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

Transcription

1 Bridging the Gap: How to Turn Your Biggest Risks into Strategic Opportunities Andrew Blau Director, Monitor Deloitte Deloitte Consulting LLP Hans-Kristian Bryn Partner, Strategic Risk Practice Deloitte United Kingdom Charles Alsdorf Director, Advisory Services Deloitte Financial Advisory Services LLP 1 1

2 Agenda The new environment of risk and the challenge for CFOs How to bridge the capability gap? Implementation considerations and concerns 2

3 The new environment of risk and the challenge for CFOs 3

4 Our research indicates an increased focus on managing strategic risk Eploring strategic risk Does your organization have an eplicit focus on managing strategic risks? Eecutive 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? What are the mechanisms that organizations use to achieve this? Source: Deloitte/Forbes Insights Eploring Strategic Risk,

5 Companies face high levels of uncertainty from eternal and internal sources Eecutive challenges Strategic 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? Financial How much do key uncertainties epose our future cash-flow positions? How should we effectively allocate capital to ensure a suitable riskadjusted return? How can strategy, risk, and finance work as one? How should we define our risk appetite? Investor questions How are the eecutives 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? 5

6 CFOs are managing risk across a range of eecutive functions Strategic planning & strategy development Strategic focus Tactical focus Business structure & portfolio management Investment decision making (organic & inorganic) Financial forecasting & budgeting Risk management 6

7 and must address distinct challenges over different time horizons Time horizon Core area Short-term Medium-term Long-term Strategic focus Tactical focus Strategic planning & strategy development Business structure & portfolio management Investment decision making (organic & inorganic) Financial forecasting & budgeting Risk management Setting short-term strategic goals and eecuting within the business Optimizing investment portfolio (e.g., small-scale acquisitions, cape) Eecuting investments; driving value in investment appraisal process Understanding the probability of a specific budget being delivered Enhancing BAU riskreturn decision making (e.g., hedging, op risk) Identifying value creation opportunities and developing strategy Aligning portfolio requirements against strategic targets Targeting future investments to optimize risk-adjusted returns Effectively linking financial planning processes with risk-return approaches Defining risk appetite and tolerances and enabling their practical use Preparing to succeed in future markets; succession planning Building future drivers of value into the portfolio (e.g., brand value) Verifying seed capital investment is applied for innovation Reliably analyzing the eposure to emerging risks with long-range forecasts Considering what new risk capabilities are needed to support strategic eecution 7

8 Topics for discussion 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? 8

9 How to bridge the capability gap? 9

10 The capability gap can be addressed using a range of approaches Time horizon Core area Short-term Medium-term Long-term Strategic focus Tactical focus Strategic planning & strategy development Business structure & portfolio management Investment decision making (organic & inorganic) Financial forecasting & budgeting Risk management 1 2 Understanding the probability of a specific budget being delivered Identifying value creation opportunities and developing strategy Aligning portfolio requirements against strategic targets Effectively linking financial planning processes with risk-return approaches Preparing to succeed in future markets; succession planning Building future drivers of value into the portfolio (e.g., brand value) Reliably analyzing the eposure to emerging risks with long-range forecasts 10

11 Risk-adjusted forecasting involves stressing forecasts with major risk drivers Risk-adjusted forecasting approach Inputs Model Outputs Decision making Key inputs are required to enable structured and transparent evaluation of riskreturn of financial planning $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $- Parameter The modeling approach utilizes quantitative techniques to analyze risk-return across the application areas Eample risk drivers included for illustration only BU1 BU2 BU3 BU4 BU5... Eternal and internal data used to describe impact and probability distributions for each of the selected groupwide risk drivers FX currency pairing forward curves Group-wide risk drivers Commodityspecific spot price forecasts Steel consumption rates GDP / capita forecasts Local market-specific risk adjustments applied to specific parts of the segment or business unit Contract obligations BU-specific risk drivers Ta or customs duty factors Local governance factors Supplier-specific uncertainty Security considerations The outputs produced by the model allow assessment of uncertainty in forecasts and plans EBIT forecast ( m) Budget Epected value Worst case (1/20) Best case (1/20) Quarterly forecasts 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 11

12 Risk-adjusted forecasting helps develop a robust evaluation of risk within budgets See chart (right) Core benefits ü Deeper assessment of uncertainty in cash-flow and earnings forecasts ü Quantitative understanding of which risks contribute most to eposure 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 12

13 Case study: Risk-adjusted forecasting to optimize asset performance The challenge The main operating sites of this global metals and mining company frequently failed to meet planned production targets and budgets. The solution 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 benefits 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. 13

14 Scenario planning helps eecutives spot eternal threats and their implications Identify driving forces and critical uncertainties Assess implications, generate options, and identify indicators Develop a framework to eplore plausible futures 14

15 which allows eecutives to reframe risks and opportunities Risk 1 Option 1 Critical Uncertainty 1 Option 2 Critical Uncertainty 2 Risk 2 Option 3 Option 4 Option 5 15

16 Case study: Scenario planning to identify value creation opportunities and drivers The challenge A global media services company was reorganizing in the face of a changing market. The CEO asked the eecutive team to identify a short list of growth strategies to bring to the board and investors. The solution 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 benefits Eecutive 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. 16

17 Topics for discussion Do you use any of these approaches in your financial and strategic planning processes? If yes, what has your eperience of the value been? 17

18 Implementation considerations and concerns 18

19 Enhanced forecasting capabilities can be developed through a phased approach How do we build the business case? Articulate core benefits Outline quick wins and longterm value Set up an internal working group Where should we start? Initiate pilot project or proof of concept Use group-level forecasts Build eecutive buy-in What level should we go to? Limit input to the top risks Miture of data and SME input is required Consider specialists challenge of risk inputs What is the basis of the technical approach? Outline desired outputs Build and validate the technical model Provide a consistent set of risks and forecasts How do we start to use the output? Plan a roadmap for first use Build into eisting frameworks Consider how to use in market communication 19

20 Topics for discussion What gets in the way of using these tools today? What would you need to successfully put these approaches to work? People Process Technology 20

21 Contact info Charles Alsdorf Director Deloitte Financial Advisory Services LLC Andrew Blau Director Deloitte Consulting LLP Hans-Kristian Bryn Partner Deloitte United Kingdom 21

22 This publication contains general information only and is based on the eperiences 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 for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.