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The Dbriefs Risk Intelligence series presents: Benefits of Effective Scenario Planning: Are You Ready for Anything? Mark Carey, Deloitte & Touche LLP Matt Hourin, Deloitte & Touche LLP Julian Sevillano, Visa Inc. May 27, 2010

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Page 1: Scenario Planning

The Dbriefs Risk Intelligence series presents:

Benefits of Effective

Scenario Planning: Are

You Ready for Anything?Mark Carey, Deloitte & Touche LLP

Matt Hourin, Deloitte & Touche LLP

Julian Sevillano, Visa Inc.

May 27, 2010

Page 2: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Why do scenario planning?

Example scenario development tools

Case study: Visa, Inc

Q&A

Agenda

Page 3: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

The Risk Intelligent EnterpriseTM

Page 4: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

The Risk Intelligent Enterprise utilizes risk information to

influence strategic planning in three key ways:

1. Risks are identified and analyzed when considering

strategic alternatives and developing

business/organizational strategy

• Risks of the strategy

2. Risk appetite serves as a guidepost in setting strategy

and allocating resources.

3. Once business/organizational strategy has been selected,

risks that might affect the organization’s ability to

implement key strategies are identified and managed

• Risks to the strategy

Why do scenario planning?

Page 5: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Polling question 1

Do you yourself participate in scenario planning for your

organization?

•Yes

•No

•Don’t know / not applicable

Page 6: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Failure of modern risk management

Information filtering

Mental models

Common risk management challenges

include

Page 7: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Frameworks

• COSO

• 9 Principles of Risk Intelligence

Maps

• Enterprise value maps

• Enterprise risk maps

• Risk impact matrices

Models and simulations

• Event tree risk tool

• Risk workshops

• "Black swan" workshops

Risk scenario development tools include

Page 8: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Better understanding of risk

• to the strategy

• of the strategy

Shared commitment and approach to:

• manage key risks to within risk appetite

• exploit risks where the organization has a strategic

advantage

Desired results may include

Page 9: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Leading indicators of risk include

Risk strategy

Risk management process

Key risks

Board consideration

Page 10: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Polling question 2

To what extent does your company currently integrate

risk analysis tools into strategic planning and

development?

•A great deal – risk is forefront in evaluating strategic

scenarios

•Somewhat – risk is an important, but not dominant,

consideration

•Very little – consideration of risk is an afterthought

•Not at all

•Don’t know / not applicable

Page 11: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Identify potential opportunities to create business value

Value creation: Enterprise value maps

Revenue

Growth

Operating

Margin (after taxes)

Asset

EfficiencyExpectations

Volume

Price

Realization

Company

Strengths

Receivables &

Payables

Selling, General

& Administrative

Cost of Goods

Sold (COGS)

Income Taxes

External Factors

Property, Plant

& Equipment

(PP&E)

Inventory

Shareholder Value

Illustrative

Page 12: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Value creation: Enterprise Value Map

Illustrative

Page 13: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Identify potential risks

Risk identification: Enterprise risk maps

Governance

Strategy

and

Planning

Operations/

InfrastructureCompliance Reporting

Corporate

Governance

External

Factors

Corporate

Assets

Information

Technology

Sales,

Marketing and

Communication

Human

Resources

Reporting

Ethics

Planning

Finance

Legal

Supply Chain

Product

Development

Corporate

Responsibility

& Sustainability

Strategy

Compliance

Risk Intelligence

Illustrative

Page 14: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Risk Identification: Risk Intelligence Map

Illustrative

Page 15: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Risk Intelligent approach

The organization could consider

risks and risk interactions to

realize synergies from the

strategic initiative, and to identify

and capitalize on the

opportunities

Linking value and risk

Compliance

Talent Management

Sales & Distribution

Sample project to create

value

The organization wants to

venture into M&A to increase

market presence and margins

Page 16: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Polling question 3

Does your company stress test its ability to execute on

contingency plans?

•Yes

•No

•Don’t know / not applicable

Page 17: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Risk Modeling

Workshops

Enterprise Risk

Management:

Risk Advisory Services

Page 18: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Facilitate improved understanding of key risks:

• Understand internal and external factors impacting likelihood and

severity

• Identify most likely trigger and intermediate events

• Share similar risk experiences from other business units, if

appropriate

Quantify impacts to Visa’s business:

• Focus exercise on understanding impacts of most likely outcomes

• Project long-term impacts on our market value

Rationalize mitigation alternatives:

• Mitigation What can we do today to reduce probability?

• Reaction What can we do today to be better prepared if it

does happen?

• Diversification What new strategies can we employ to reduce the

impact on our business?

What existing strategies need to be revisited?

Workshop objectives

Page 19: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Scenario analysis approach

Implemented scenario-based analysis to facilitate a

deeper understanding of risks and drive mitigation

• Uses expert opinion to overcome a lack of historical loss

data for risk modeling, but equally supports analysis of

data-rich risks

• Adds transparency and improves understanding of risk

impacts

• Provides a disciplined framework to rationalize risk

management decisions

• Leverage external loss event database for research

Page 20: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Polling question 4

How heavily does your company rely upon software-

based systems to support scenario planning efforts in

identifying triggers and anomalies?

•Heavily

•Somewhat

•Not at all

•Don’t know / not applicable

Page 21: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Scenario analysis approach

3 2

7 8

4

5

9

12

Trigger Event 1

1

Intermediate Event Severity 1

Severity 2

6

11

10

Trigger Event 2 Intermediate Event Intermediate Event

Severity 4

Intermediate Event

Severity 3

Severity 5

Severity 6

0.25 0.3

0.4

0.95 0.07125

0.1

1.5 0.8 0.4 0.85 0.408

0.2

0.05 0.5

0.5

0.24

0.03

0.03

3 2

7 8

4

5

9

12

Trigger Event 1

1

Intermediate Event Severity 1

Severity 2

6

11

10

Trigger Event 2 Intermediate Event Intermediate Event

Severity 4

Intermediate Event

Severity 3

Severity 5

Severity 6

0.25 0.3

0.4

0.95 0.07125

0.1

1.5 0.8 0.4 0.85 0.408

0.2

0.05 0.5

0.5

0.24

0.03

0.03

Severity TreeAggregate consequence

distribution

Consequence Tree

Path Dependencies

1

5 7

3

8

12

9

2

4

6

10

11

14

17

15

16

Cash Flow

13

Cash Flow Consequence 1

Cash Flow Consequence 2

Earnings Earnings Consequence 1

1.0

0.9 0.9

0.95

1.0

0.95

Page 22: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Scenario analysis approach (cont.)

Page 23: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Scenario analysis approach (cont.)

Page 24: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Risk impact quantification

Earnings X Market Multiple

• Loss of key customer

• Operational inefficiency

Net Earnings

• Macro-economic

conditions

• External events

Strategic impact (perpetual)

Tactical impact (short term)

Macro-economic

conditions

External events

Loss of key

customer

Operational

inefficiency

Page 25: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Advance preparation:

• Information gathering regarding risks, including history (if any) and

future outlook

• Draft scenario analysis with select group of subject matter experts

• Gather relevant financial information regarding impacts

• Draft list of potential mitigation strategies

Workshop:

• Assemble relevant cross-functional group of SMEs to inform, debate

and refine scenario and impact analysis

• Facilitate robust discussion on mitigation strategies, focusing on

costs versus effectiveness

Follow up:

• Facilitate development of action plans and next steps, if appropriate

• Provide on-going support of scenario analysis, if there are material

changes in expectations

Structure of exercise

Page 26: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Polling question 5

When your company engages in scenario planning,

which groups are involved?

•C-suite and board only

•Risk department only

•C-suite, board, risk department and other groups

•We don’t do scenario planning

•Don’t know / not applicable

Page 27: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Key risks in key markets:

• Improving understanding of key issues that could impact long-term

growth

• Focusing strategic direction to support growth and minimize

downside risk

Risks with cross-functional impacts:

• Driving consistent understanding of risks

• Aligning organizational priorities across business units

Large mitigation investments:

• Focusing mitigation discussions by improving identification of root

causes and critical risk factors

• Rationalizing the costs versus effectiveness of mitigation strategies

Top enterprise risks:

• Supporting Board and Senior Management’s governance obligations

• Providing higher level of risk analysis for improved stakeholder

reporting (SEC, rating agencies, etc.)

Applicability

Page 28: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Marketplace barriers

Project summary:

In various countries, certain government bodies have been given

authority to establish state-sponsored and/or owned payment systems.

These government activities and trends have led Visa to conduct risk

analysis to better understand its exposure in these markets.

Scenario: National payment brand established

Page 29: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Marketplace barriers (cont.)

Impacts:

• The creation of National Payments System in country A could

potentially lead to a XXX% loss in the franchise value of that market.

• Workshop participants agree that the probability of the creation of a

National Payment System in country A currently stands at XX%.

Page 30: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Marketplace barriers (cont.)

Mitigation initiatives:

• Development of an action plan to address most likely outcomes

• Recommendation to executive management on key next steps, if

necessary

• Agreement between key stakeholders on immediate and medium

term mitigation efforts

• Establishment of a cross-functional task force to manage different

aspect of mitigation strategies

• Ongoing monitoring of risks and mitigation effectiveness

• Periodic refreshing of event tree models

29

Page 31: Scenario Planning

Question and Answer

Page 32: Scenario Planning

Join us June 24th at 2 PM ET as our Risk Intelligence series presents:

Reducing Risk in the Financial Close: Effective Governance in the Last Mile

Page 33: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Thank you for joining

today’s webcast.

To request CPE credit,

click the link below.

Page 34: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Mark Carey, Partner, Deloitte & Touche LLP

+1 571 882 5392

[email protected]

Matt Hourin, Senior Manager, Deloitte & Touche LLP

+1 617 437 2687

[email protected]

Julian Sevillano, Visa Inc

+1 415 932 2361

[email protected]

Contact info

Page 35: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

This presentation contains general information only and is based on the experiences and

research of Deloitte practitioners. Deloitte is not, by means of this presentation, rendering

business, financial, investment, or other professional advice or services. This presentation is not a

substitute for such professional advice or services, nor should it be used as a basis for any

decision or action that may affect your business. Before making any decision or taking any action

that may affect your business, you should consult a qualified professional advisor. Deloitte, its

affiliates, and related entities shall not be responsible for any loss sustained by any person who

relies on this presentation.

Page 36: Scenario Planning

Copyright © 2010 Deloitte Development LLC. All rights reserved.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member

firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/us/about

for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Please

see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its

subsidiaries.

Page 37: Scenario Planning