Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 2
• The new environment of risk and the challenge for CFOs
• How to bridge the capability gap?
• Implementation considerations and concerns
Agenda
Copyright © 2013 Deloitte Development LLC. All rights reserved. 3
The new environment of risk and the challenge for CFOs
Copyright © 2013 Deloitte Development LLC. All rights reserved. 4
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 5
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?
Copyright © 2013 Deloitte Development LLC. All rights reserved. 6
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…
Copyright © 2013 Deloitte Development LLC. All rights reserved. 7
…and must address distinct challenges over different time horizons
Financial forecasting & budgeting
Strategic planning & strategy development
Risk management
Business structure & portfolio 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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 8
• 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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 9
How to bridge the capability gap?
Copyright © 2013 Deloitte Development LLC. All rights reserved. 10
The capability gap can be addressed using a range of approaches
Financial forecasting & budgeting
Strategic planning & strategy development
Risk management
Business structure & portfolio 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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 11
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
spot
pric
e fo
reca
sts
Stee
l co
nsum
ptio
n ra
tes
GD
P / c
apita
fo
reca
sts
Con
tract
ob
ligat
ions
Tax
or c
usto
ms
duty
fact
ors
Loca
l gov
erna
nce
fact
ors
Supp
lier-
spec
ific
unce
rtain
ty
Secu
rity
cons
ider
atio
ns
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 12
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 13
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 14
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 15
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 16
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 17
• Do you use any of these approaches in your financial and strategic planning processes?
• If yes, what has your experience of the value been?
Topics for discussion
Copyright © 2013 Deloitte Development LLC. All rights reserved. 18
Implementation considerations and concerns
Copyright © 2013 Deloitte Development LLC. All rights reserved. 19
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
Copyright © 2013 Deloitte Development LLC. All rights reserved. 20
• What gets in the way of using these tools today?
• What would you need to successfully put these approaches to work? – People – Process
– Technology
Topics for discussion
Copyright © 2013 Deloitte Development LLC. All rights reserved. 21
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.