Aligning strategy decisions with risk appetite, presented by David Shearer, 10th Oct 2016, APM North...

David ShearerProject Management and Commercial Lead

10th October 2016

Aligning Strategy Decisions with Risk Appetite

Need

‘Stable’ Consultancy Business

Desire;Growth and Diversification

Culture;Manage Growth Risk

Help the business decide which projects to take on!

Agenda

1. Risk Appetite Examples

2. Terminology

3. Standard Models

4. MWH Background

5. MWH Pilot Model

Risk Appetite Examples1

Risk Appetite Examples1

Risk Appetite Examples1

Terminology2

TerminologyA Short Guide to Risk Appetite (David Hillson & Ruth Murray-Webster, Gower Publishing, 2012)

• Risk Appetite – is the tendency of an individual or group to take risk in a given situation.

• Risk Attitude – is the chosen response to a given risky situation, influenced by risk perception.

• Risk Thresholds – quantified measures that represent upper and lower limits of acceptable uncertainty against each objective.

8

TerminologyThe Institute of Risk Management• Risk Appetite –The amount of risk that an organization is

willing to take in order to meet their strategic objectives. Uses a ‘Fight or Flight’ response example.

• Risk Attitude – is the chosen position adopted by an individual or group towards risk influenced by risk perception and pre-disposition.

• Risk Tolerance – is about what you can allow an organization to deal with (if push comes to shove).

9

TerminologyRisk Based Performance Management (Andrew Smart & James Creelman, Palgrave Macmilan, 2013)

• Risk Appetite – is the amount and type of risk that an organization is willing to accept, and must take, to achieve their strategic objectives and therefore create value for shareholders and their stakeholders.

10

Standard Models• The Institute of Risk Management• Committee of Sponsoring Organisations

of the Treadway Commission (COSO)• Risk Based Performance Management• A Short Guide to Risk Appetite

3

Risk culture Risk appetite

Standard Models

The Institute of Risk Management culture aspects model

Tone at the top

Risk leadership Informed risk decisions

Decision

sDealing with bad news Reward

Governance

Accountability Risk resources Competenc

yTransparency Risk skills

<<

<<

<<

< R

isk

univ

erse

>

>>

>>

>>

<<

Ris

k to

lera

nce

>>

Risk

< a

ppet

ite

>

t0 t1time

perfo

rman

ce12

COSOInterrelationships of Strategy, Management Decisions and Risk Appetite

Obje

ctiv

es

Tolerances

Sets Strategic Goals

Standard Models

Formulates Strategies

Establishes Objectives Manage risks

Appe

tite

State Risk Appetite

Link to Objectives

Facilitate Alignment

Facilitate Monitoring

13

Manage Performance

Set Strategy

Manage Risk

AppetiteAlign Risk Taking to Strategy

Appetite

Communication

Culture

Governance

Standard ModelsRisk Based Performance Management

14

Standard ModelsA Short Guide to Risk Appetite;The Risk Appetite – Risk Attitude (RARA) Model

Risk appetite Risk capacity

Risk thresholds

Residual risk exposureRisk actionsRisk attitude

MWH Background4

Background - NeedDiversification;

17

Contracting

AsbestosNew Services

Land Remediation Incentivisation

Performance GuaranteesProcess Integration

Developer

Resource Constraints

Major Sub-Contract

Unlimited Liabilities

Background - MWHStructure• Very Strong Project Level Risk Process• Defined Roles and Responsibilities• Healthy ScepticismGrowth• Growth Targets• Process Constraints

18

“the board is responsible for determining the Nature and Extent of the Principal Risks it is willing to take in achieving its Strategic Objectives.”

Background – UK Corporate Governance Code

MWH;UK Business / Board Level;• Strategy, Defined Outcomes, KPIs

Project Level;• Strong, well defined process

Business Unit Level

19

MWH Pilot Model• Conversation and Journey • Models, Rules and Tools• Future

5

“Strategy without tactics is the slowest route to victory. Tactics

without strategy is the noise before defeat.”

Sun Tzu – The Art of War (500 BC);

Model - Conversation and JourneyStage 1• What is slowing growth?• Is the Risk Process really a blocker?• What risks are we taking to grow (gain an opportunity)?• Are we taking too much or too little risk?• Can we be more innovative in our approach?

22

Model - Conversation and Journey Stage 2• Need to align risk with the growth strategy;• Need to agree the Business Unit (mid tier) risk

appetite;• Need a mandate from the business on the

“acceptable risk in pursuit of our goal”

23

Model - Conversation and Journey Stage 3• How do we define the risk appetite at BU level?• How do we simply measure risk across the portfolio?• How do we define the lowest margin across the

portfolio and individual projects/opportunities?• How do we know the process works?

24

Overall Strategy

Outcomes and KPIs

Risk Appetite Statement

Risk Appetite Statement

Risk Tolerance (Financial)

Risk Identification

Risk Analysis

Risk Reporting

Key Risk and Control Indicators

UK Business / Board Level –

Rules

Business / Unit Level –

Rules

Business / Unit Level –

Tools

Model

25

Outcome 1Our actions protect and benefit people and the

environment

Model – Business / Board Level

26

Outcome 2We are a sustainable, thriving and growing business

Outcome 3Our clients consistently tell us that we deliver exceptional service

Outcome 4All our employees feel valued and proud to work for MWH

Model - Business / Board LevelExtract from the “10 Rules of Essential Business and Contracting Policy”;“Rule 2 – Pursue and Accept Opportunities Aligned with Strategy that Balance Risk and Reward”

Extract from Risk Policy;“The Company will accept reasonable project risks, but not those that threaten the Company’s financial well-being or those that it has little ability to mitigate and control…. Project risks must be evaluated from the perspective of what is in the best interests of the Company as a whole…The risks taken by the Company must not outweigh expected project rewards.” 27

Model - Business Unit Level; RulesBusiness Unit Level Risk Appetite Statement

Examples;

1. The Global Risk Policy and MAM applies in all cases. The business has a very low tolerance on Ethics and Compliance and will not enter into any agreements that do not comply with MWH’s Ethic Policy.

2. The business had a very low tolerance on Health, Safety and Environment and will not enter into any agreements whereby MWH cannot comply with MWH Policy and legal obligations.

3. The business has a low risk tolerance to appointment of appropriate PM and Tech Leads. The business views this as critical and will not accept additional risk by appointing inappropriate personnel in these key roles.

4. The business has a zero tolerance to progressing delivery without a signed contract. The business accepts the need to progress projects during the planning stage in limited cases to support planning or meet initial deadlines. There is a low tolerance to full mobilisation prior to the planning stage being completed and approved.

5. Project risks across the business unit will be evaluated to ensure a balance of risks and no excessive clusters of any risk types.

All figures and data are purely illustrative.

RAG;

28

Model - Business Unit Level; Rules

Target Margin

7%

time

perfo

rman

ce Appetite Boundary – Max Margin 12%

Appetite Boundary – Min Boundary 1%

All figures and data are purely illustrative. 29

Model - Business Unit Level; ToolsProject Risk Identification Matrix

Decision Category/Rank 0 -- 1 2 -- 3 4 -- 5

ScoreKey Risk

Comments / Actions0-5 Y / N

Scope - Ability to Define

Specific deliverables, assumptions, and exclusions.

Potential ambiguity. No RIBA level or examples.

Client or MWH unable to fully define.

3 N 

Scope - Design Detail Feasibility stage.

Simple detailed design, Tech specs for D&B Contractor.

Detailed design; multi-disciplinary or complex.

5 Y 

Scope - Key Discipline Risks

Standard Disciplines.

New Technologies. Remediation design.

ORC trigger. Remediation Contracting. Principal Designer.

5 Y

All figures and data are purely illustrative.

Model - Business Unit Level; ToolsProject Risk Identification MatrixScope;• Ability to Define• Design Detail• Key Discipline Risk

Client;• Type of Client• Experience With Client

Resources;• In House Availability• In House Skills & Experience• Sub-Contract Experience• Ability to Manage Sub-Contract

Contractual;• Contractual terms• Financial Implications• Sub-Contract Flow Down

Financial;• Incentivisation• Grade / Rates

Other Risks (inc review of 10 Essential Rules of Business and Contracting)

Model - Business Unit Level; ToolsProject and Portfolio Analysis

Project

Client Scope Client Resources

Financial

Contractual

H&S / Wellbeing

Env & Communities

Client Service

Valued & Proud

Live Projects1 … -1 0 -1 0 0 0 3 3 42 … -1 0 -3 0 -1 1 1 2 03 … -5 -2 0 -1 0 0 0 0 04 …Bids / Opportunities5 … -1 0 -4 0 0 0 2 4 0Pipeline6 … -4 -3 -5 -1 -2 -2 3 0 0

Revenue

Expected margin

Risk Reserve

Maximum Credible

Minimum Credible

Factored Minimum Cred

£1500k

£100k £80k £180k £20k £20k

£1500k

£100k £80k £180k £20k £-100k

All figures and data are purely illustrative.

Model - Business Unit Level; ToolsProject and Portfolio Analysis

  Margin RAG  Min Margin 1.00%  Risk Appetite Target 7.00%    Max Margin 12.00%       5%-ile 1.20%  Live Projects Mean 6.50%    95%-ile 11.85%       5%-ile 0.90%  Live+Bids Mean 5.5%    95%-ile 11.80%       5%-ile -2.00%  Live+Bids+Pipeline Mean 5.90%    95%-ile 10.90%         

Expected Margin

Max Cred

Min Cred

Factored Min Cred

All figures and data are purely illustrative.

Model - Business Unit Level; ToolsQualitative / Quantitative Analysis

Target Margin 7.00%

time

perfo

rman

ce Appetite BoundaryMax Margin 12.00%

Appetite BoundaryMin Margin 1.00%

Live 95%-ile11.85%

Live 5%-ile1.20%

Live Mean6.50%

All figures and data are purely illustrative.

Model - Business Unit Level; ToolsQualitative / Quantitative Analysis

Target Margin 7.00%

time

perfo

rman

ce Appetite BoundaryMax Margin 12.00%

Appetite BoundaryMin Margin 1.00%

Live+Bids+Pipeline95%-ile 10.80%

Live+Bids+Pipeline 5%-ile -2.00%

Live+Bids+PipelineMean 5.90%

All figures and data are purely illustrative.

Projec

t 1

Projec

t 2

Projec

t 3

Projec

t 4

Projec

t 5

Projec

t 6

Projec

t 7

Projec

t 8

Projec

t 90

5001,0001,5002,0002,5003,0003,500

Resources

Model - Business Unit Level; ToolsRisk Graphs

All figures and data are purely illustrative. 36

Model - Future Developments• Formalised Leadership Links• Culture Shifts and Communications• Improved Data and Data Governance• Key Risk Indicators and Control Indicators• Review & Adjustments to Models and Tools

37

Model – Benefits to BU Commercial Team• Better Understanding of Acceptable Risk• Earlier Identification of Key Risks• Fixed Process to Evaluate Risks Across Portfolio • Ability to Model Scenarios• Greater Visibility• Ability to Influence Decisions

38

Model – Benefits to Business Development• Better Understanding of Acceptable Risk • Growth Strategy Aligned with Risk Appetite• More focused Marketing Activities• Ability to Quantify Risks to Remove ‘Invalid’ Risk

Perception

39

Model - Benefits to UK Board• Clear Instruction of what is the Acceptable Risk• Greater Visibility of

– Live Project and Portfolio Risk Profile– Impact of Potential Projects– High Risk Areas (Scope, Resources etc)

• Ability to Make Informed Decisions on Opportunities

40

Need: Help the business decide which projects to take on!

Model

BU Level Strategy with clear Risk Appetite

Qualitative Project and Portfolio Analysis Tool

Quantitative Project and Portfolio Analysis Tool

Report

UK Board Level

Any questions?

42

This presentation was delivered at an APM event

To find out more about upcoming events please visit

our website www.apm.org.uk/events