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Many organizations do not have a formal risk management program in place. And there are fewer corporations that bring risk factors into their planning and forecasting exercise. The question that arises is whether corporations should focus on enterprise performance or risk management – which of these is more critical. An organization with an optimistic business outlook would always say enterprise performance while a conservative business would say risk management. But best run businesses should have a enterprise performance strategy that incorporates risk management as an element of the same and more so extend it to their business planning or forecasting processes.

 

Having an adaptive planning process that incorporate risk assessment and mitigation plan, would truly enable factoring in of all the scenarios that may come across in business and the action plan to handle the different scenarios that may occur. This leads to a robust proactive business planning with almost no surprises other than external or natural events that can never be predicted.

 

Does every risk need management?

 

Normally people are overwhelmed with becoming too conservative and trying to become too overcautious, which could lead to detrimental effect on the enterprise performance. This is where the true risk management comes into play to draw the lines. Risk assessment needs to be in scope of what would affect the enterprise materially, and not every risk that may happen. For example, there could be a risk that Oil prices are increasing. Though this may have indirect effect on some organization, there should be a model to figure out if oil prices increase would effect the bottom line materially. In some organization where transport is critical in their supply chain, oil price increase would be a substantial risk. But in another organization that does a service business, oil price may not be as critical as it may mean some additional compensation for its employees, but nothing material. So it is important to have a risk management policy and more important to have that modeled into your enterprise performance management program, to ensure where you should concentrate.  And it is important to have a driver based planning model within the enterprise performance management program, where key risks are the identified as the drivers.

  

Driver based risk adjusted planning

 

Risks could be classified into external and internal risks. Often many organizations put more focus on external risks and do not put same level of effort on internal risks. But it is essential that both external and internal risks should be equally assessed and these risks serve as inputs to the planning process, as drivers, and facilitates assessing their impact on the organization financial performance. In the below table there are few examples of these drivers and how they affect the planning models. Offcourse the magnitude and effect depend on the business and industry an enterprise is in:

 

External Risk

Internal Risk

How does it affect the enterprise performance

Crude Oil price

Operational efficiency

Cost of Goods sold

Currency Fluctuations

Hedging strategy

Cost of Capital

Competitor Innovation

Exchange Rates

Disruptive technologies

New market strategy

Capital Investment strategy

Revenue growth

Government Policy

Strategic Location

Tax Rates

Supplier risks

Inventory strategy and policy

Working capital

     

 

 

 

Who drives risk adjusted planning and through what process?

 

This varies across an organization that has covered a formal process of risk management (more matured) vs. an organization that does the risk management in a more adhoc/informal way. Typically in a formal process, an organization has a person responsible for Risk – called as Chief Risk Officer (CRO).  But in the other type of organization, it is the CFO who is at the center of risk management. But in both type of enterprises, CFO is the person who brings the linking between risk management and planning process.

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But it is important to understand that both these processes are organization wide. In order to understand this further we can split the risk management part into two, Risk Assessment and Risk Mitigation. The risk assessment is really bottoms up and organization wide. The risk assessment goes hand in hand with the bottoms up planning process. Every department – sales, operations, human resources, finance, service, et al during the process of their planning would have risk assessment closely integrated where they identify the various risks and build their impacts into their plans. The management of these departments, consolidates these risks, adds additional risks that are more organization wide and builds the impacts of that risk into the overall plans. One of the important thing that is ensured in this consolidation process is to find of the ripple effect of 2 or more risks together. This may have a more significant impact on the plan. Now once the risk assessment is completed, the CFO with the help of CRO (in organizations CROs exist) comes up with the Risk Mitigation strategies, and again builds the cost effect of risk mitigations into the plans.  These strategies are reviewed and approved, and taken to execution in a closed loop performance management process.

 

Characteristics of risk and planning being dealt together in performance management

 

Here we list few characteristics that make risk and planning going together

 

  • Top down commitment – Both risk management and planning needs a management commitment, and driven from the top to ensure desigred results
  • Integrated across organization – both these process should be an organization wide process and should not be done in silo at individual department level, so a holistic approach is essential in this process
  • CFO at the center – Most of the organizations the CFO is at the center of both these process driving and responsible for the whole thing and ensuring organization wide alignment
  • Event based – both these process are driven by events that may occur, and making sure the business is predictable based on the scenarios that may arise due to the events
  • Futuristic – Its difficult to predict the future, but both risk management and planning are to do with future and therefore it becomes a more difficult and challenging process.

So having an integrated process across planning and risk ensures business predictability and better results.

 

How SAP solutions help?

 

SAP has best of breed solutions to perform both of the above processes – business planning (under the enterprise performance management solutions) and risk management (under the governance risk and compliance solutions).The goal of SAP’s solution is to have integrated processes across enterprise performance and risk management, that would enable risk adjusted planning and performance management.  This integrated with the Business Suite, would enable closed loop performance management to bridge the gap between strategy and execution, and ensure that the business is best run business.

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