Operational Risk Management & Strategic Planning

Eneni Oduwole Group Head, Operational Risk Mgt.Dangote Group of Industries Limited

Outline

Introduction Strategic Planning Operational Risk Management Case Study OpRisk Drivers OpRisk Communication Improvement Strategy & Risk Interplay Prioritizing Risks RM & Value Creation RM & Strategic Planning Failure to Incorporate RM

Introduction

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Overview – Strategic Planning

Strategic planning requires clarifying the overall purpose and desired results of an organization, and how those results will be achieved

It is a disciplined effort to produce fundamental decisions and actions that shape and guide what an organization is, what it does, and why it does it, with a focus on the future

Elements Of Strategic Planning

Strategy Task Force

Vision and Mission Statements

Values

Goals and Objectives

Tasks Required

Implementation Strategy

Monitoring of the Strategic Plan

Operational risk, broadly speaking, is the risk of loss resulting from any malfunction in an organization

Such events include direct and indirect actions that may lead to increased errors, system failures, acts of nature, non-adherence with internal policies land regulatory stipulations

Operational Risk is the responsibility of all staff in an organization – junior, middle and senior staff

Involves interfacing with all business units with all business areas in the organization

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Overview – Operational Risk Management

What Is Operational Risk?

‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’…Basel Definition

‘the risk of loss resulting from inadequate or failed internal processes, systems or human factors, or from external events. It includes the reputation and franchise risk associated with business practices or market conduct in which the Company is involved’…Citigroup Definition

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Classification Of OpRisk

Operational risk can be classified as follows:

─The nature of the loss: internally inflicted or externally inflicted

─The impact of the loss: direct losses or indirect losses

─The degree of expectancy: expected or unexpected

─Risk type, event type, and loss type

─The magnitude (or severity) of loss and frequency of loss

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OpRisk Components & Processes

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Case Study

Its 2008, CS Computer Ltd is about to review its strategic plan; a few months ago, it concluded its Risk & Control Self Assessment

Is there any need to refer to the output of its Risk Assessment?

What should be the drivers of its strategic planning?

What areas of its business require focus to achieve its growth plan and desired first mover advantage with new business opportunities?

Contents Of A Risk Register

Risk description

Risk owner

Risk Category

Cause of the Risk

Impact of the Risk

Probability / Frequency of occurrence

Risk Rating

Contingency or Action plan

Cost of Mitigation

Deadline for implementation

Current status

Planning For Superior Service Delivery

Develop Customer Service Policy Build customer loyalty Create a positive environment Establish an image of quality & professionalism Ensure prompt & effective customer complaints mgt Ensure management awareness of key criticisms Going the extra mile; beat competition Develop customized services Maintain customer feedback vehicle Train all staff on service delivery and products

Operational Risk Management Enablers

Develop Customer Service PolicyRisk Governance

Build customer loyaltyTrack business volumes and demographics of customers (reward

systems, promotions, special events) using Key Risk Indicators (KRIs)

Create a positive environment Risk Assessments

Establish an image of quality & professionalismTrack customer, agencies and regulators’ ratings with KRIs

Prompt and effective customer complaints management Track no. of customer complaints logged, treated and outstanding with

KRIs

Operational Risk Management Enablers (Cont’d) Management awareness of key criticisms

Risk Reporting

Going the extra mile; beat competition Peer group analysis by tracking relevant KRIs / Risk Reporting

Develop customized services Review of customer behaviour / Trend Analysis from RCSA and KRIs

Maintain customer feedback vehicle Track number of feedback, areas of business commended and areas not

mentioned at all (KRI, RCSA, Loss data collation)

Training on service delivery and products Track number of staff trained on service delivery, product offering &

number of complaints against staff attitude and product knowledge (KRI)

• Risk Register / Log• Identification of prevalent risks• Prioritized list of risks • Impacts identified

• Residual risks • Risk Appetite & Tolerance Levels

• Risk Register / Log• Identification of prevalent risks• Prioritized list of risks • Impacts identified

• Residual risks • Risk Appetite & Tolerance Levels

OpRisk Management – Strategic Planning

Desired business model, organizational structures and business strategies

Desired business model, organizational structures and business strategies

OpRisk Deliverables

The Economist

OpRisk Delivers Risk Management

Proper Operational Risk Management ensures Effective Holistic Risk Management as it minimizes overall risk exposures in the

organization

Prioritizing Risks In Your Organization

Risk prioritization must be based on the following:

The Risk Appetite of the organizationThe Business Model of the organizationRegulatory RequirementsBusiness objectives in the short, medium and long termsRisk – Reward AnalysisResponse style of the organizationMaturity of the Risk-Aware Culture

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Improvements In Risk Communication

The Economist

Strategy & Risk Management Interplay

Strategy

RM Objectives Assure Value-Creation Enhance Value

Value 1 Create new opportunities Invest in new business activities that promise gainful returns; expected to exceed capital cost

Create new opportunities Opportunity/threat identification / mitigation in new activities, price deals to compensate for such risks

Value 2 Improve performance Increase returns on existing business with better tech, processes, policies, knowledge etc.

Improve performance Measure loss exposure on cash flows. Risk/Reward, aggregated capital, scenario analyses, opportunity costs

Value 3 Harvest existing value Evaluate, exit non-profitable business

Harvest existing value Market analysis, risk mapping, risk adjusted performance measurement

Value 4 Align risk-taking with risk appetite Assurance that company is not gambling its future; avoid risk averse behaviour or excessive competitiveness

Align risk-taking with risk appetite Discipline, focus & control, only take risks equipped to handle, capital adequacy

Risk Management And Value Creation

Evaluate risk profiles for strategic plans for enhanced decision-making in developing a more realistic and achievable robust plan

Ensure that the policies, procedures, measures and monitoring are established and continuously improved

Provide periodic updates / reports to the Board and Management on identified risks, milestone achievements, and residuals risks

Operational Risk Management & Strategic Planning

Informal or reactive evaluation leading to either conservative or exaggerated growth scenarios in developing strategic plans

Subjective reasoning feeding the strategic planning process

Little or no risk adjustment mechanism

Inability to maximize potential for creating sustainable competitive advantage

Poor OpRisk Management Leads To…

TO CREATE VALUE ALWAYS CONSIDER

OPRISK MGT STRATEGY

“For firms to succeed in this increasingly global and competitive marketplace,

risk management must become a state of mind.

A systematic and proactive enterprise-wide approach to managing risks is essential to

making risk management an integral part of the company’s DNA”

ANURAG SAKSENA

– Chief Enterprise Risk Officer, Freddie Mac

CONCLUSION

Operational Risk Management is the Centre-piece of Risk Management and an

Organization’s Strategy…Thank [email protected]

Tel: 234-8033045896