Enterprise Risk Management

Posted by Nia Dwi Astuti

Concept of risk has been studied in plenty of business contexts and even in the fields of science and engineering. The study of risk has promised essential investigation of corporate functions, for example decision-making tools (Yates and Stone, 2002), operations (Khan and Burnes, 2007), and strategic management tools (Sitkin and Pablo, 1992).

So what is risk? The ISO 31000 (Enterprise Risk Management) definition of risk is the 'effect of uncertainty on objectives.  In this definition, uncertainties include events (which may or may not happen) and uncertainties caused by ambiguity or a lack of information. It also includes both negative and positive impacts on objectives.

All projects involve risk, the zero risk project is not worth pursuing. This is not purely intuitive but also a recognition that acceptance of some risk is likely to yield a more desirable and appropriate level of benefit in return for the resources committed to the venture. (Chriss Chapman and Stephen, 2003).

Risk is present in every aspect of our lives thus risk management is universal but in most circumstances an unstructured activity, based on common sense, relevant knowledge, experience and instinct. Managing risk is the step that should take to know what you don’t know. The Purpose of Risk Management is not to eliminate risk, if you strive to eliminate risks to zero level, you are in process to kill your business. Risk management refers to a coordinated set of activities and methods that is used to direct an organization and to control  the many risks that can affect its ability to achieve objectives. According to the Introduction to ISO 31000 2009, the term risk management also refers to the architecture that is used to manage risk. This architecture includes risk management principles, a risk management framework, and a risk management process.

Risk management encourages value creation by enabling management to:

• Manage all potential future events that create uncertainty.
• Provide the proper treatment to minimize the potential loss and simultaneously strengthen opportunity.

The characteristics of Enterprise Risk Management are:

• Support the strategy and planning
• Proactive.
• Driven by the needs of each company's business processes
• Applied to the tangible and intangible assets
• Integrated.
• Manage all potential future events that create uncertainty.
• Provide the proper treatment to minimize the potential for loss
• Identification, risk analysis, evaluation, treatment, and ongoing risk monitoring.
• Clearly specify the party responsible for each risk, determine roles and responsibilities clearly.

The flow lines in Figure 1.1 show the process of risk management. 

1.   Risk Identification

Risk identification will produce a risk register. Risk register lists all identified risks that may affect the project. It should be as comprehensive as possible to include all identifiable items that have probability of occurrences and generally includes estimated probability of the risk event to occur, severity or possible impact of the risk, probable timing and anticipated frequency.

2.   Risk Analyze

The step after Risk Identification is analyzing the risk. Analyze how much the probability of occurrence of a risk event and what the impact on the company's operations. Analyze if the risk of events will cause a financial loss (profit and not achieving the target or not absorb the cost of the investment budget). Calculate financial losses include costs such as workers compensation, damage to assets / facilities, and rising operating costs and / or decrease in the Company's revenue also included in risk analyze. And also we must analyze qualitatively affect of reputation such disruption, environmental damage and health - safety (accidents), compared with the qualitative impact criteria and select the greatest index score.

3.   Risk Evaluation

Comparing Risk Level (Probability x Impact) to make decision regarding further action. Risk evaluation is a process that is used to compare risk analysis results with risk criteria in order to determine whether or not a specified level of risk is acceptable or tolerable.

4.    Risk Treatment/Response

This can include determining risk tolerance, choosing risk appetites, setting risk limits, performing risk mitigation activities, and optimizing organizational objectives relative to risk. Risk treatment is a risk modification process. It involves selecting and implementing one or more treatment options. Once a treatment has been implemented, it becomes a control or it modifies existing controls. You have many treatment options. You can avoid the risk, you can reduce the risk, you can remove the source of the risk, you can modify the consequences, you can change the probabilities, you can share the risk with others, you can simply retain the risk, or you can even increase the risk in order to pursue an opportunity.

Reference:

Chapman, Chris and Stephen Ward, Project Risk Management (Process, Techniques, and Insight), 2013, John Wiley & Sons, Ltd

Overview of ISO 31000 Risk Management Standard

Measuring and Evaluating Performance

Posted by Nia Dwi Astuti

Introduction

Putting performance measurement systems in place can be an important way of keeping track on the progress of the business. It gives a vital information about what's happening now and it also provides the starting point for a system of target-setting that will help to implement the strategies for growth. 

Why evaluate performance? Evaluate Performance is an essential part of the management process. The purpose of performance evaluation is to understand and continuously improve the way in which the function works and the results that it achieves. Performances evaluation helps to:

• Understand to what extent customers (external as well as internal) are satisfied
• Understand different factors that may be causing problems
• Focus attention on priority areas when seeking solutions to problems
•  Take corrective action wherever problems exist
• Improve decision-making
•  Develop better relationships with customers, including suppliers and other functional area in the company
• Identify the resources or organizational arrangements that may be needed to improve performance
• Recognize high or low performing staff and teams, and identify needs for training and better work organization
• Motivate people to do the best possible job

What makes a good evaluation system?

There is no single best performance evaluation system applicable to every company. Each enterprise must find its own solution, tailored to its particular needs and context. A good performance evaluation system must respond to a number of requirements, for instance:

• Support and consistent with the company’s goals and objectives
• Reflect customer satisfaction level
• Allow for control but focus on improvement
• Contribute to effective decision making
• Take account of the external & internal environment
•  Be adaptable to changing circumstances
•  Measure results against target performance
• Have a balance of quantitative and qualitative measures

Behavioral Impact

Evaluating performance has an impact on the way people behave. The effect is particularly noticeable if the results of the evaluation have an influence on the person’s remuneration or other form of incentives. If some aspect of your work is being monitored and assessed, it is natural to want to ensure that it is properly completed. This will ensure that the reports on your work are favorable. Nobody wants to be seen to be doing an unsatisfactory job.

Not everything can be evaluated, so performance evaluation must necessarily be selective and focus on what is important. Performance evaluation can also have a positive or negative effect on people’s motivation. The motivation is likely high if performing well will result in positive recognition, has ability to achieve he target even if they require extra effort, have been involved in setting the performance target or at least agree with the importance of reaching the targets.

Otherwise, performance evaluation will be de-motivating if the target not realistically achievable, or that there are too many other factors beyond control that determine whether the targets will be achieved, the excessive focus on quantifiable targets restricts and restrains the creativity and ability to find innovative solution in daily work.

Achieving a good performance can help the function to “sell itself” more effectively within the organization. This is because its contributions will be seen as more concrete, and therefore more believable.

Reference:

International Purchasing And Supply Chain Management Modular Learning System Module 12, ITC

http://www.controlglobal.com/assets/Media/Whitepapers/2009/090312_Osisoft_KPI.pdf

Understanding Balance Scorecard

Posted by Nia Dwi Astuti

A company is sustainable only if it delivers balanced superior value to win the heart and mind of its three most important markets i.e .: Commercial Market, Competence Market and Capital Market. (“The Value Enterprise”, J. Donovan; R. Tully; B. Wortman.)

Both large and small companies will be able to be more agile if they have a management system that can break down the establishment, and culture “talk only”. Almost all private and government organizations, profit and nonprofit, believes that build design of the strategy is relatively easy, but the biggest challenges often faced is execution strategy. (“Even Elephant Can Dance”, Suwardi L; Prima A.Bintoro and Raymond Hadisubrata)

Execution strategy has become the corporate challenge of the time. The main reason why organizations failed in optimizing their Strategy Implementation. (rank based on % survey respondent choices) Indonesia Strategy and Performance Management Survey Report, 2010 and 2011

1. Absence of an unit that facilitated strategy development and monitoring the implementation.
2. There is no learning and corrective action for implemented strategy (from review meeting).
3. Unavailability of standard process to ensure that unit strategy, target and working program align with other units and organization level strategy.
4. There is no clear and inspiring guidance for strategy ahead from Executive Management.
5. There is no clear reward (and non‐reward) system between high performance and low performance  employee.

The first step to execute strategy is create the strategy. After that we need to visualize the strategy before implement the strategy. Balance scorecard is tool to visualize the strategy. So what is balance scorecard? Balanced Scorecard is a Framework that helps organizations visualize its strategy and translate the strategy into operational objectives that drive both behavior and performance. 

There are 4 perspectives in balance scorecard, which are financial perspective, customer perspective, internal business process perspective and Learning & Growth Perspective.

Steps of Strategy Execution:

1. Build Vision and Mission, from vision and mission to destination statement.

Vision         : A desired future outcome of an organization

Mission       : The reason of organization’s existence, what we do today to achieve vision

Destination Statement : A “Snapshot” of what an organization is expected to be like 3‐5 years in the future, as a milestone along the journey in achieving the vision.

Example:

2. Build Strategy Map

Strategy Map is an interrelationship among strategy objectives in cause‐effect format that reflects the “journey” of an organization’s strategy.

3. Build Strategy Objective
Strategy Objective is a concise statement describing the major activities that an organization must do well in order to execute its strategy. A cause‐effect mapping of SO is termed as strategy map. The Strategic Objective typically uses the verb that implies improvement, such as: improve, increase, develop, attain and decrease.

           Example:

           • Enhance competency of employee

           • Improve logistic management

          Alternatively, may use noun that is accompanied by adjective that also implies improvement.

          Example:

          • Conducive working climate

          • Optimal budget spending

4. Build initiatives/action plan
Specific projects that need to be implemented in order to support the achievement of strategic objectives. A project normally has a beginning and ending points.

Component of the balanced scorecard framework

Reference:

Even Elephant Can Dance, Suwardi L; Prima A.Bintoro and Raymond Hadisubrata

The Value Enterprise, J. Donovan; R. Tully; B. Wortman.

Team-Based Strategic Planning: A Complete Guide to Structuring, Facilitating, and Implementing the Process, C. Davis Fogg

The Balanced Scorecard: Translating Strategy into Action, Robert S.Kaplan and David P. Norton

Modul Training Certified Strategy Execution Professional.

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