Bridging the Gap: How to Turn Your

Biggest Risks into Strategic Opportunities

Andrew Blau
Hans-Kristian Bryn

Director,

Monitor Deloitte Partner, Strategic Risk Practice
Deloitte Consulting LLP Deloitte United Kingdom

Charles Alsdorf

Director, Advisory Services
Deloitte Financial Advisory Services LLP

1 Copyright © 2013 Deloitte Development LLC. All rights reserved.

1
Agenda

•  The new environment of risk and the challenge for CFOs

•  How to bridge the capability gap?
•  Implementation considerations and concerns

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The new environment of risk
and the challenge for CFOs

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Our research indicates an increased
focus on managing strategic risk

Exploring strategic risk Executive ownership Changing approaches

Does your organization Who primarily determines your Has your approach to
have an explicit focus on company's approach to managing strategic
managing strategic risks? managing strategic risk? risks changed in the
past three years?

What are the mechanisms that organizations use to achieve this?

Source: Deloitte/Forbes Insights Exploring Strategic Risk, 2013
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Companies face high levels of uncertainty
from external and internal sources

Executive challenges Investor questions

Strategic Financial • How are the executives

• How prepared are we • How much do key
for the risks and uncertainties expose our
opportunities that future cash-flow
inevitably lie ahead? positions?
• How should we invest in • How should we
our business to drive effectively allocate capital
optimal returns? to ensure a suitable risk-
adjusted return?
• As a CFO, what is my
own, personal “black • How can strategy, risk,
swan” and how should and finance work as
we plan for it? one?
• How should we define
our risk appetite?
planning for future value
creation/protection?
• What upside/downside risk
do you see on the
forecasts and dividends?
• How are strategic and
emerging risks managed
within the business?
• What is the best use for
the cash on the company's
balance sheet?
• What risk factors will affect
the stock going forward?

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CFOs are managing risk across a range of executive
functions…

Strategic planning & strategy development

Strategic focus

Business structure & portfolio management

Investment decision making

(organic & inorganic)
Tactical focus

Financial forecasting & budgeting

Risk management

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 …and must address distinct challenges over different time
horizons

Time horizon
Core area Short-term Medium-term Long-term
Setting short-term
Strategic planning Identifying value creation Preparing to succeed in
strategic goals and
& strategy opportunities and future markets;
executing within the
Strategic focus

development developing strategy succession planning

business

Business structure Optimizing investment Aligning portfolio Building future drivers of

& portfolio portfolio (e.g., small-scale requirements against value into the portfolio
management acquisitions, capex) strategic targets (e.g., brand value)

Executing investments;
Investment decision Targeting future Verifying “seed capital”
driving value in
making (organic & investments to optimize investment is applied for
investment appraisal
inorganic) risk-adjusted returns innovation
process
Tactical focus

Reliably analyzing the

Financial Understanding the
forecasting & probability of a specific
budgeting budget being delivered
Enhancing BAU risk-
Risk management return decision making
(e.g., hedging, op risk)
Effectively linking financial
exposure to emerging
planning processes with
risks with long-range
risk-return approaches
forecasts
Considering what new risk
Defining risk appetite and
capabilities are needed to
tolerances and enabling
support strategic
their practical use
execution

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Topics for discussion

•  What risks are giving most cause for concern?

•  Have these changed significantly over the past two to three years?
•  How well equipped are your organizations to address these risks?

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How to bridge the capability gap?

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 The capability gap can be
addressed using a range of approaches

Time horizon
Core area Short-term Medium-term Long-term

Strategic planning & 2 Identifying value creation Preparing to succeed in

opportunities and future markets;
strategy development
Strategic focus

developing strategy succession planning

Business structure & Aligning portfolio Building future drivers of

portfolio requirements against value into the portfolio (e.g.,
management strategic targets brand value)

Investment decision
making (organic &
inorganic) 1
Tactical focus

Understanding the Effectively linking financial Reliably analyzing the

Financial forecasting
probability of a specific planning processes with exposure to emerging risks
& budgeting budget being delivered risk-return approaches with long-range forecasts

Risk management

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Risk-adjusted forecasting involves stressing forecasts
with major risk drivers

Risk-adjusted forecasting approach

Inputs Model Outputs Decision making

Key inputs are The modeling The outputs ü  More robust and
required to enable approach utilizes produced by the transparent
structured and quantitative model allow evaluation of the
transparent techniques to assessment of risk and uncertainty
evaluation of risk- analyze risk-return uncertainty in in budgets and
return of financial across the forecasts and plans plans
planning application areas ü  Enabling scenario
modeling and
multirisk
External and internal data used
to describe impact and Local market-specific risk adjustments
probability distributions for applied to specific parts of the segment
each of the selected group- or business unit
wide risk drivers Budget

perspectives
£20  
Expected  value
Group-wide risk drivers BU-specific risk drivers
Worst  c ase  (1/20)
Example risk £15   Best  c ase  (1/20)
specific spot price

Local governance

Supplier-specific
Tax or customs
pairing forward

ü  Focus
drivers
considerations
consumption

GDP / capita
Commodity-
FX currency

duty factors

uncertainty
obligations

included for
forecasts

forecasts

EBIT  forecast  (£m)

Contract

Security
curves

factors

illustration
rates
Steel

only
Parameter £10  
$10  
$9  
$8  
$7  
BU1

BU2
x
x
x
x
£5  
management time
and efforts on the
$6   £-­‐
$5  
BU3 x x x
$4   BU4 x -­‐£5  
$3  
$2  
$1  
BU5 x x x
1 2 3 4 5 6 7 8
Quarterly  forecasts
9 10 11 12
key risk and value
x
drivers
...
$-­‐
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

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Risk-adjusted forecasting helps develop
a robust evaluation of risk within budgets

See chart (right)

ü  Deeper assessment of uncertainty in cash-flow and earnings forecasts

ü  Quantitative understanding of which risks contribute most to exposure
ü  Outputs provide insights into opportunities for capturing upside
Core
ü  Enabling integrated scenario modeling and multirisk perspectives
benefits
ü  Focus management time and efforts on the key risk and value drivers
ü  Enhanced confidence in delivery of plans and budgets
ü  Facilitates transparent challenge and review
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Case study:
Risk-adjusted forecasting to optimize asset performance

The main operating sites of this global metals and mining

The challenge company frequently failed to meet planned production targets and
budgets.

The underlying planning process did not take process variance

into account. By identifying and analyzing key input variables,
The solution
quantitative distributions were developed for each risk driver and
risk-adjusted forecasting models were generated for each site.

The enhanced models improved understanding of how underlying

volatility was impacting asset performance. In addition, more
The benefits
effective decision making was enabled through enhanced scenario
modeling, increasing confidence in plans.

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Scenario planning helps executives spot external threats
and their implications…

Assess implications,
Identify driving forces and
generate options, and
critical uncertainties
identify indicators

Develop a framework to
explore plausible futures

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…which allows executives to reframe risks and opportunities

Critical
Option 1 Risk 2

Risk 1 Critical Uncertainty 1

Uncertainty 2 Option 3

Option 2
Option 5
Option 4

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Case study:
Scenario planning to identify value creation
opportunities and drivers

A global media services company was reorganizing in the face of

The challenge a changing market. The CEO asked the executive team to identify
a short list of growth strategies to bring to the board and investors.

Recent strategy efforts had focused on cutting costs and

rationalizing the portfolio, but there was no vision of where new
The solution growth options were. By identifying drivers and uncertainties
across the media value chain, scenarios were developed to
generate strategic options, each linked to specific futures.

Executive leadership committed to pursue selected options

aligned to one of the scenarios, and the scenarios became the
The benefits basis for ongoing strategy reviews and monitoring shifts in the
environment. The highly participatory process also fostered
collaboration and alignment across business units and regions.

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Topics for discussion

•  Do you use any of these approaches in your financial and strategic

planning processes?
•  If yes, what has your experience of the value been?

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Implementation considerations and concerns

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Enhanced forecasting capabilities can be developed
through a phased approach
How do we start
to use the
What is the basis output?
of the technical
approach? •  Plan a roadmap
What level should for “first use”
we go to? •  Build into
•  Outline desired
Where should outputs existing
we start? •  Limit input to frameworks
•  Build and
How do we the top 10–15 •  Consider how
validate the
build the risks to use in
technical model
business case? •  Mixture of data market
•  Initiate pilot •  Provide a
and SME input communication
project or proof consistent set of
is required
•  Articulate core of concept risks and
•  Consider
benefits •  Use group-level forecasts
specialists’
•  Outline quick forecasts challenge of
wins and long- •  Build executive risk inputs
term value buy-in
•  Set up an
internal working
group

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Topics for discussion

•  What gets in the way of using these tools today?

•  What would you need to successfully put these approaches to work?
– People
– Process
– Technology

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Contact info

Charles Alsdorf
Director
Deloitte Financial Advisory Services LLC
calsdorf@deloitte.com

Andrew Blau
Director
Deloitte Consulting LLP
ablau@deloitte.com

Hans-Kristian Bryn
Partner
Deloitte United Kingdom
hbryn@deloitte.co.uk

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This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is
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