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					                    Enterprise Risk Management– Fad or Fact?




                           Wolfgang F. Friedel

                              President and CEO
                              Zurich IC Squared


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                    Enterprise Risk Management - Fad or Fact?




                                              ?
                                    “Insanity is doing the same thing
                                     and expecting different results”

                                                     Albert Einstein
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                    Enterprise Risk Management– Fad or Fact?


                                     Fad if we do the same
                                     thing and……




                                     Fact if we are creating
                                     value for stakeholders
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                    Creating Stakeholder Value – Fad or Fact?

                                  •   What do you do to create value?
                                  •   What can happen to destroy
                                      value?
                                  •   What degree of confidence do
                                      you have in the estimated
                                      distribution of outcomes?
                                             Source: The Value Reporting Revolution




                                      Risk is an Investment
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                       The “Risk is an Investment” Paradigm


                                              Increased Stakeholder Value


                    Communicate Risks, Opportunities and Actions


        Create sustainable Competitive Advantage
        (identify, quantify and model risks
         and opportunities)

                                                 Risks can create value
            Risk is an Investment
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Zurich IC Squared                                Risks can destroy value
                         Stakeholder Value Creation Process

                                      Identification


                     Stakeholder
                                                       Measurement/
                    Value Creation                     Prioritization


                                         Cultural
                                         Buy - in

                     Performance
                    Communication                      Execution Plans



                                     Implementation/
                                      Measurements
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                      The IC2 “Reward - Risk Continuum”

                       Reward
                                                   COO,        Board,
                                  Risk Mgmt. /     CFO,         CEO,
                                    Int. Audit   Treasurer      CRO




                    Uncertainty
                     (Variance)




                          Risk    Hazard Financial Operational Strategic

                                                              Adopted from PWC
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                    Enterprise Risk Management – The Challenge


                       High
                        Financial Impact
                                              Operational      Strategic




                                                  Hazard       Financial


                       Low

                                           Easy                          Difficult
                                                  Complexity to Manage
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                    Example: Strategic Alliance




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                                       Example: Strategic Alliance

                    AMEX/National West Announcement            1990-1996 Harvard/Yale Study
            Share                                                of 1000 Alliances Showed
            Price
                         Share Price Movement                 Statistical Evidence of Positive
                                                                   Share Price Movement
              $60
                                                               SAMPLE - VALUE CREATION
                                                               ON DAY OF ANNOUNCEMENT
              $58

                      Alliance Announcement                     Alliance           $Billions
              $56
                                                              Mobil/BP              $5.7

              $54                                             Merck/RPR             $5.3

                                                              HP/Microsoft/
              $52                                             Oracle/Netscape       $3.8

                                                              GE/Pratt & Whitney    $1.9
              $50
                                                              Millennium/AHP        $1.0
              $48
                                      December, 1996
            Sources: WSJ & Booz Allen & Hamilton

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                                                Example: Strategic Alliance

             100%                                      SUCCESS RATES IN ALLIANCES
              90%

              80%

              70%

              60%

              50%                                                          Alliances
              40%

              30%

              20%

              10%

               0%
                                Low Skilled                              High Skilled
                               Alliance Firm                             Alliance Firm
                Source: Booz Allen & Hamilton studies of 2000 U.S. firms 1993 to 1998 (covering 10,000 alliances) &
                Association of Corporate Growth January 2000 survey of alliance practices at 1300 companies

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                        Example: Business Model


                     Based on Perception

                        60 to 20 in 12 = ($38b)
                        39 to 19 in 9 = ($150b)
                               -42% in 1

                    It’s the business model, stupid!
                                Geoffrey Colvin, Fortune Magazine


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                                          Business Profile
                     Business Profile
                       Company:      XYZ Co                                   Analysis Date

                       Scope:        Corp Level Business Objectives           14.04.2000

                      High
                                 A


                                 B               3
                                                                 2


                                                                7
                    Likelihood




                                 C                                            1


                                     4
                                 D


                                                 8                        5
                                 E


                                                 6
                                 F

                     Low                 IV          III             II        I High
                                                  Financial Impact
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                    Collaboration is an innovator

                             60% Rule

                              For over 60% of identified issues,
                               common - sense based action plans
                               can be agreed upon without any need
                               for further costly research or time
                               consuming and file filling
                               documentation.


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                    Collaboration is an innovator

                             40 % Rule

                              The balance of issues requires
                              additional input, data, information or
                              consideration before execution plans
                              are developed.

                              Most frequent issue is the inability of
                              the team to conclusively quantify
                              financial impact and likely hood of
                              occurrence.

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                                       Dynamic Modeling: 40 - 80


                    High
                    Financial Impact
                                          Operational      Strategic




                                              Hazard       Financial


                    Low

                                       Easy                          Difficult
                                              Complexity to Manage
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                          Dynamic Modeling - Structural View
     Identification,                Modeling           Number
                                                                                  Evaluation
     simplification               interactions        crunching


          Model                                       Simulation                  Improved
             =                … and their                 =                        decision
         Selected             dependence              Evolution                    speed &
         Variables                                    over time                   capability


     EXTERNAL, e.g.           •     Stochastic    •    path by path           •    Optimal reward /
                                    Dependence         (Monte Carlo)               risk trade-off
     •      Economy
     •      Competition       •     Functional    •    or all paths at once   •    Evaluating
     •      Customers               Dependence         (Markov Chain)              alternative
                                                                                   business models
     INTERNAL, e.g.           •     Correlation   •    high performance
                                                       software               •    Break even
     •      Strategy                                   (speed is essential)        analysis
     •      Resources
     •      Cash Flow                                                         •    etc...
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                    Data, data, data, data!




                             so what!
                           “Insanity is doing the same thing
                            and expecting different results”

                                              Albert Einstein
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                                     Dynamic modeling
                                            Projected Year End Profit
                                                                       Strategy 3

                                      Strategy 2




                                                                   Strategy 1
                Probability




                                                                                      Strategy 1
                                                                                      Strategy 2
                                                                                      Strategy 3




                              -300   -100           100          300            500
                                            Profit (US $ „000)

                                                   = 90% Confidence outcomes

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                                          Optimize Risk/Reward Trade Off

                                                    Efficient Frontier
                                 30

                                 25

                                 20
                    Return [%]




                                 15

                                 10

                                 5

                                 0
                                      0         5            10          15       20
                                               Standard Deviation of Return [%]
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                    Risk is an Investment

                      The New Game

                      Creating exponential results through
                      understanding rewards and their risks
                      and communicating related strategies to
                      achieve sustainable value for
                      stakeholders. FAST!




                      Time is an Ally
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