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Integrating ERM with Strategy Do, H., Railwaywalla, M., & Thayer, J. (2016). Integration of ERM with Strategy reading provided 3 use cases on methods of integrating ERM with strategy. Review the approach of each company and provide a summary of the key differences between the three implementations. integration_of_erm_and_strategy_case_study.pdf Unformatted Attachment Preview Integration of ERM with Strategy Case Study Analysis – April 2016 Prepared by: Ha Do, Maria Railwaywalla, Jeremiah Thayer Graduate Students, Poole College of Management, NCSU Table of Contents I. Introduction ......................................................................................................... 2 II. Case Study: Mitchell Industries .......................................................................... 3 III. Case Study: Eli Lilly ............................................................................................ 9 IV. Case Study: Daisy Company .............................................................................. 15 V. Conclusion........................................................................................................... 21 VI. Appendix ............................................................................................................. 22 A1: Mitchell Industries: Risk Assessment Template A2: Mitchell Industries: Template Assessing Risk in Relation to Strategy A3: Eli Lilly: Risk Assessment Template A4: Eli Lilly: Risk Ranking Matrix A5: Daisy Company: Risk Template A6: Daisy Company: Rating Scale VII. About the Authors .............................................................................................. 34 Introduction One of the greatest sources of risk for today’s companies arises from the context of its strategic plan. While a company’s strategy drives its value creation, it also entails risk-taking; when strategies change or new initiatives are implemented, new risks may be introduced or existing risks could change. The greater the degree of integration between strategy and risk management, the more likely it is that a company will be able to successfully implement its strategy. Enterprise Risk Management (ERM) is an emerging process that can serve many purposes: as a tool for risk management, strategic planning, and identification of emerging opportunities and potential competitive advantages. The purpose of this case study is to provide a description of the processes used by three different companies in different industries to illustrate the ways these companies have integrated ERM in the context of their strategy. These case studies are based on real life examples of how companies have attempted to better integrate their ERM process within their strategic planning process. The three cases reveal the variety of methods that can be used based on a company’s strategic objectives, business model, culture, and maturity in ERM implementation. This report also highlights key takeaways as points of comparison when assessing the level of integration between ERM and the strategic planning and implementation process. Readers should keep the following in mind: ● ERM personnel can use this document to assess their company’s level of integration and discuss how their current ERM process can be improved and be more closely aligned with the strategic planning process. ● The methods of integrating ERM with strategy will vary based on the company. Just as ERM requires customization to suit a company’s unique objectives, culture, and business model, the integration of risk management and strategic planning also requires a company to consider its objectives and culture before deciding the best way to align the two processes. Increasing complexity due to industry changes, globalization, and shifts in technology and business cycles can produce more risks related to strategy than ever before. By establishing a close link between a company’s strategic planning and risk management processes, management can help ensure that new strategic initiatives are connected to appropriate risk mitigation strategies, that changes in the company’s strategic direction are accompanied by timely assessment of new or emerging risks, and that the company is better prepared to identify riskrelated competitive advantages. INTEGRATION OF ERM WITH STRATEGY - 2 Case Study: Mitchell Industries Background of the Organization Mitchell Industries is a global aerospace, defense and information technology company. They provide a broad range of management, engineering, technical, scientific, logistics and information services. The company was founded in 1985 and has grown organically and through a number of acquisitions. Headquartered in Chicago, Illinois and incorporated in Delaware, the company conducts most of its business with the U.S. Government, principally the Department of Defense (DoD) and intelligence community. The company has 120 locations worldwide, including 72 international offices, approximately 24,000 employees and customers in 150 countries. Overview of ERM Mitchell Industries views risk management as critical to its success. Risk management is embedded in many business processes such as executive planning, program / contract management, research and development, etc. However, following the financial crisis, there was an increased focus on risk oversight practices. Credit rating agencies, such as Standard and Poor’s, began assessing enterprise risk management processes as part of their corporate credit ratings analysis, and there were signs that new requirements would be placed on Boards of Directors regarding their risk oversight responsibilities. During this same time frame, the company appointed a new board member to chair the Audit Committee who placed an increased focus on the company’s risk management practices. Leadership of the organization also began to see the need for a more formal enterprise wide process for managing risk. All of these events led to the implementation of a formal structured ERM process in 2009. Initially, Mitchell Industries maintained independent ERM and strategy processes that occurred in parallel. As leaders recognized the value of being better informed of and prepared for risk events, steps were taken to align and integrate ERM with the strategic planning process. There are now several points of integration between the two processes to ensure they are in sync and reflect the priorities of the organization as a whole. Integration of ERM with Strategy The next few paragraphs highlight the details of the ERM cycle, strategy planning process and their integration. ERM Cycle The company has an annual ERM cycle which is facilitated by the ERM team. The ERM team consists of three members, the Director and two analysts. They are the link between the members of the organization responsible for risk management and the enterprise risk management process. The annual process begins with the identification and assessment of risks in the January / February time frame. The ERM team administers a survey to Vice Presidents (VPs) and selected INTEGRATION OF ERM WITH STRATEGY - 3 Directors (direct reports to VPs). At the same time, interviews are conducted with the CEO and the CEO’s direct reports (senior executives). The ERM team analyzes the information gathered in the surveys and interviews to prioritize the risks. The prioritized risks are typically presented using a heat map. For each of the organization’s top risks (typically 8-10 risks), an owner is identified. The risk owners, also referred to as risk champions, are responsible for assigning a risk manager, approving mitigation (action) plans, resourcing the plan, and briefing the plan to the Board. The risk owners are assisted by risk managers who are responsible for the risk action plan. The ERM team works with the risk managers to understand survey findings and develop mitigation plans. The risk managers are responsible for managing the risk and tracking the progress of the mitigation plan. They own the risk and report progress of the mitigation plans to the ERM team on a quarterly basis. The ERM team summarizes the risks, the risk mitigation plan and the progress in implementing the plans on a dashboard that is reported to executive leadership and the Board. During the third quarter, the ERM team updates the earlier identified risks by conducting a second round of interviews with the CEO and senior executives. They factor in risks that arise due to external factors such as regulatory risks, geo-political risks, economic risks, technological risks, etc. Any significant changes are incorporated into the heat map and used to refine the risk mitigation plans. The company has several business units and the ERM team shares business unit specific risks (heat maps) with the executive leadership team of each business unit during the March timeframe. During the second quarter, the business units consider these risks, determine the risks critical to their respective business unit and communicate their action/ mitigation plans back to the executive team during the July time frame as part of their strategic plan. Strategic Planning Process Mitchell Industries has an annual strategic planning cycle. The process starts in December and is both a top-down and bottom-up approach. The CEO owns the overall strategy. That strategy is primarily developed by the Corporate Strategy office, working in conjunction with business unit strategists. Once the overall strategy is developed, the plan is communicated by the CEO to the VPs at the annual Senior Leadership Meeting in the January/February timeframe and to the Board in February. The business units develop their respective strategies in light of their portfolio of products and within the framework of the corporate strategy and guidance provided by the Corporate Strategy office. This process begins in February and culminates in July with the Strategic Planning Conference where the business unit leaders present their strategy for the upcoming year to the CEO. Each business unit is also responsible for annually developing a three-year business plan that reflects the implementation of the strategy. This plan is updated concurrently with the strategy and is finalized in November. INTEGRATION OF ERM WITH STRATEGY - 4 Mitchell Industries ERM & Strategy Implementation Timeline Jan. Strategy ERM Feb. Mar. CEO communicates strategy to VPs & Corporate Strategy provides planning guidance to Business Units Apr. May Jun. Jul. Business Units develop strategic plans and factor in risks communicated by ERM team in formulation of plans ERM team conducts ERM team ERM team enterprise-wide survey analyzes communicates of VPs and interviews survey survey results executive leadership results and Communication to CEO and team (CEO, Business unit prioritizes of enterprise risks Business Unit leaders) risks to the Board leaders Aug. Sep. Business Units communicate strategic plans to CEO Oct. Nov. Dec. Corporate strategy kick-off Business Units develop and present 3 year business plan Interview results fed in to Dec corporate strategy kickoff ERM team conducts follow-up interviews with executive team Communication of risk status to executive leadership and the board Continuous review of progress of mitigation plans Integrating the Two Processes The strategic planning process and ERM process are initiated in two different organizations and start at slightly different times. Strategic planning starts with the CEO and strategy leads. ERM starts with surveying the VPs and their direct reports. The two processes operate in parallel, with both following an annual cycle and combined top-down / bottoms-up approach. There are several points where information is shared between the two. This is how the company integrates the two processes to ensure ERM and strategy are in sync and have an enterprise wide impact. The following are the specific points of integration: ● Macro Level – The first point of integration is the third quarter risk update. This updated information, which includes external risk developments that may impact the organization, is communicated to the corporate strategy team who then factors the information into the corporate-level strategy. ● Micro Level – The second stage of integration is at the business unit level. Each business unit receives the broad strategic objectives post the CEO and VPs meeting (January/ February time frame). The business units also receive specific information about their top risks from the ERM team (March time frame). The business units factor this information into the formulation of their strategic plans. ● Third Level – The final stage of integration occurs when Functions develop strategies/ action plans to support Business Unit plans and address specific risks. INTEGRATION OF ERM WITH STRATEGY - 5 Mitchell Industries ERM & Strategy Integration Strategy Planning Process ERM Process Corporate strategy office develops corporate strategy plan on behalf of CEO ERM team surveys the VPs and directors to identify broad level risks ERM team interviews the CEO & senior executives for additional risk identification and assessment Quarterly reporting Macro level integration ERM team communicates the results of the interviews/ surveys to the corporate strategy team who incorporates the same in strategic planning ERM team:  Gathers information about external risks to the organization  Consolidates the survey/ interview results  Communicates top risks to risk owners and business units through heat maps  Works with risk managers to develop risk mitigation plans  Conducts second round of interviews and communicates to senior executive team Risk owners identify a risk manager, approve mitigation plans and provide resources for plans Planning guidance to BUs Micro level integration BU’s develop individual strategic plans within the corporate guidance framework and include BU specific risks BU leaders are responsible for preparing mitigation plans for their respective BUs Risk managers develop and execute risk mitigation plans and report progress quarterly CEO communicates strategy to all VPs at Senior Leadership Meeting Functional units develop strategies/ action plans to support BU plans and address specific risks Business Units:  Receive broad strategic objectives post CEO/ VP meeting  Receive guidance from Corporate strategy office  Communicate respective strategic plan to CEO  Develop 3 year business plans Third level integration Functional unit support to BUs Issues in Integration The initial integration of the two processes was not simple and smooth. The company encountered some challenges, but ultimately was able to adapt the process. The key issues faced by the company and the steps that were taken to remedy those issues are as follows: ● Non-value Add Perception The strategy and business unit leaders believed they had a complete understanding of the internal and external environment. Therefore, they did not see the value offered by the ERM team and the need for a separate risk identification and assessment process. To deal with this, the ERM team worked to eliminate duplication and redundancy and show the business unit leaders the value added by taking a comprehensive, enterprise wide approach to risk. For example, the ERM team accumulated risk information from across the enterprise and provided executive leaders with an enterprise view of risks that they otherwise INTEGRATION OF ERM WITH STRATEGY - 6 would not get. In addition, they provided business unit leaders with an opportunity to shape the process for gathering risk information so that the process would be more meaningful for the business units. Over time, this helped the strategic and business unit leaders be more accepting of the ERM process and team. ● Leadership Change Another challenge faced by the organization was the frequent turnover in the top corporate strategist position. This led to frequent adjustments in the planning process for the organization. For example, at one time, there was heavy reliance on external sources for risk information, however, with a change in personnel, the strategic planning function began relying more on the internal ERM team for risk information. With that shift, the ERM team was able to be more involved in the strategic planning process. Through these changes, the ERM team recognized the need to educate and advocate the value the ERM process can bring. They now provide a basic introduction and overview of ERM to new leaders. The education process is not always formal; ERM professionals also look for opportunities to network within the organization to make more people aware of the work the ERM team performs and the resources they have to offer. Future Steps Like the ERM process overall, the integration of ERM and strategy is an ongoing effort which continues to make incremental improvements each year. The company believes the integration is working well especially since the current leadership is open to further opportunities to fine tune the integration between the two. Even with the advances the company has made in their ERM process, the company feels that parts of the organization are still operating in silos and that improvements could be made in the linkage of risk mitigation processes across organizational boundaries. The company does not have a system to align strategic initiatives and risks at the business unit level with initiatives and risks at the corporate level. This could potentially result in disconnects between the two. The company is now piloting a new software tool that has the potential to link corporate level and business unit level strategies and risks. Another area of improvement recognized by the company is the resource allocation process as it relates to risk mitigation. While risks are being considered in the strategic planning process, the need for resources to mitigate high priority risks is not being considered alongside the resources needed to implement strategic initiatives in each function area. Each functional team has their initiatives that support the corporate strategy, but those initiatives are not explicitly linked to the potential risks of achieving the corporate strategy. The ERM team is working with strategy and functional teams to create better alignment of objectives, strategies and risks. INTEGRATION OF ERM WITH STRATEGY - 7 The company has crossed the initial hurdle of identifying and spreading awareness about the need for and benefits of integrating ERM and strategy. In other words, they have successfully answered the question “why is integration necessary”. However, they are now in the stage of answering the question “how to effectively implement the integration” and “how to overcome the challenges of integration”. Successfully dealing with these questions will enable Mitchell Industries to move onto the advanced stage of integration where corporate level and business unit level strategies and risks are developed and managed in an integrated, enterprise-wide process. INTEGRATION OF ERM WITH STRATEGY - 8 Case Study: Eli Lilly Background of the Organization Headquartered in Indianapolis Indiana, Eli Lilly and Company focuses on the research, development, manufacturing, sale and distribution of human pharmaceutical and animal health products. The company sells products in approximately 120 countries worldwide. Eli Lilly has a market capitalization of approximately $90 billion, revenue in 2014 of $20 billion, and approximately 41,300 employees worldwide. Overview of ERM While the company’s ERM program began formally in 2005, the integration of ERM with the company’s strategic planning process started in 2007. In order to promote the importance of a strong connection and assess ways to improve the link between ERM and the company’s strategic planning process, the Sr. Director of ERM initiated a series of sessions amongst leaders from the Corporate Strategy, Ethics and Compliance (E&C), and Legal functions. It was especially important that key strategic risks be included in the ERM process, and that leaders within Eli Lilly’s strategic functions be able to provide inp ... Purchase answer to see full attachment