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Building Enterprise Risk Management ERM: managing at the speed of risk

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Title: Building Enterprise Risk Management ERM: managing at the speed of risk


1
Building Enterprise Risk ManagementERM
managing at the speed of risk
  • Nancy Simonson, Senior Vice President of
    Construction, Zurich Deron Cowan, Global
    Construction -Zurich Services Corporation RE
  • December 7, 2011

2
Why Enterprise Risk and Resiliency Management?
Corporate Failures Large Catastrophes
  • Fishbach Moore
  • Mortgage meltdown
  • Credit crisis

Best Practices
Regulatory Actions
ERM
  • Architects/engineers
  • Contractors
  • Specialty trades
  • Suppliers
  • Corps of Engineers
  • OSHA
  • Federal guidelines

Industry Initiatives
  • BIM
  • LEED
  • Sustainable/Green

ERM is not a passing fad Standard Poors May
7, 2008
3
Aim of Enterprise Risk Management
Establish a proactive process framework for
planning, organizing and controlling the
activities of the organization in order to
optimize the effects of risk on capital and
earnings.
  • Protects profit, reputation and shareholder value
  • Enables effective recovery of business before
    customers leave
  • Reduces overall cost of risk at improved
    protection levels
  • Enables more informed risk transfer decisions
  • Improves compliance and strategic planning for
    execution

4
Perceived Benefits of ERMHighest rated benefits
by type of firm ranked in order(Zurich/FMI
survey results)
CM/GC Specialty/Subcontractor
Improved understanding of risks and controls Ability to apply consistent policies and standards
Ability to apply consistent policies and standards Improved understanding of risks and controls
Opportunity to identify and assess risk holistically Ability to set a common risk culture (e.g., risk appetite, language)
5
Today we will discuss..
  • Current challenges
  • State of the industry
  • Why contractors fail
  • Business Resilience
  • Enterprise Risk Management

6
Challenges to Enterprise Resilience
  • Risks are on the increase
  • Disruptions are created by global supply chains,
    lean operations, complexity, outsourcing, the
    economy
  • Businesses are under-prepared
  • More disruptions expected

D
7
Sources of ChangeInfluences on engineering and
construction
At present another composition is commencing,
each generation has its composition, people do
not change from one generation to another
generation but the composition that surrounds
them changes. - Gertrude Stein
Green Building
Credit
Social Networking
BIM
Internet
Labor
Asia
Terrorism
Baby Boomers
Collaborative Software
Economic Crisis
Modular Construction
Aging Infrastructure
Outsourcing
D
8
The Anatomy of Enterprise Risks
Hazard
Event
Cause
1st order risks
Physical damage, personal injuries/deaths
Insurable
Visible, can be evaluated
2nd order risks
Consequential losses (production, profits)
3rd order risks
Indirect economic losses (market share, image,
managing upset, personnel, lost investments...)
Poorly visible, difficult to evaluate
4th order risks
A consequence of the preceding risks and
unacceptable to society
Not insurable
D
9
Segments of Risk
  • Strategic risks-Comprise threats and
    opportunities that influence the ability of the
    company to attain strategic ambitions and remain
    viable
  • Operational risks-Involve adverse unexpected
    developments resulting from internal processes,
    people, and systems, or from external events that
    are linked to the actual running of each risk
  • Financial risks-Cover risks related to
    accounting, treasury, pensions and fiscal risk
  • Market risks-Cover the effect that changes in the
    market may have on a company. Market risks are
    related to areas such as economic and political
    developments are likely to affect all market
    participants in a similar manner

D
10
ERM Risk Wheel
D
11
Today we will discuss..
  • Current challenges
  • Risk Management Approaches
  • Why contractors fail
  • Business Resilience
  • Enterprise Risk Management

12
Competing Risk Management Approaches
  1. Risks are measured and managed independently,
    typically on a project-to-project basis.
  2. Risk types are aggregated to facilitate
    discussion of the firms overall risk position.
    Correlations between risks are generally not
    addressed.
  3. Many major risks are measured simultaneously
    (i.e., with correlation effects considered),
    however, the process tends to lack
    standardization.
  4. Most major risk types are measured simultaneously
    (i.e., with correlation effects considered), with
    many of the processes standardized and repeatable.

13
Today we will discuss..
  • Current challenges
  • State of the industry
  • How and Why contractors fail
  • Business Resilience
  • Enterprise Risk Management

14
The Icarus EffectFMIs Failure Chain Reaction
Model
Mind of the Contractor
Nature of the Construction Industry
Company Performance
Loss of Financial Capacity
Culture and Systems of the Organization
General Economic Conditions
Bankruptcy Doom Loop
FMI Research on Why Contractors Fail, FMI
Quarterly, Issue 2, 2007, pg 56.
D
15
Failure Chain Reaction Model
Interest Rates
Material Shortages
General Economic Conditions
Global Economy
Bonding Status
Demographics
Government Policy
Changes in Tax Law
Consumer Confidence
FMI Research on Why Contractors Fail, FMI
Quarterly, Issue 2, 2007, pg 57.
16
Failure Chain Reaction Model
Financial Discipline
Succession Planning
Culture and Systems of the Organization
Project/Owner Selection
Innovation Process
Strategic Planning
Capital Reserves
HR Systems
Corporate Culture
Public vs. Private
FMI Research on Why Contractors Fail, FMI
Quarterly, Issue 2, 2007, pg 59.
17
Failure Chain Reaction Model
High Leverage
Manpower Shortage
Nature of the Construction Industry
Industry Cycle
Hard Bid Process
Project Timing
Derived Demand
Hyper-Competitive
Unique Projects
FMI Research on Why Contractors Fail, FMI
Quarterly, Issue 2, 2007, pg 57.
D
18
Failure Chain Reaction Model
Driven to Grow
Numb to Risk
Mind of the Contractor
Hyper-Optimistic
Overconfident
Afraid of Layoffs
Action Oriented
PM vs. CEO
General economic conditions are rarely the root
cause of failure. A declining market can,
however, provide the tipping point to impending
disaster.
Feast or Famine
FMI Research on Why Contractors Fail, FMI
Quarterly, Issue 2, 2007, pg 60.
D
19
The Icarus EffectFMIs Failure Chain Reaction
Model
Mind of the Contractor
Nature of the Construction Industry
Company Performance
Loss of Financial Capacity
Culture and Systems of the Organization
General Economic Conditions
Bankruptcy Doom Loop
FMI Research on Why Contractors Fail, FMI
Quarterly, Issue 2, 2007, pg 56.
D
19
20
Mind of the ContractorConflicting mentalities
  • Construction is a high-risk businessthose who
    venture into this business are numb to its
    inherent risks
  • Or, after decades of facing these risks and
    succeeding, contractors can develop calluses to
    these risksthey believe they can control the
    risks

D
21
FMI Surety Providers SurveyWhich criteria do you
view as the major causes of financial
difficulties for contractors?
Insufficient capital/excessive debt
Mismanagement
Independent risk-taking
High overhead
Weak project execution
Inadequate controls
Character of management
Low profit margins
Slow collections
of All Responses
22
FMI Surety Providers SurveyRespondents concerns
regarding their contractor clients
  • Clients failed to bring down overhead in
    conjunction with declining revenue and backlog
  • Clients have strayed too far from their areas of
    competency
  • Many contractors that traditionally served
    private markets are now pursuing public project
    opportunities or expanding into new geographies.
  • Clients have taken on unacceptable levels of risk
    in bidding new work
  • In efforts to keep the lights on many
    contractors are taking projects at a loss. For
    example, bids are coming in almost 20 below the
    engineers estimate on Florida Department of
    Transportation projects due to the influx of new
    competitors.

23
Today we will discuss..
  • Current challenges
  • State of the industry
  • Why contractors fail
  • Business Resilience
  • Enterprise Risk Management

24
24
25
Companies are not prepared to recover from major
disruptions
  • Over 75 say a major disruption to their top
    earnings driver would cause sustained damage to
    earnings or threaten the continuity of
    operations.
  • Fewer than 25 of respondents believe their
    current risk management efforts sufficiently
    address key areas of contingency planning.
  • More than 33 say senior management lacks a
    thorough understanding of the level of
    preparation and potential impact of a major
    disruption.
  • Many Sr. executives still fail to recognize risk
    management as a priority.
  • Improved communication among key stakeholders
    about risks and contingency planning is needed.

Protecting Value Study, 2002. A survey of 199
financial executives and risk managers at Fortune
1000 firms in a variety of industries, sponsored
by FM Global, the National Association of
Corporate treasurers, and Sherbrooke Partners.
www.protectingvalue.com
26
Analysis of approximately 2500 disruptions
Source The University of Manchester (Manchester
Business School)
SC7(V1)Jul/05/10GC/ZCA
27
Model financial effects of scenarios threatening
business resilience
Framework to analyze effects of BI
Repeatable and consistent approach
Understand profit and loss exposure
Risk information communication
Informed decision making
Optimize risk transfer premium allocation
Enhanced operating efficiencies
REP14(V2)Mar/03/10GC/ZCA
28
Identify and Prioritize Your Mission Critical
Activities
Proactive risk management
Identify vulnerabilities minimize uncertainty
Appropriate focused attention
Efficient resource capital allocation
Informed decision making
REP17(V2)Mar/03/10GC/ZCA
29
Total Risk Profiling to prioritize and improve
critical exposure
Business engagement support
Identify key risk triggers or new risks
Consensus on risk prioritization
Determine risk tolerance/appetite
Informed decision making management support
Risk profiling measurement
Risk mitigation
D
REP13(V2)Mar/03/10GC/ZCA
30
Keeping you in business
Easy to use planning templates
In-depth training support
Demonstrate competence resilience to
stakeholder
Achieve compliance
Effective communication plans
Protects reputation ensures sustainability
D
REP16(V2)Mar/03/10GC/ZCA
31
Today we will discuss..
  • Current challenges
  • State of the industry
  • Why contractors fail
  • Business Resilience
  • Enterprise Risk Management

32
Building ERM
D
33
Building ERM
D
34
Building ERM
35
Building ERM
D
36
Building ERM
37
Building ERM
38
Summary
  • The current business environment
  • Can cost customers money and shareholder value by
    mismanaging exposure
  • Prevent them from taking advantage of
    opportunities that drive growth
  • Requires a broad enterprise management framework
    to optimize balance
  • ERM offers building blocks to success
  • Minimize negative impacts on the balance sheet
    and the bottom line
  • Maximize success by removing barriers to
    achieving business objectives
  • Improve business resilience and capitalize on
    strategic growth opportunities

39
Thank youNancy.Simonson_at_zurichna.com,
952-229-3616Deron.Cowan_at_zurichna.com,
812-858-5391
  • Zurich Services Corporation
  • 1400 American Lane, Schaumburg, Illinois
    60196-1056
  • 800 982 5964 www.zurichservices.com
  • Zurich Services Corporation
  • Risk Engineering
  • This is intended as a general description of
    certain types of risk engineering
  • services available to qualified customers
    through Zurich Services Corporation.
  • Zurich Services Corporation does not guarantee
    particular outcomes and there
  • may be conditions on your premises or within your
    organization which may
  • not be apparent to us. You are in the best
    position to understand your business
  • and your organization and to take steps to
    minimize risk, and we wish to assist
  • you by providing the information and tools to
    assess your changing risk environment.
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