Strategically Managing Risk in Today's Perilous Markets: You Need to Successfully Integrate Strategic Planning and Enterprise Risk Management
Paladino, Bob, Strategic Finance
Companies today face a broad array of risks--strategic, operational, currency, subprime, contract, customer, vendor, financial instrument, and hedging, to name a few. Hardly a day goes by without another business posting write-downs, recapitalizing, or seeking bankruptcy protection associated with poorly managed risks. What is enterprise risk management (ERM), and how are leading companies strategically managing risks to avoid being devastated by today's perilous marketplace?
In this article I'll explore the 2004 ERM framework (Enterprise Risk Management--Integrated Framework) of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which consists of eight interrelated components (see Figure 1). COSO defines ERM as: "A process effected by an entity's board of directors, management, and other personnel, applied in a strategic setting across the enterprise, designed to identify potential events that may affect the entity and manage risk within its risk appetite to provide reasonable assurance regarding the achievement of entity objectives."
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I'll also review the practical application of the framework by The United Illuminating Company (UI), the company's integration of strategic planning and ERM, and the use of a process-based organization.
CASE: THE UNITED ILLUMINATING COMPANY
The United Illuminating Company, the principal subsidiary of UIL Holdings Corporation (NYSE: UIL), was formed in 1899 when the Bridgeport Electric Company merged with the New Haven Electric Company. UI is a regulated utility that delivers electricity and energy-related services to 320,000 customers in the greater New Haven and Bridgeport areas of Connecticut. Headquartered in New Haven, the company has more than 1,000 employees and revenue of $982 million. It also is the recipient of an APQC Best Practice Partner Award. (Recipients of this award are organizations identified by APQC as exhibiting exceptional performance or employing innovative approaches.) As a subject matter expert for this APQC ERP project award, I helped screen more than 50 leading organizations to arrive at just five that scored the highest on an ERM survey. UI was one of those five. These organizations served as the model for identifying and sharing best practices, and this article captures many of those findings.
Strategic Process-Based Management. UI employs a continuous strategic planning process to achieve strategic objectives, as shown in Figure 2. Edward J. Drew, UI associate vice president, strategic business services, states, "A defined, repeatable, and integrated governing process provides a basis for continuous improvement, shared knowledge, teamwork, and efficient use of executive time." Strategic objectives are typically long term, and progress is assessed and measured continuously to reflect gaps overcome and remaining, lessons learned, and changing business demands. These objectives are organized by four perspectives: financial, customer, operational, and capability. Projects to achieve these objectives are also defined through the strategic planning process, which includes risk identification and analysis. Annual goals are captured with a corporate balanced scorecard and balanced scorecards at the divisional levels, providing alignment across the organization.
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ERM responsibilities are assigned to Strategic Business Services (SBS), the organizational unit responsible for the strategic planning process at UI. SBS reports directly to the CEO. This assignment enables UI to integrate ERM with strategic planning, process improvement, and project management--core practice areas of SBS--and to leverage process improvement and project management as risk management tools to increase the predictability of results. This effort results in an integrated strategic planning and risk management process. UI is a process-based organization (horizontal or cross-functional view), but it still uses a traditional vertical organization to manage budgets and staff (see Figure 3). …