Toshiba’s Westinghouse into bankruptcy
Reuters March 29, 2017
Enterprise Sustainability
▪ HSE
▪ Corporate finance (cash, debt, liquidity, solvency)
▪ Fixed price content
Is CB&I Hiding A Debt Problem?
Reputation
▪ Investors & analysts
▪ Client perception
▪ Government standing
28
Working with KPMG
▪ Series of workshops
• Assessment
o Goals and objectives
o Current and future state
o Existing documents and metrics
• Education and alignment
• Planning
• Strategizing
• Re-assessing…
▪ Share forum
Adapting an ERM Framework
®
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
2929
Enterprise Risk Management
What is ERM?
— History and overview1
Why is it a “hot topic”?2
Key Learnings6
ERM maturity in the EPC industry3
ERM at Fluor
— Working with KPMG4
Adapting an ERM Framework5
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
30
Key Learnings
▪ ERM needs to be driven from the top.
▪ Stakeholder management >> Technical sophistication
▪ Understand your organization’s absorptive capacity
▪ Identify shared interests
▪ People respond enthusiastically when given a voice
▪ Significant effort and treasure can be spent with little to show for it
ERM in the EPC Industry
®
©2017 Fluor. All rights reserved.
HO20170668-001 ERM pres.pptx
Questions
Thank you
Mike Wilson, US National Lead for ERM
KPMG
312- 771-2376
michaelwilson@kpmg.com
Paul Rajmaira, Commercial Strategies and Risk
Fluor
281-637-1497
paul.rajmaira@fluor.com
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