bridging the gap: how to turn your biggest risks into strategic … · 2020. 9. 2. · bridging the...

Copyright © 2013 Deloitte Development LLC. All rights reserved. 1

Partner, Strategic Risk Practice Deloitte United Kingdom

Hans-Kristian Bryn

Bridging the Gap: How to Turn Your Biggest Risks into Strategic Opportunities

Andrew Blau Director, Monitor Deloitte Deloitte Consulting LLP

Charles Alsdorf Director, Advisory Services Deloitte Financial Advisory Services LLP

1


•  The new environment of risk and the challenge for CFOs

•  How to bridge the capability gap?

•  Implementation considerations and concerns

Agenda


The new environment of risk and the challenge for CFOs


Our research indicates an increased focus on managing strategic risk

What are the mechanisms that organizations use to achieve this?

Exploring strategic risk Does your organization have an explicit focus on managing strategic risks?

Executive ownership Who primarily determines your company's approach to managing strategic risk?

Changing approaches Has your approach to managing strategic risks changed in the past three years?

Source: Deloitte/Forbes Insights Exploring Strategic Risk, 2013


Companies face high levels of uncertainty from external and internal sources

Financial Strategic

Executive challenges Investor questions

• How prepared are we for the risks and opportunities that inevitably lie ahead?

• How should we invest in our business to drive optimal returns?

• As a CFO, what is my own, personal “black swan” and how should we plan for it?

• How are the executives planning for future value creation/protection?

• What upside/downside risk do you see on the forecasts and dividends?

• How are strategic and emerging risks managed within the business?

• What is the best use for the cash on the company's balance sheet?

• What risk factors will affect the stock going forward?

• How much do key uncertainties expose our future cash-flow positions?

• How should we effectively allocate capital to ensure a suitable risk-adjusted return?

• How can strategy, risk, and finance work as one?

• How should we define our risk appetite?


Financial forecasting & budgeting

Strategic planning & strategy development

Risk management

Business structure & portfolio management

Investment decision making (organic & inorganic) St

rate

gic

focu

s

Tact

ical

focu

s

CFOs are managing risk across a range of executive functions…


…and must address distinct challenges over different time horizons



Risk management


Core area Short-term Medium-term Long-term

Investment decision making (organic & inorganic)

Setting short-term strategic goals and executing within the business

Identifying value creation opportunities and developing strategy

Preparing to succeed in future markets; succession planning

Optimizing investment portfolio (e.g., small-scale acquisitions, capex)

Aligning portfolio requirements against strategic targets

Building future drivers of value into the portfolio (e.g., brand value)

Understanding the probability of a specific budget being delivered

Effectively linking financial planning processes with risk-return approaches

Reliably analyzing the exposure to emerging risks with long-range forecasts

Executing investments; driving value in investment appraisal process

Targeting future investments to optimize risk-adjusted returns

Verifying “seed capital” investment is applied for innovation

Enhancing BAU risk-return decision making (e.g., hedging, op risk)

Defining risk appetite and tolerances and enabling their practical use

Considering what new risk capabilities are needed to support strategic execution

Stra

tegi

c fo

cus

Tact

ical

focu

s

Time horizon


•  What risks are giving most cause for concern?

•  Have these changed significantly over the past two to three years?

•  How well equipped are your organizations to address these risks?

Topics for discussion


How to bridge the capability gap?


The capability gap can be addressed using a range of approaches



Risk management


Core area Short-term Medium-term Long-term

Investment decision making (organic & inorganic)

Identifying value creation opportunities and

developing strategy

Preparing to succeed in future markets;

succession planning

Aligning portfolio requirements against

strategic targets

Building future drivers of value into the portfolio (e.g.,

brand value)

Understanding the probability of a specific budget being delivered

Effectively linking financial planning processes with risk-return approaches

Reliably analyzing the exposure to emerging risks with long-range forecasts

Stra

tegi

c fo

cus

Tact

ical

focu

s

Time horizon

1

2


Risk-adjusted forecasting involves stressing forecasts with major risk drivers

-‐£5

£-‐

£5

£10

£15

£20

1 2 3 4 5 6 7 8 9 10 11 12

EBIT fo

recast (£m

)

Quarterly forecasts

BudgetExpected valueWorst case (1/20)Best case (1/20)

$-‐

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Risk-adjusted forecasting approach

Outputs Model Inputs Decision making

Parameter

ü  More robust and transparent evaluation of the risk and uncertainty in budgets and plans

ü  Enabling scenario modeling and multirisk perspectives

ü  Focus management time and efforts on the key risk and value drivers

Key inputs are required to enable structured and transparent evaluation of risk-return of financial planning

The modeling approach utilizes quantitative techniques to analyze risk-return across the application areas

The outputs produced by the model allow assessment of uncertainty in forecasts and plans

BU3

x

FX c

urre

ncy

pairi

ng fo

rwar

d cu

rves

x

x

x

x

x

x

x

x

x

x

x

Group-wide risk drivers

BU1

BU2

BU4

BU5

...

BU-specific risk drivers

Com

mod

ity-

spec

ific

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sts

Stee

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tes

GD

P / c

apita

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Con

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ions

Tax

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fact

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Loca

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erna

nce

fact

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Supp

lier-

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ific

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rtain

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Secu

rity

cons

ider

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Example risk drivers

included for illustration

only

External and internal data used to describe impact and

probability distributions for each of the selected group-

wide risk drivers

Local market-specific risk adjustments applied to specific parts of the segment

or business unit


Risk-adjusted forecasting helps develop a robust evaluation of risk within budgets

See chart (right)

ü  Deeper assessment of uncertainty in cash-flow and earnings forecasts ü  Quantitative understanding of which risks contribute most to exposure ü  Outputs provide insights into opportunities for capturing upside ü  Enabling integrated scenario modeling and multirisk perspectives ü  Focus management time and efforts on the key risk and value drivers ü  Enhanced confidence in delivery of plans and budgets ü  Facilitates transparent challenge and review

Core benefits


Case study: Risk-adjusted forecasting to optimize asset performance

The main operating sites of this global metals and mining company frequently failed to meet planned production targets and budgets.

The challenge

The underlying planning process did not take process variance into account. By identifying and analyzing key input variables, quantitative distributions were developed for each risk driver and risk-adjusted forecasting models were generated for each site.

The solution

The enhanced models improved understanding of how underlying volatility was impacting asset performance. In addition, more effective decision making was enabled through enhanced scenario modeling, increasing confidence in plans.

The benefits


Scenario planning helps executives spot external threats and their implications…

Identify driving forces and critical uncertainties

Develop a framework to explore plausible futures

Assess implications, generate options, and

identify indicators


Option 2

Critical Uncertainty 1

Critical

U

ncertainty 2

…which allows executives to reframe risks and opportunities

Risk 2

Option 4 Option 5

Option 3

Risk 1

Option 1


Case study: Scenario planning to identify value creation opportunities and drivers

A global media services company was reorganizing in the face of a changing market. The CEO asked the executive team to identify a short list of growth strategies to bring to the board and investors.

The challenge

Recent strategy efforts had focused on cutting costs and rationalizing the portfolio, but there was no vision of where new growth options were. By identifying drivers and uncertainties across the media value chain, scenarios were developed to generate strategic options, each linked to specific futures.

The solution

Executive leadership committed to pursue selected options aligned to one of the scenarios, and the scenarios became the basis for ongoing strategy reviews and monitoring shifts in the environment. The highly participatory process also fostered collaboration and alignment across business units and regions.

The benefits


•  Do you use any of these approaches in your financial and strategic planning processes?

•  If yes, what has your experience of the value been?



Implementation considerations and concerns


Enhanced forecasting capabilities can be developed through a phased approach

How do we build the

business case?

Where should we start?

What level should we go to?

What is the basis of the technical

approach?

How do we start to use the output?

• Outline desired outputs

• Build and validate the technical model

• Provide a consistent set of risks and forecasts

• Plan a roadmap for “first use”

• Build into existing frameworks

• Consider how to use in market communication

• Limit input to the top 10–15 risks

• Mixture of data and SME input is required

• Consider specialists’ challenge of risk inputs

•  Initiate pilot project or proof of concept

• Use group-level forecasts

• Build executive buy-in

• Articulate core benefits

• Outline quick wins and long-term value

• Set up an internal working group


•  What gets in the way of using these tools today?

•  What would you need to successfully put these approaches to work? – People – Process

– Technology



Charles Alsdorf Director Deloitte Financial Advisory Services LLC [email protected] Andrew Blau Director Deloitte Consulting LLP [email protected] Hans-Kristian Bryn Partner Deloitte United Kingdom [email protected]

Contact info

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Copyright © 2013 Deloitte Development LLC. All rights reserved.

bridging the gap: how to turn your biggest risks into strategic … · 2020. 9. 2. · bridging the...

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