In the fourth of a series of 5 articles for Retail World Magazine, ShopAbility discuss the uses of strategic and enterprise risk management for positive gain not just crisis aversion.
In our article on symptoms of a business in crisis, we discussed using crisis diagnosis as an opportunity to review the business holistically. Strategic (Enterprise) Risk Management carries a similar theme.
Rather than turning an organisation’s risk management efforts into a low value compliance task, the Leadership Team should reframe their risk discussions on the basis that superior performance comes from focussing the organisations finite resources on what must go right, rather than concentrating on what can go wrong. Taking this strategic approach will align the organisational resources on the key levers and maximise the organisation’s potential for success.
Common Failings of ERM Programs
In “The Seven Deadly Sins of Enterprise Risk Management and how to avoid them”1, author Frank Edelblut identifies the main areas that organisations have incorrectly applied Enterprise Risk Management (ERM):
1. Lack of a clear vision for ERM. Installation of ERM systems to respond to external pressures (eg shareholder expectations) rather than designing the ERM system and process to deliver long term value creation
2. Building unnecessary organisation, function and process. Establishment of incremental activities and costs rather than utilising risk management activities and capabilities embedded in the organisation
3. Lack of support from leaders. Absence of strong leadership that aligns the organisation around common Risk philosophy and Risk appetite definitions, which leads to an inconsistent perspective and response to risk
4. Bottom-up approach. Identification, assessment and observation of all the things that could go wrong, resulting in consumption of unnecessary resources on risks that are unlikely to occur or cannot be mitigated
5. Risk Confusion. Plethora of terms (eg risk philosophy, risk appetite, risk tolerance, risk assessment, risk response) are not clearly defined and understood by the organisation, leading to miscommunication and wasted time, effort and resources
6. Overly Complex Risk Assessment. Replacement of management judgement with complex quantitative models (which are ultimately skewed to match management judgement), and too much focus on Risk Assessment (likelihood and impact) rather than on how to respond to the Assessment (given success profile of responding to previous concerns and available resources)
7. Making ERM the Endgame. Allowing ERM to become an objective unto itself, with too much time spent on compliance and risk rather than strategy and objective setting
The Strategic Risk Management Trinity
Whilst The Seven Deadly Sins identify a range of traps that organisations tend to fall into, I can offer you the Strategic ERM Trinity:
1. Focus first on what must go right, not on what can go wrong
2. Harness the Leadership Team
3. Embed Risk Management into your ways of working
1. Focus on What Must Go Right
The fundamental difference between the proposed approach, and that adopted in many organisations, is the change in mindset away from the identification, quantification and elimination of all the things that can go wrong, to a strategic mindset that accepts that many things will not go according to plan, and that the organisation must be ready and able to respond to the best of its ability. Whilst the approach of concentrating the Strategic ERM efforts on only a portion of the business will result in less attention on some areas, the investment of time on the high impact areas will pay much larger dividends for the organisation.
“What Must Go Right” will vary according to the context of each business, and can only be determined through an understanding of the business strategy. A good business strategy will have an understanding of four key elements:
* What Ambition (Vision, objectives and goals)
* Where To Play (Profit Pools where the business will focus)
* How To Win (Strategies and initiatives to achieve the objectives)
* How to Mobilise (organisation and resources to support strategies)
Any dialogue around strategic risk will be ineffective unless the organisation has a relatively strong grasp over the first three elements. Whilst embedding a Strategic ERM process will be instrumental in developing the fourth element (How To Mobilise).
2. Harness the Leadership Team
The business strategy must be delivered through the concerted efforts of the Leadership Team. The best chance of achieving this result is by harnessing the best the team has to offer, and by building an aligned and engaged team.
The team guiding the delivery of the strategic plan are by definition, a set of individuals that have successfully negotiated the trials and tribulations of their experiences to become a member of the current Leadership team. These valuable experiences need to be recognised and incorporated into the ERM process. This is achieved by using the team’s collective judgement when identifying and assessing risks, and also when determining how best to respond to these perceived risks Maximising team diversity will help to reduce the risk of group-think and ensure that a broad perspective is available.
Even if the organisation has developed a strong strategy, when participants of a strategic planning process walk out of the room without testing their alignment on the key deployment activities, the program execution could well be compromised. The ERM process gives a legitimate space to the team to encourage a robust discussion of contrary points of view. This full and frank discussion helps to clarify exactly where the team is aligned, where there are still underlying areas of misalignment on priorities and activities.
The opportunity for team members to have their experiences valued and their perspectives legitimised not only helps to improve deployment, but also helps to build an engaged team, who are committed to the program that they helped co-create.
3. Embed Risk Management into your Ways of Working
Risk Management is a fluid process. What is considered a major risk today, may become irrelevant tomorrow, and conversely what is insignificant today may become a major obstacle to success tomorrow, in four weeks or next quarter. That is why part of the ERM process needs to include a facility to check back with the Leadership Team to see if the team view has changed.
After conducting an initial ERM workshop to align the team, it is recommended that the ERM dashboard is reviewed monthly. This thirty minute session once a month results in greater understanding, team and individual ownership, and a sense of purpose as actions are completed and risks are mitigated.
To assist in this process the ERM workbook is treated as a dynamic document where risk ratings, risks and actions are rigorously reviewed and updated. This activity is used to focus the actions of the team throughout the year as additional pressures and actions surface. Team members critically review the risks and alter the level of resources or actions to suit the current needs. Additionally, the belief that “if we can crack these issues, we will deliver the Plan” creates a shared commitment and reduces “silo” mentality. This belief leads to a willing re-allocation of resources as required for the best interests of the organisation.
Being mindful of the second of the Seven Deadly Sins, this process needs to avoid the requirement for any additional resources where possible. This can be achieved by incorporating the ERM dashboard into existing business scorecards. (We will be discussing scorecards in more detail in our next article.)
Additionally, the Leadership Team meeting schedule needs to be reviewed to determine how best to incorporate this discussion into their agenda.
Starting the ERM journey in your organisation
Prior to the commencement of the ERM journey, it is critical have the necessary support structures in place. In particular ERM requires a passionate sponsor and caretaker of the process willing to invest the time necessary (typically Finance), plus a leader (Chair, CEO, GM) who believes in the value of ERM and provides strong and visible support.
The best time to start the ERM journey is just before the end of an organisational planning process. This could either be a Strategic Planning process (three plus years) or the Operating Plan process (next years activities and budget).
Starting before the completion of the planning process allows the team to come to the discussions with a strong awareness of the underlying issues and rationale for proposed actions and strategies, whilst still leaving some room for movement if the team recognise the requirement for a fundamental change in plans during the ERM discussions. Apart from providing the valuable understanding of “How To Win”, the planning process enables the team to gain clarity on the SMART outcomes that constitute success for the business (these should be Specific Measurable Achievable Realistic Time bound objectives).
To kick-off the process, a one day workshop with the Leadership Team is necessary to build a shared view of the strategic priorities, the risks facing the business and the actions required to mitigate these risks. With the removal of all those distracting PowerPoint slides, and the focus on the strategic few levers of the business, these discussions allow for a more in-depth conversation than is typically possible during standard Leadership Team meetings and generates new insights for all team members involved.
Consistent feedback from over forty workshops has identified a handful of factors that improve the outcomes for all participants and the organisation.
* Preparation. In particular giving team members time to reflect on the issues, and gathering input from a large and diverse team prior to the workshop are instrumental to gaining buy-in, avoiding group-think, and ensuring time in the workshop is focused on actions due to the higher level of understanding of the initiatives and risks
* Facilitation. Strong external facilitation allows the Leadership Team to concentrate on the content rather than the process. Additionally, the “Open Floor” and use of anonymous voting in the Workshop allow team members to air views traditionally seen as too negative
* High Performing Team behaviours, such as openness to own vulnerabilities, commitment to the team winning, comfort dealing with conflict, and asking for help play a role is promoting the right discussions
* Full attendance of the Leadership Team is critical to obtain the diversity of opinion, drive strong alignment of the team to a common goal, and where necessary enable the re-deployment of resources.
Once the kick-off ERM workshop has been completed, the outcomes need to be rigorously followed up to ensure this is not just another fad or Planning compliance task.
Summary – Benefits of Strategic ERM
Businesses undertaking this process have substantially improved delivery of their strategic objectives via improved Leadership Team alignment, acceleration of the “critical few” projects, clarification of performance requirements (KPI’s), unlocking cross-functional support for the key levers and improved agility in the face of crises as they emerge.
Next time (final article in the series): Developing your business scorecards.
In the meantime, we welcome feedback from you.
Email us at enquiries@shop-ability.com
