Category Archives: Strategic Risk Management

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Managing Strategic Risk: How IBM Looked Ahead, Revamped Its Operations and Profited

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New IBM chief executive Virginia Rometty

In 1981, IBM revolutionized the computer industry — and arguably the world. In introducing its IBM Personal Computer, the company’s goal was to offer a machine capable of competing for sales in a burgeoning market against the likes of Commodore, Apple, Atari and Tandy. But what it really did was create a product that was so successful that its makeup became the standard for all home computers.

Fast forward 10 years. The massive market share of the home computer segment that IBM devoured following the success of the IBM PC, while still substantial, was dwindling. The “IBM Compatible” army of imitators was growing by the year and the company no longer retained the popular cache among consumer to give it any real advantage over “PC Clone” rivals like Compaq and Hewlett-Packard.

It became increasingly clear that the company’s domination of the hardware market was over.

 For some companies, this could have been the beginning of the end. But it was merely a new beginning away from the machines that had once been so much at the heart of its business that they not only comprised most of its revenue but one third of its very name, International Business Machines.

Like the long version of its name, however, the past model is long gone. In 2005, IBM made it official, selling off its venerable ThinkPad brand of laptops to Lenovo and culminating a mission began by Samuel Palmisano, who took the top executive spot in 1993, to find a non-hardware-driven way to not just survive, but thrive.

Leaders knew that their company’s long-term success would come from services and software, not hardware. In 2002, the company made its marquee splash into a pool it now dominates, by spending $3.5 billion to purchase PricewaterhouseCoopers’ consulting arm, something the company lists as “the largest acquisition in professional services history.”

And it was largely due to the vision of IBM’s recently appointed new CEO Virginia Rommety.

In 2002, Ms. Rometty championed the purchase of the big business consulting firm, PricewaterhouseCoopers Consulting, for .

5 billion.

The deal was made shortly after [former chief executive Samuel] Palmisano became chief executive and it was seen as a big risk. The PricewaterhouseCoopers consultants were used to operating fairly independently, in a very different culture from the more regimented I.B.M. style of the time. The danger, analysts say, was that the business consultants would flee in droves, leaving the business a shell.

Ms. Rometty was put in charge of coordinating the work of the acquired firm’s consultants with I.B.M.’s technologists, to tailor services and software offering for specific industries. Ms. Rometty, analysts say, worked tirelessly and effectively to win over the consultants. “She did the deal, and she made it work,” Mr. Palmisano said.

This shows two admirable leadership qualities of Rometty: the ability to think long-term and the ability to successfully navigate a tricky merger. Its rare for anyone to be capable of pulling off even one of those tasks. She has done both.

And its not just those inside IBM that see it this way. Outside analysts agree.

Ms. Rometty has led the growth and development of I.B.M.’s huge services business for more than a decade. The services strategy, analysts say, is partly a marketing tactic. But, they add, it also represents a different approach to the technology business, with less emphasis on selling hardware and software products. Instead, I.B.M. puts together bundles of technology to help business streamline operations, find customers and develop new products.

“I.B.M. is selling business solutions, not just products,” said Frank Gens, chief analyst for the technology market research firm IDC. “Rometty has been at the forefront of that effort.

”

And this.

“Ginni Rometty combines performance and charisma,” said George F. Colony, chairman of Forrester Research. “She orchestrated a massive charm campaign to bring the PricewaterhouseCoopers people into the fold. That was the trial by fire for her.”

As its hardware dominance started to wane, the company didn’t panic. Its leaders, notably Rometty, just found new ways to maintain the company’s status as a leader in the tech market. Now, the company is the 18th largest in the country, the 2nd largest tech firm on the planet (trailing only Apply) and the world’s 2nd best brand (according to Interbrand).

Warren Buffet even wants in on the action, yesterday announcing that his company just paid $10 billion for a 5% stake in IBM in a deal that is the “most Berkshire has ever paid for a minority stake in a publicly traded company” and “a massive bet on a technology services company after years of eschewing technology stocks.”

Managing a strategic risk is perhaps the hardest thing for a company to do. It takes considerable vision, and even more effort, to redirect operations in another direction or — harder still — revamp a business model. But any company that thinks it can last for decades doing the exact same thing it has always done is likely fooling itself.

We can all learn a lot about risk management from the IBM turnaround.

Excellence in Risk Management

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The Great Recession is not known for inspiring great things, but it did spur the creation of the Dodd-Frank bill, which, among many things, created the Financial Stability Oversight Council and the Federal Insurance Office. And the near-collapse of the U.S. economy did wonders for the discipline of risk management.

As a result, according to a new survey from Marsh and the Risk and Insurance Management Society (RIMS), executives in the C-suite are expecting much more from the risk managers at their company.

Below are a few of the key findings from the report:

  • An overwhelming majority of respondents said that senior management’s expectations of their organizations’ risk management departments have grown over the past three years. Senior management’s list of desired changes from risk managers includes integrating risk management deeper with operations, executing daily risk management activities more efficiently, providing improved analysis and quantification, and leading enterprise risk management (ERM) activities.
  • The most common focus area for 2011 is strengthening strategic risk management, which was cited by more than half of survey respondents. For the second year, this area came out on top, although barriers to doing so remain.
  • The top barrier cited to senior leadership understanding of the risk landscape was silos within the organization. This is the same answer given in prior years, and is something that organizations should begin to confront if they have not already done so. One way to tear down the silos is to create or strengthen cross-functional risk committees.
  • As the role of chief risk officer (CRO) continues to develop, we are beginning to see some differences in how they view and prioritize the issues. For example, CROs were much more likely than other risk managers to categorize senior management’s change in expectations a “very significant.” CROs said strengthening ERM capabilities and integrating ERM into strategic planning were focus areas for 2011.
  • Economic conditions ranked as the number one risk among respondents, and was also the risk that they were least comfortable with their organizations’ ability to manage. In other areas, such as business disruption, risk managers and the C-suite are not as aligned in their views of how prepared their companies are to manage the risk.
  • Nearly 60% of companies said their use of data and analytics has changed over the past three years. This is likely a reflection of leadership’s desire for there to be more transparency and quantification around risk decisions, particularly the economic implications. Despite the stated changes, however, there appears to be a need for companies to better use the available tools and analytics.

And let’s take a look at the areas in which senior management’s expectations of the risk management department have grown:

It seems the financial crisis continues to shine a light on the importance of risk management as a whole and, more specifically, enterprise risk management and strategic risk management.

The Risk and Insurance Industry Needs to Get Younger

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One of the biggest risks facing the risk management and insurance industry was summed up very well yesterday by Joanne Wojcik (@BusInsJWojcik) on Twitter: There is “only one risk manager entering the profession for every five who are retiring.”

The last decade has seen a tremendous growth of the discipline from an intellectual standpoint. What was formerly little more than insurance buying is now closer than ever to becoming ingrained into strategic business planning. After 9/11 and Enron and Katrina and H1N1 and Lehman Brothers and Haiti and Japan, the concept of risk management is now almost mainstream.

Given this, it is somewhat surprising and certainly not helpful for the industry that it is losing many more people than it is recruiting. And while the one-to-five rate cited above by Wojcik is troubling for risk management, the same problem exists in insurance, a sector that may have even greater trouble if it can’t attract more young talent.

To their credit, both higher education and the insurance sector are now making concerted efforts to stem the tide and encourage an influx of talent into the market.

Here’s another tweet from Joanne Wojcik of BI.

University of Colorado-Denver to launch risk management curriculum, perhaps pumping new blood into the industry!#RIMS2011

And here’s a comment on Gallagher’s efforts from IRMI President Jack P. Gibson (@UGAJack)

Gallagher has 150 student summer interns as part of its effort to bring young people into the business says CEO Pat Gallagher @ #RIMS2011.

This morning, I also got the chance to speak about all these matters with Russ Quilley, the Calgary-based national broking director for Aon, who served on the RIMS 2011 panel “Recruiting and Retaining Risk Management Talent for the Millennium” yesterday. He has been integral in helping Aon acquire those “millennial generation” employees that will eventually replace those entering retirement and has a much more positive outlook on the situation than I do.

Part of this is because he seems to think his company is on the vanguard of these efforts. And another key reason he sees this as much of an opportunity as a concern is due to the energy, ambition and capabilities he is seeing from those students he helps integrate into his company. Aon plucks Canadian interns and recent graduates for a program it calls The Wheel. This consists of an 18-month rotation in which students complete three six-month stints in different parts of the company. The first gets their feet wet. The second tries to place them somewhere aligned with their skill set. After this, their performance is evaluated, and the broker moves them onto a third rotation during which they learn from their managers as well as independent mentors who try to teach them all about the industry.

The most encouraging aspect for Quilley is how technological savvy this generation is. He is routinely impressed with how this group can find new solutions to problems and not just rely on how things have been done in the past. And he believes this technological and cultural influence will be invaluable to making his firm more efficient in the future.

“It is really interesting to see a group that sees no hurdles,” said Quilley. “I like to challenge the status quo and they like to challenge the status quo.”

Another positive benefit is that these millennials will be very effective dealing with customers in the future. “Ten years from now they’re going to be our mid-level [brokers and managers],” said Quilley. “But they’re also going to be our clients. And this group will able to talk to clients and be very well-versed in their demands.”

This stuff is all great, and many other companies and universities are making similar efforts. Even so, there are not enough young, future insurers and brokers being churned out by academia, according to Quilley.

“I still don’t think there are enough of them coming through,” said Quilley. “If you look at the programs, there’s a 90% hiring rate. Not a lot of industries have levels that high. That’s a great indication that there aren’t enough to meet industry demand.”

To me, the whole industrywide effort to recruit young talent feels a little bit like trying to create energy independence in the United States by starting to drill offshore today; it sounds helpful and some day it certainly may be — but it’s going to be a long time, we’re talking at least a decade, before the work being done now will pay off. And considering that the talent that insurers and brokers are losing consists of graybeards with perhaps 20 or more years of experience in risk and insurance, even if the industry can get closer to a one-out/one-in ratio, it’s still not exactly an even trade when you replace a retiring, battle-worn executive who has been through multiple market cycles with an eager, 22-year-old who has a bachelor’s degree in actuarial science, an iPhone and a smile. That fledgling risk manager or future underwriter can one day be just as knowledgable and wise as the VP she is replacing, but it takes time. Experience can’t be taught and all that.

Frankly, the insurance industry is simply late to the game.

This is a major strategic risk for many companies — and one they have known about for years — yet many have still failed to really start addressing it seriously until now. The financial crisis and economic slowdown didn’t help. Hiring lagged, and now there must be a renewed urgency for insurers to find, train and retain young talent.

“I don’t think [the insurance industry has] the reputation among that young group that you can have an interesting career in insurance,” said Quilley. “We need to do a better job promoting that. You have to be aware of the demographics of your staff and have a plan in place. And starting now is key.”

With all the great institutions now educating the youth of America about risk and insurance, there is no doubt that the future of the industry is in good hands.

But the hand-off of the baton might be a little sloppy.

Let’s just hope it doesn’t get dropped.

If the sprinters in this photo were industries, insurance would be from Poland.

SRM: The New Core Competency

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Strategic risk management (SRM) has become an increasingly hot topic, with risk managers, C-suite execs and managers across all industries looking to continuously improve their risk management plan. After hearing so much buzz about SRM lately, I decided to attend a session on the topic at RIMS 2011.

Speaking on the issue were none other than the celebrated director of strategic and enterprise risk practice for RIMS, Carol Fox; the director of the center for strategies, execution and valuation for DePaul University, Dr. Mark Frigo; and Hans Laessoe, senior director of strategic risk management at LEGO Systems.

Starting off the presentation to a packed room, Fox reminded everyone of the RIMS/Advisen survey, which notes that, to survey participants, the primary value of SRM is:

  • 28% avoided and or mitigated risk
  • 16% compliance with regulatory and legal requirements
  • 17% eliminated silos
  • 5% process consolidation
  • 24% increased certainty in meeting strategic and operational objectives

Fox noted that SRM was a discipline focused on the upside of risk. More specifically, RIMS defines SRM as a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities that affect an organization’s strategy and strategy execution.

Closing her portion of the presentation, Fox questioned the way that most risk managers think. “Are we too focused on known risks or analyzing the past?” asked Fox. “There appears to be an unmet need for risk management to take a lead role in SRM.”

Following Fox, Laessoe began his speech by explaining LEGO’s theory on risk management, which is:

Prepare for uncertainty –> Active risk and opportunity planning (AROP) –> enterprise risk management –> Monte Carlo simulation

Monte Carlo simulation “has enhanced LEGO’s understanding of uncertainty,” according to Laessoe.

The company applies Monte Carlo simulation to achieve the following:

  1. Budget and estimate uncertainties to show earnings volatility and pinpoint key drivers based on input from business controllers.
  2. Simulation on ERM risk portfolio to consolidate risk exposure and identify 5% worst case scenarios which is the base of LEGO’s defined risk appetite.
  3. Simulation of credit risk portfolio as a “tool” to have a more frank discussion with insurance partners.

Frigo wrapped up the session with some inspiring words on the future of SRM. “SRM is the new core competency,” he said. “If ERM encompasses all areas of organizational exposure to risk, including strategic, why is SRM the NEW core competency? We believe SRM is a foundation for elevating the value of ERM, and for that matter, management in general.”

Amen!