Transcript ACHIEVING KPI’s THROUGH RISK

ACHIEVING KPIs
THROUGH RISK
MANAGEMENT
: THE CHALLENGES AHEAD
(I) INTRODUCTION
WHAT IS ENTERPRISE RISK MANAGEMENT
(ERM) ?

Holistic, proactive approach that identify and
measure all of the enterprise’s risk exposures and
manage them within a unified framework;

A fundamental shift in the way business must
approach risk;
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Growing interest in ERM in recent years, more
so with heavily publicized cases such as
Enron, World Com and the passage of
compliance mandate such as the SarbanesOxley Act of 2002, Basel II and industry-wide
initiatives;

According to the Committee of Sponsoring
Organizations of the Treadway Commision
(COSO), ERM deals with risks and
opportunities affecting value creation or
preservation and is defined as follow:
“Enterprise risk management is a process,
effected by an entity’s board of directors,
management and other personnel, applied
in strategy setting and across the
enterprise, designed to identify potential
events that may affect the entity, and
manage risk to be within its risk appetite
to provide reasonable assurance regarding
the achievement of entity objectives”
Relationship between ERM and
traditional methods of treating risk:

Traditionally risk is being handled through the
silo approach;

Corporate losses or those due to pure risk such
as property losses, liability suits, workmen
compensations and others are being handled
through insurance contracts and others;

Financial losses or those due to speculative
risk such as credit risk, operational risk,
liquidity risk and others are being handled
through derivative contracts such as options,
swaps, futures or forwards;
In short ERM consist of :
Corporate risk
management/pure risk
Enterprise risk
management
+
Financial risk management
/speculative risk
Total Risk
Management
ERM Consists Of Eight Interrelated
Components:
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Internal
Objective
Event Identification
Risk Management
Risk Response
Control Activities
Information & Communication
Monitoring
(II) KEY PERFORMANCE
INDICATORS (KPIs)
KPIs of an organization can be viewed from four
perspective namely:

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Financial perspective
Customer perspective
Internal Business Process Perspective
Learning and Growth (Human Resource)
Perspective
The four perspective will be attached
to the organization as follows:
Financial
Customer
Vision and
Strategy
Learning and
Growth (HR)
(Kaplan & Norton)
Internal Business
Process
Under the different perspective; the
objectives and initiatives are:
Perspective
Objectives
Initiative
Financial
- Enhance revenue stream
- Improve utilization of assets
-
Customer
-
Find new partners
- Increase customer loyalty
- Grow market share
-
Internal Business
Process
-
Develop customer profile
- Eliminate defects
-
Employee Learning
& Growth
-
Close our skills gap
- Increase empowerment
-
(Paul R. Niven)
New pricing program
- Benchmarking;
- Just in time manufacturing
Partner program
- Frequent purchase program
- Frequent purchase program
IT tools and training
- Maintenance overhaul;
- ISO 9002
Critical skills training
- 360 degree feedback
- Decision training
(III) ERM’s ROLE IN ACHIEVING KPIs
a) Financial Perspectives:

Guaranteeing insofar as possible that an
organization will not be prevented from
pursuing its other goals as a result of losses
associated with pure risks;

It can contribute directly to profit by
controlling the cost of risk; since the profit
depends on the level relative to income to the
extent that ERM activities can reduce expenses
they directly increase profits;

ERM can also reduce expenses through risk
control measures; if the cost of loss prevention
and control measures is less than the amount of
losses prevented, the expense of uninsured loss
is reduced; loss prevention and control
measures could also reduce the cost of
insurance;

Since the effect of losses from pure risk can be
minimized the organization has greater latitude
in the speculative risk activities; there will be
inevitable trade-off between pure and
speculative risks; by managing the amount of
pure risk with which the organization must
contend, ERM increases the organization’s
ability to engage in speculative risk;
b) Customer Perspective :

By adopting the partner programs, frequent
purchase programs the organization will be
able to increase customer loyalty and market
share; this can be viewed as increasing the
number of risk exposures which is in line with
the effort to reduce risk;
c) Internal Business Process :

By developing customer profile, the
organization would be able to identify the
targeted or segmented preferred customers
with the least risk possible;
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By eliminating defects through a maintenance
overhaul program the organization would be
able to produce better products which in turn
will attract more customers as well as reduce
cost eventually;
d) Employee Learning & Growth Perspective :

By conducting more training and other skill
enhancing programs, the knowledge and
expertise of employees will be increased and
this will finally improve quality in the
organization, reduce errors and reduce cost of
operation.
Apart from the above mentioned KPIs, ERM can
be utilized in many other situations such as:

Financial type risks;
 Credit risk
 Liquidity risk
 Interest rate risk
 Currency exchange risk

Risks related to Systems;
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Issues related to Shareholder Wealth;
 Opportunity cost of capital;
 Expected cash flow;
(IV) ANALYTICAL TOOL

Among the analysis tools used in corporate
risk management are :

Constructing the frequency and severity of
losses from historical data;
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Constructing the total loss distribution;

Computer simulation of loss distributions;

Regression and correlation analysis;

Use of discounted cash flow analysis;
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Other more sophisticated analysis such as
multivariate and factor analysis
nonparametric statistics and others.
(V) CONCLUSION
It is natural for the evolution of enterprise risk
management to take place because it would
bring together the management of all risksfinancial, operational, strategic and
traditionally insured hazards – into a single
portfolio. The convergence of responsibility
for managing pure risks and other risks is a
foregone conclusion and that the responsibility
of risk managers should be expanded to
include other risks especially those relating to
other facets of finance. However, the concepts
of enterprise risk management is still
relatively new. What remains unclear is who
will have ultimate responsibility for managing
a company’s enterprise risk portfolio. The
disagreement is not about whether financial
risks susceptible to treatment by derivatives
futures and options should be managed,
but whether they should be managed by the
same person who manages the risks of fires,
explosions, embezzlements and legal liability.
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