Risk Management and the Balanced Scorecard Be$er Decisions in Strategy Development
SRM010
Speaker: Charles Jones, Strategy & Risk Manager, UIL Holdings Corporation
Dmitriy Borovik, Director ERM Services, Deloitte Consulting
Learning Objectives
At the end of this session, you will:
• Better understand the Balanced Scorecard Methodology
• Have examples for applying the ERM methodology to your Strategic Planning Process
• Have some concrete takeaways for adding immediate value at your companies and positioning yourselves for success
Se5ng the Stage at UIL
• UIL is an gas and electric energy distribution company – 4 operating companies in CT and MA
• Balanced Scorecard is our primary strategy tool – First implemented in 2001 – Worked with Kaplan/Norton (Palladium) and Balanced Scorecard Institute
• Risk Management well established first in our operations and project management areas
– Operational risk management embedded in gas and electric distribution – Project centered business – Strong adherence to the PMI methodology
• Enterprise Risk Management evolved from the PM work and follows the ISO3100 and COSO methodologies
Current Situa=on
• Increasing volatility in the energy sector – Long standing business paradigms are being challenged/changed – Technology advances are changing the playing field
• Company culture is evolving with acquisitions – Added gas companies to an electric centric holding company – Doubled number of employees and size of the company
• ‘Business as usual’ no matter how efficient is no longer a viable long term strategy
– Customer and market expectations are rapidly increasing – Macro sector trends are moving to consolidation
• This just in…… – Offer in the works to merge with a larger company
Copyright © 2015 Deloi$e Development LLC. All rights reserved. Strategic Risk SoluDons Copyright © 2015 Deloi$e Development LLC. All rights reserved. 7
Major categories of risks
Expected reward for risk (value to an organizaDon for taking on risks)
Controllability (ability of organizaDon to minimize the uncertainDes
creaDng risks) Less More
Posi*ve (e.g., rewarded
risks)
Nega*ve (e.g.,
unrewarded risks)
Imposed risks
Risks originaDng from uncontrollable and unavoidable external factors
(e.g., catastrophic, technological or regulatory)
Self-‐inflicted risks
Risks resulDng from day-‐to-‐day operaDons, decisions, and behaviors of consDtuencies
(e.g., poor judgment, gaps in compliance)
Calculated risks
Risks resulDng from organizaDon's strategic and operaDonal choices intended to generate value
(e.g., new market entry, R&D)
Copyright © 2015 Deloi$e Development LLC. All rights reserved. Strategic Risk SoluDons Copyright © 2015 Deloi$e Development LLC. All rights reserved. 8
Why is strategic risk challenging?
Unclear what to look for
Signals oUen weak
Sources may be in other industries or geographies
TradiDonal tools and methods don’t reliably detect what’s “over the horizon”
No historical precedent
Strategic risks threaten to disrupt the assumpDons at the core of a company’s strategy (and strategic objecDves), and undermine a company's ability to achieve or maintain excepDonal performance
Aligning Strategy Development & ERM
• First ‘Why do you need a strategy?’ – Your strategy is your map for moving your company effectively into the future – Without a strategy there is no basis for disciplined planning and you relinquish control of potential drivers of your success
• Second ‘Why do you need to do risk management at this level?’ – Failure to manage risk at any level can increase the possibility it will become a problem and/or increase the impact if it does occur – Higher level risks have the potential of greater cascading effects as they can impact large portion of an organizations business processes
• Finally ‘Why do they need to work together?’
The Hand and the Glove Strategy “aligning polices, practices & resources to realize an
objective or vision” Risk “the effect of uncertainty on objectives”
Strategies are about pursuing business opportunities (upside risk). ERM is about maximizing opportunities while controlling threats (downside risks) that could limit your success.
Advantages of the Balanced Scorecard
• A place for everything and everything in its place
• Concise communication tool – All critical information can be effectively presented on one page
• Development is top down and delivery is bottom up
• ‘Line of sight’ is created for every employee so they can see how their work helps achieve the overall strategic objectives
• Risk Management can be focused at multiple levels and drive a risk informed decision making proces
UIL Balanced Scorecard
We use a standardized Excel based format for our scorecards at the Opera=ng Company and Division levels. The one page summary is the founda=on of our process. It contains the following elements:
• Vision Statement • Mission Statement • 4 Strategic Perspec=ves (Financial, Customer, Operations &
Capabilities) • One or more Strategic Objectives for each Perspective to establish
the needed balance • One or more metrics for each objective with a 3 tier performance
system that establishes levels for Threshold, Target and Max.
Our Annual Strategy and ERM Process
• Establish Enterprise long term objectives • Decompose those into shorter term Operating Company and
possibly division level objectives • Assure alignment from the lower level scorecards with those
above • Assess Risks at each level and implement mitigations needed to
address the threats to success. • Monthly reports are made on the metric performance levels and
adjustments made as needed.
Value Added • Management has one place to reference our strategic goals and a
guide to influence prioritization & resource allocation decisions
• Employees are provided a framework in which they can assess their department and individual work efforts
• Adding risk assessment as an element of the decision making process increases confidence in the final decision
• The discipline required by the process helps embed risk management into strategy development
• Reporting is simplified at all levels