Adding Value to ERM
With Palisade’s DecisionTools®
PALISADE EMEA 2012 Risk Conference
Ghislain Giroux Dufort
London - 2012.04.18
WARNING'!'
There will be no simulation during this
presentation …
© 2012 Ghislain Giroux Dufort
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What'is'Risk'Management'?'
Please visit
http://www.dartmoorzoo.org/
to see the picture of Benjamin Mee and Matt Damon
that was presented to discuss positive risk-taking
© 2012 Ghislain Giroux Dufort
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Risk'and'Opportunity'
“Wherever there is danger, there lurks opportunity;
whenever there is opportunity, there lurks danger.
The two are inseparable. They go together.”
–  Earl Nightingale
(from Kuala Lumpur 2012 ERM Conference Program)
© 2012 Ghislain Giroux Dufort
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In'Moving'Pictures'
Please visit the home page of
http://www.baldwinglobal.com/
to view the movie that was presented here
© 2012 Ghislain Giroux Dufort
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So'Risk'Management'is'About…'
•
•
•
•
Understanding the mission of your organization
The objectives it has set for itself
The kind of return it is seeking
The risks it is willing to take to achieve that
–  Positive risks
–  Negative risks
–  (Lost) Opportunities
•  Balancing risks
•  Accepting that risk cannot be eliminated
–  Should not!
•  That risk is necessary
•  And therefore that risk must be managed
© 2012 Ghislain Giroux Dufort
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The'Video’s'Conclusion'
•  End the Journey
•  Achieve Results
•  Return to RiskTM
© 2012 Ghislain Giroux Dufort
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And Now to Our Feature Presentation !
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PresentaOon'Outline'
•  Risk Management Teaser – done !
•  Baldwin Risk Strategies Inc. – done!
NOW:
•
•
•
•
•
What is Enterprise Risk Management
ERM Risk Maps
Going Ballistic ! – I mean … probabilistic
Integrating DecisionTools®
Adding Value to ERM
© 2012 Ghislain Giroux Dufort
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What'is'Enterprise'Risk'Management'?'
ERM DRIVERS, SOURCES AND THOUGHT LEADERS
•  Corporate Governance
–  20% risk management and some ERM now
•
•
•
•
•
•
COSO – accountants and internal auditors
CAS - actuaries
RIMS – insurance
IRM – Institute of Risk Management
CBOC’s SRC - Strategic Risk Council of Canada
ISO 31000 – best seller of ISO standards!
© 2012 Ghislain Giroux Dufort
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Very'SelecOve'ERM'Literature'…'
2000'
2010'
2012'
'
© 2012 Ghislain Giroux Dufort
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Enterprise'Risk'Management'Giveaway'
Conference'Board'of'Canada’s'Strategic'Risk'Council'ExecuOve'Advisory'Commi^ee'Members''
John'Fraser,'Vice'President,'
Internal'Audit'and'Chief'Risk'
Officer'of'Hydro'One'
Networks'Inc.'
Be^y'J.'Simkins'(Williams'
Companies'Professor'of'Business'
and'Professor'of'Finance'at'
Oklahoma'State'University'
© 2012 Ghislain Giroux Dufort
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Baldwin’s'View'on'ERM'
A holistic approach to risk management that ensures a
company or organization takes the right type and
amount of risks necessary to attain its objectives and
fulfill its mission while preserving its value and
reputation given its capacity, appetite and tolerance
•  Potential deviation relative to plan or expectation
•  Can be positive as well as negative
•  Use probability, potential impact, interdependency
•  Need Anticipation + Resilience
•  Top-down first | Bottom-up after if needed
© 2012 Ghislain Giroux Dufort
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Baldwin’s'ERM'Process'
Foundations
Company s'values,'mission,'vision,'objecOves'and'strategies'
Company s'risk'capacity,'appeOte,'and'tolerance'
ERM s'mission'and'objecOves'(risk/return,'cost/benefit,'other)'
OrganizaOon:'board,'ceo,'smt,'cro,'sponsors,'champions,'risk'commi^ees'
Common'language:'ISO'31000,'customized'
Identification
Prioritization
Evaluation
Risk Strategies
Continuous improvement
Lessons'learned'
Key information for
decision-making
Avoid'/'Transfer'/'Reduce'/'
Finance'/'Price'/'Accept'/'Increase'
ConOnuity'&'Crisis'Management'
Performance monitoring
Implementation
Risk'/'Return'
'Velocity'/'VolaOlity'/'CorrelaOon'
'Cost'/'Benefit'
Including'risk'management'
performance'measurement'criteria'
© 2012 Ghislain Giroux Dufort
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Baldwin’s'Value'Chain'&'Risk'Dynamics'
Negative Risks
Partners
Counterparties
Competitors
New Entrants
Planet | Resources | Suppliers
Competitors
''
External Risks
•  Business
Environment
New Entrants
''
Partners
''
Clients | Consumers | People
Internal Risks
•  Operational
Boundary Risks
•  Management
& Contracts
Positive Risks
© 2012 Ghislain Giroux Dufort
Counterparties
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The'Most'Widely'Used'Result:'the'Risk'Map'
REAL AND TYPICAL EXAMPLE OF HOW IT’S BEING DONE AT ITS BEST NOW:
Rate the following global risks (10-year horizon) on a scale of 0 to 10 in terms of:
A)
Perceived likelihood to occur in the next ten years
!
B)
Perceived worldwide impact in $bn
!
1.
2.
3.
4.
5.
6.
0 = Impossible and 10 = Certain
0 = $0bn, 10 = $1000bn
Space security
Online data and information security
Infectious diseases
Global imbalances and currency volatility
Fiscal crises
Climate change
© 2012 Ghislain Giroux Dufort
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World'Economic'Forum'Global'Risks''1/11'
Perceived(global(impact(in($US(bn(
Survey + Risk Workshops
1200'
•
•
•
•
Fiscal'crises'
1000'
Climate'change'
800'
600'
•
•
•
•
Imbalances'and'currency'
“Risk Management has to
create dialogue. The more
people you talk to, the better
the distribution.”
400'
200'
0'
0'
Online'security'
'
Space'security'
'
unlikely'
'
2'
4'
likely'
'
580 respondents’ perceptions
Likelihood and Impact (2010-20)
Confidence level self-assessment
Interconnectedness: choose up to 6
risks ‘related in some way to this 1’
Statistical Analysis
Challenge in 18 Risk Workshops
Voting?
Is ‘consensus view’ good?
InfecOous'diseases'
'
– Adrian Clements
6'
8'
10'
Very'likely'
'
Global Asset Risk Management
ArcelorMittal:
$78bn, 1k plants,
220k employees
Probability(of(occurence(
© 2012 Ghislain Giroux Dufort
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From(Douglas(Hubbard,(President(of(Hubbard(Decision(Research(
Toronto,(January(2010(
The'‘Confidence’'Issue'
© 2012 Ghislain Giroux Dufort
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Risk'QualificaOon'Vs.'QuanOficaOon'
•  Doug Hubbard’s 2010 conference and first 2 books
(How to Measure Anything & The Failure of Risk
Management) in 6 points:
1.
2.
3.
4.
You can measure anything
Measure what’s needed, not what’s easy or available
You have more data & need less data than you think
Use ranges assessed by calibrated experts, not
subjective point estimates
5.  Use a proven decision-making method: Monte Carlo
Simulations (MCS)
6.  Someone should track Risk Management’s own
performance
© 2012 Ghislain Giroux Dufort
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How'Hard'Can'ERM'ImplementaOon'Be?'
•  “ERM is lonely, hard, and nobody really knows what it is. Thank you for
accepting me in your support group!’’ – Adi Agrawal, CME Group
•  I’m sure you’ve heard of the recent Mars launch
•  Did you know they’ve implemented ERM there?
“The objective of ERM is to provide Mars with
a proven, sustainable framework to proactively
understand and deal with complex business
risks, both tangible and intangible, existing and
emerging, across the entire organization.”
'
•  Mars: US$33bn, 65k employees, ERM: 1
© 2012 Ghislain Giroux Dufort
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Adding Value to ERM With DecisionTools®
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Risk'Heat'Maps':'going'from'dots'…'
Probability
Negative Risks (R)
Positive Risks / Opportunities (O)
5
Almost certain
4
Likely
3
Possible
2
Unlikely
1
Rare
E
Extraordinary
D
Major
C
Moderate
B
A
A
B
Minor Insignificant Insignificant
Minor
C
Moderate
D
E
Major
Extraordinary
Potential impact
''
''
Low''R'/'O'
RouOne'management'
''
''
Moderate''R'/'O'
Assign'responsibility'
''
''
High''R'/'O'
Senior'management'needed'
© 2012 Ghislain Giroux Dufort
''
''
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Extreme''R'/'O'
Immediate'acOon'required'
Risk'Heat'Maps':'to'ranges'…'
Probability
Negative Risks (R)
Positive Risks / Opportunities (O)
5
Almost certain
4
Likely
3
Possible
2
Unlikely
1
Rare
E
Extraordinary
D
Major
C
Moderate
B
A
A
B
Minor Insignificant Insignificant
Minor
C
Moderate
D
E
Major
Extraordinary
Potential impact
''
''
Low''R'/'O'
RouOne'management'
''
''
Moderate''R'/'O'
Assign'responsibility'
''
''
High''R'/'O'
Senior'management'needed'
© 2012 Ghislain Giroux Dufort
''
''
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Extreme''R'/'O'
Immediate'acOon'required'
Risk'Heat'Maps':'to'naturally'going'ballisOc!'
Probability
Negative Risks (R)
Positive Risks / Opportunities (O)
5
Almost certain
4
Likely
3
Possible
2
Unlikely
1
Rare
E
Extraordinary
D
Major
C
Moderate
B
A
A
B
Minor Insignificant Insignificant
Minor
C
Moderate
D
E
Major
Extraordinary
Potential impact
''
''
Low''R'/'O'
RouOne'management'
''
''
Moderate''R'/'O'
Assign'responsibility'
''
''
High''R'/'O'
Senior'management'needed'
© 2012 Ghislain Giroux Dufort
''
''
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Extreme''R'/'O'
Immediate'acOon'required'
WEF'Global'Risks'Interconnectedness'
Please visit
http://reports.weforum.org/wp-content/blogs.dir/1/mp/
uploads/pages/files/global-risks-2011.pdf
Page 4, Figure 2,
to see the map of global risks interconnectedness that was
shown and discussed
© 2012 Ghislain Giroux Dufort
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From'Interconnectedness'to'CorrelaOon'
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© 2012 Ghislain Giroux Dufort
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From'Interconnectedness'to'CorrelaOon'
1(
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2(
3(
+.25(
0(
Etc.(
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© 2012 Ghislain Giroux Dufort
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ERM'Value'Added:'“Show'Me'The'Money”'
OK: Take BP’s Deepwater Horizon
•  Loss of 11 lives, 17 injured, $20bn market value loss + indemnities
Vs.
•  Risk Anticipation:
–  Preemptive cost of stricter operational procedures and dome building/testing
•  Risk Resilience
–
–
–
–
May be zero cost in lives and $ if accident had been prevented
If not, substantially lower post-event costs– a few days duration?
No ‘I want my life back’ and CEO resignation
No ‘We care about the little people’ and loss of reputation
•  There’s Only One Problem:
–  If nothing happens, you only see the preemptive costs….
© 2012 Ghislain Giroux Dufort
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ERM'Value'Added:'Pathways'for'Palisade''
•  Take ‘qualitative’ top 10 risks from colored risk map
•  Calibrate relevant experts for those risks
•  Use them to now quantify the top 10 risks:
–  potential impact’s range (90% C.I. for example)
–  distribution type
–  rough correlation matrix (-1,0,1 or by .50/.25)
•  Use PrecisionTree to facilitate risk interconnectedness
analysis
•  Prioritize top 3-5 risks based on previous analysis
•  Drill down / roll-up those 3-5 risks to link them to the
organizations forward-looking existing Excel plans for
–
–
–
–
Revenues
Profits
Cash flow
Shareholder’s equity
© 2012 Ghislain Giroux Dufort
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ERM'Value'Added:'Through'Palisade'!'
•  Use @RISK to obtain the distribution of those key
forward looking metrics affected by top 3-5 risks
•  Use TopRank to prioritize further if needed
•  If risk is unacceptable (positively or negatively), devise
potential risk treatments with calibrated experts
–  Change in probability distribution / impact
–  Change in correlations
•  Factor into the Excel forward-looking plans
–  Cost of treatments
–  Impact on key metrics distribution
•  Get the value of Risk Management!
•  Look at ‘wild correlations’ scenarios
•  Use PrecisionTree to anticipate as well as to plan for
resilience
© 2012 Ghislain Giroux Dufort
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Next'Steps'
•  From our Leading ERM Practices Survey
–  A number of companies use MCS into ERM
•  Baldwin Risk Strategies will investigate these
approaches further with them
•  And develop and publish case studies on use of
Palisade products into ERM
© 2012 Ghislain Giroux Dufort
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Conclusion:'Risk'EducaOon'
2012'
Coming(soon(
Go(to(www.baldwinglobal.com(for(developments(
© 2012 Ghislain Giroux Dufort
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Adding Value to ERM
With Palisade’s DecisionTools®
Ghislain Giroux Dufort
President of Baldwin Risk Strategies Inc.
ggd@baldwinglobal.com