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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
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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
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