A*Star ERM Day 2017 - Innovation & Risk Management - Marc Ronez presentation

ARiMI – Asia Risk Management Institute
By MARC RONEZ
Chief Risk Strategist
ARIMI – Asia Risk Management Institute
NOTES
A*STAR ERM Day – Singapore
20th October 2017
Risk Management:
An essential Toolbox to Support Innovation
& Growth

Agenda for this Session
þ Clarifying the Concept of Innovation & the link with Risk
management.
þ Understand the practical implications of the risk of
changes and the challenges of generating & implementing
Innovations
þ Learn how Risk Management can help Organization
recognize & manage different types of changes and
Innovations
þ The negative unintended consequences of Human
Driven Innovations.
þ List of some good practices to follow to cope with Change
and be an Effective Risk Manager
Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 3

1 – WHAT is INNOVATION
& what is the LINK with RISK
MANAGEMENT?

Hunter-Gatherers VS Modern Family Home & Lives
The Difference is Thousands of Years
of INNOVATIONS

INNOVATION
=
Doing something
NEW..

INNOVATION
=
Something that Creates
VALUE

INNOVATION
=
Examples?

Example of INNOVATIONS: Changes in Land
Transportation from Horses to Modern Vehicles
In the beginning 1880s 1910s 2000s
Horse drawn
vehicle
First Cars
Modern
Vehicles
Mass
Production
On foot
ESSENTIAL to Make the world SMALLER
On horse

Example of INNOVATIONS: The invention &
evolution of MONEY
In the beginning 8,000 BC 2000 BC 1700s 1950s 2000s
Precious
Metals
Barter Paper Money
Internet
Banking /
Mobile
Payment /
Cashless
Sea shells &
beans
Credit cards
Payment
ESSENTIAL to facilitate TRADE

INNOVATION
is NOT just
about products
or services..

INNOVATION
can happen in
any aspect of
your Business &
Operations

YOU can INNOVATE about any aspect of your
Business Model
Product/
Service
Features
Distribution
Channels
Customer
Relationship
Revenue
Model
Costs
Structure
Brand/
Package
Product/
Service
Ecosystem
Resources
Mix
Process
Structure &
System Partnerships
ORGANIZATION

INNOVATION can occur in any aspect of your
Business Model: EXAMPLES
PROFIT MODEL
Razor & Blades
Model
Gilette
PROCESS
‘Lean’ Production
Process
Toyota
MULTIPLE
Station-Free
Bike Sharing
System
OFO

INNOVATION
VS
RISK..
MANAGEMENT

INNOVATING is all about Taking RISK
Example 1: Discovery of America

INNOVATING is all about Taking RISK
Example 2: Launch of the Wii by Nintendo

RISK..
is the effect of
UNCERTAINTY on
OBJECTIVES
(ISO 31000:2009)

RISK-Taking can Lead to either Negative or
Positive results depending how it is MANAGED
& what happens in the environment
19
- +
Target
Performance
Expected
Potential
Losses
Expected
Potential
Opportunities
Unexpected
Catastrophic
Losses
Transformational
Blue swans
Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017
Catastrophic
Losses
Black swans
Unexpected
Opportunities
LOSS GAIN

TAKING RISK is NECESSARY to answer
THREATS, NEEDS & achieve REWARDS
However Taking Risk WITHOUT proper
Risk Management ..
… is GAMBLING!
20Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017

2 – WHY DO we NEED to
INNOVATE?

Is INNOVATION a NECESSITY for HUMAN SOCIETIES?
Can’t we be happy with what we
already have?

What Defines
SUCCESS in a
CAPITALIST
ECONOMIC
System?

ECONOMIC
GROWTH!

The only Constant in Life
is…
CHANGE

Organizations face a COMPLEX, UNCERTAIN &
always CHANGING environment climate: Key Drivers
Domestic
Global
Human & Social
Factors
Political &
Regulatory
Climate
Resources &
environmental
Factors
Economic
Environment &
market Forces
Technological
innovations
Source of both Risks & Opportunities

27
GLOBALIZATION of Production & Markets &
COMPETITION – The GROWTH OBJECTIVE
Global Competition for Investments,
Talents, and others Resources, Markets,
Products and Services

28
SHORTENING technology/business Cycles
Product Time Length Cycle (TCL): how much time do you have to
‘milk the cow’ before another cycle start.
1930 1940 1950 1960 1970 1980 1990 2000 2008
TLC: 25 years TCL: < 15 years TLC: < 5 years

DISRUPTIVE Technological
Innovations
Impact TRANSFORMATIONAL
Onset Speed within 15 Years
Mobile Banking
& Cashless
Payments
Self-drive cars
& automated
systems
AI to support
Decision-
Making

Population – GROWTH in emerging economies &
AGING in developed countries

Increased Pressures on Resources, human
communities & Environment

Increased PRESURES on Resources, human
communities & Environment
Business has also been viewed increasingly as a major cause of
Social, Environmental and Economic problems.

In a world where CHANGE is the
ONLY constant, …
we need to LEARN &
ADAPT to changes
continuously!

In short, We Need to
INNOVATE!

QUESTION:
Are Organizations 'Good' at Managing CHANGE
and the RISKS associated with it?
Many CEOs think that they are already EFFECTIVE at
managing the RISKS of their organizations .. in the best
interest of their Shareholders ( that they have a track record
of performance success to ‘prove’it!).
BUT is it really the case?
Let the data Speak!

36

Need for Better Risk Management?

WHY are
Organizations
NOT
BUILD TO LAST?

Part of the challenges have to do with HOW
organizations approach INNOVATIONS
WHAT is the
ISSUE?
38Marc Ronez - Innovation & Risk Management - Copyright © ARiMI 2017 38

It has to do with the TYPES of Innovations
Business
optimization
(incremental)
Product,
market,
method
innovation
Business model
innovation
You can convince BoD
of this because some
of it is familiar.
This terrifies BoD
because of uncertainty &
it cannibalise the current
business.
SUSTAINING
INCREMENTAL
SUSTAINING
RADICAL
DISRUPTIVE
RADICAL
Next Year’s car
model
Electric car
model
On-demand self
drive car

The Challenge posed by INNOVATION for Established
Organizations
proven
Unproven
Unknown
High Uncertainty
Growth Potential
Cannibalization
Risk of Failure
Known Business
High certainty
Efficiency/Profit
Complementarity
Predictability
Business Model
OPTIMISE EXPLORE
Shareholders
Prefers
this
SUSTAINING
INCREMENTAL
Innovations
RADICAL or
DISRUPTIVE
Innovations
Ideas

Short-Termism: What is the time horizon covered by
typical RISK Assessments?
Risk Management Survey 2015

Short Time Horizon = Short Term Focus
Horizon 1 Horizon 2 Horizon 3
Businesses typically have many
projects in this horizon, which
require limited resource
invementment and deliver quickly
Businesses support fewer H2
projects against stage gates and
killings off under performers
Seen as an expensive distraction
or pipe dream H3 usually
neglected
Profit
Time (years)
?

43
Risk Averse
Risk Taker
Cautious
Administrator
Conservative
Player
Anxious
Loser
Victim of Life
Smart
Expert
Effective Risk
Taker
Gambler
Relying on Luck
Risk-Taking & Management Life-cycle
Source: “Risk-Taking & Management ”,
Marc Ronez, ARiMI, 2006
High Expertise in
Risk Management
Low Expertise
in Risk
Management ARiMI

44
LEVELS of Management Controls vs Sustainability

Imperialism of
internal controls
Obsession
with numbers
Inability to think
out of the box
Lack of creativity &
innovation
Result of FOCUS on Protection & Sustaining
Innovations
The effect will often be deceiving and only provide pseudo-comfort
about risk.
Defensive Risk
Management
Which consists of
overloading in structures,
processes, systems and
technologies.
45

46
Illusion of Control – Getting fooled by Track Record
"It's only when the tide goes out that … you learn who's been
swimming naked."
Warren Buffett, Berkshire Hathaway

Example of Disruptive Innovations – Smartphone
Cameras vs Stand alone Digital Cameras
Cheaper, Simpler,
Smaller & More
convenient
•  No need to buy a
digital camera
•  Cheap: Eg built in
phones
•  Store many pictures
on memory
•  Can edit and share
digital picture
•  Low picture quality
•  Low resolution
•  Low file size
capacity
Initial Inferior
Performance
Technology
Progression
Potential
•  On going
improvements in
image quality,
resolution, memory
capacity and so on to
the point of
threatening highest
end markets
Disrupted Markets: Camera manufacturers

DISRUPTIVE Innovations Examples
Internet Subscription
Service for videos
Online Free
Encyclopedia
Free Long Distance
Calls on Internet
Online Retailer Online Accommodation
reservation
Online Private car with
Driver Booking

Quiz on Innovation: What is special about the Top 20
Most Innovative Companies
Forbes, Fast Company, BCG, MIT and so on, publish a yearly listing of the most
INNOVATIVE companies.
Nvidia
SpaceX
Amazon
23andMe
AlphabetiFlytek
Kite PharmaTencent
Regeneron
Spark Therapeutics
Face ++
First Solar
Intel
Quanergy Systems
Vestas Wind Systems
Apple
Merck
Carbon
Desktop Metal Ionis Pharmaceuticals
75% are Young Companies

3 – HOW can ERM BE A BASIS for
INNOVATION & GROWTH?


You Can Nurture an
Organization to be able
to LEARN & ADAPT
to changes
continuously!

It can be called a..
Risk Smart Organization

Industry ERM & BCM Standards / Frameworks
þ COSO:2017 - Revised ERM Framework (US)
þ ISO 31000:2009 - Risk Management Guideline
(International)
þ ISO 22301:2012 - Societal security – Business continuity
management systems (International)
þ AS/NZS 4360:2004 - Risk Management Standard
(Australia/NZ)
þ Rating Agencies Frameworks (S&P, Moodys)
þ Consultants Frameworks (SAP, KPMG, Marsh, etc)

54
Financial & Hazard
ERM STANDARDS: Expanding the OBJECTIVES
from Value PROTECTION to Value CREATION
Finance Losses
Protect & Sustain
Operations
Create Value with
effective Risk-taking
& ManagementValue
increase
1980/90s1960/70s 2000/10s
Operational Strategic

Revised ERM COSO: CLEAR FOCUS on understanding
& supporting the BUSINESS MODEL

Risk – Threats, Opportunities & Uncertainty
56
- +
Target
Performance
Expected
Potential
Losses
Expected Potential
Opportunities
Unexpected
Catastrophic
Losses
Transformational
Blue swans
Catastrophic
Losses
Black swans
Unexpected
Opportunities
LOSS GAIN
Risk Can Lead to either Negative or Positive impact depending
how it is managed..
ERM – Create Shared Sustainable Value

SP – Strategic Planning
Develop opportunities
& create value
BCM – Ensure Business
Continuity & Societal
Security
ERM vs Strategic Planning, Operational & BCM
57
- +
Target
Performance
Expected
Potential
Losses
Expected Potential
Opportunities
Unexpected
Catastrophic
Losses
Transformational
Blue swans
Catastrophic
Losses
Black swans
Unexpected
Opportunities
ERM – Enterprise Risk Management
LOSS
Operational
Management
GAIN

The Objective of Risk Management is that …
.. an organisation takes risk KNOWINGLY and
manage risk exposure INTELLIGENTLY
.. in a controlled (or balanced) manner so that the
business is viable for a longer term (SUSTAINABILITY)
while meeting the expectation of all the relevant
stakeholders by CREATING SHARED VALUE

In a World full of Uncertainties, Managing Risks &
Opportunity Effectively means THAT...
59
Deliver
DESIRED
Business
RESULTS
Make Sound
Strategic &
Operational
DECISIONS
?
We NEED
PEOPLE to be
able to..
In order to be
able to..
Question
is.. HOW?

Risk &
Value
Model
The DECISION-MAKERS
Profile
The ORGANIZATION
Context
skills
Understanding the FACTORS: Personal & Environmental that
support Sound Strategic & Operational DECISION-MAKING
organizational
structure
management
systems
culture & values
experiences
moral values
Knowledge
network
attitude
behavior
Processes
Tools
& Resources
Social
networks
What are the areas of Strengths &
Weaknesses..?

Understanding the FACTORS: Personal &
Environmental that support Sound Strategic &
Operational DECISION-MAKING
1- The DECISION-
MAKERS PROFILE
Strengths & weaknesses in
terms of Knowledge, skills
experience, network, moral
values, attitude and behaviors
2 - The ORGANIZATION
CONTEXT
Strengths & weaknesses in terms of
organizational structure
management systems & of the cultural setting.

62
ARiMI ERM Framework - The Keys Components

Risk CULTURE: Guiding
Principles & Values

Building commitment to principles
& ethical values essential for ERM
effectiveness

Risk GOVERNANCE: Structure
& Oversight

Extend of role, responsibilities and
oversight for ERM throughout an
organization

ERM Philosophy &
MATURITY

Level of Awareness of ERM Benefits
and resulting commitment from the
top management to ERM initiatives

Risk PROCESS: Methodology
& Tools

Quality of assessment,
quantification, treatment &
monitoring methodologies and tools

Risk RESOURCES

Range, quality and level of resources
(people, financial & IT) allocated
to support the ERM efforts

ERM SCOPE & ACTIVITIES

Categories of Risks covered & level of
integration of ERM in strategic and
operational decision-making
throughout an organization

Risk & Performance System

Level of integration between Risk and
Performance Management system to
support effective risk-taking

Risk CAPITAL Structure

Range and level of risk financing
strategies and practices including
capital/debt management and
Insurance

ERM COMPETENCE

Quality and range of L&D programs to
build strong ERM competencies
among the people of an organization

ARiMI

ARiMI Process for Managing Risk – The Key Steps
Understand the
Organization & its
Context
Risk Assessment
Risk Quantification &
Aggregation
2. Evaluation &
DECISIONS about Risk
3. SOLUTIONS
Plan & Implement
Exercise & Test
1. DIAGNOSTIC
4.
MONITOR, MANAGE
& REVIEW
CONSULT,
COMMUNICATE
&
COORDINATE
Recovery
Management
Intervention &
Containment
Monitor, Report &
Recognize
Analysis & Learning
ARiMI

Understanding CURRENT REALITY and Projecting
Forward to Identify the Possible FUTURE(S)
TODAY
CURRENT
Reality
Where are you
Now?
Time
Range of
Possible
FUTURE(S)
Threats
Performance
Opportunities

So You need to use a Business Model Analysis Tools
such as the ARiMI-CCS Model
1 2
3
The Customer(s)
How to
CREATE
VALUE for the
Customer?
How do we SUSTAIN the above VALUE
creation process over time?
How to
CAPTURE a
fair share for our
Organizations?
ARiMI

Understanding VALUE CREATION with ARiMI CCS

Changes in the Tranportation Industry:
What is NEXT to come?
YESTERDAY TODAY TOMORROW
Horse drawn
vehicle
Modern Cars
?
Where are we
coming from ?
Where are we
Now ?
Where are we
Going to be ?
On-demand
Self-drive car

Understanding your Value Chain & Competitive Context
Key Partners:
(Supply
Chain)
Raw Materials,
Goods &
Services
Competitors
& New Entrants
YOUR
ORGANIZATION
Key Partners:
(Routes to
Markets, Channels)
Distributors,
Complementors,
Vendors, etc.
Customers
(Segments &
Profiles)
Prospectivecustomers
Substitutes
Source: Marc Ronez – Asia Risk Management Institute
External Macro Forces…

Look a Long-term then Short-term (3 HORIZONS)
Horizon 1
0 to 3 years
Horizon 2
3 to 10 years
Horizon 3
10 years & Beyond
Profit
Time (years)
Next Year’s car
model
Electric car model
On-demand self-drive
car
•  high growth businesses with
potential to become core
•  may or may not be generating
profit today
•  portfolio of embryonic
businesses and initiatives
•  Will grow into H2 or be
pruned
•  core business, central to company
identity
•  generating majority of profit today
but eventually flattening or
declining

70
A STRATEGY is a „Road Map“ that provides a
Pathway from CURRENT REALITY to VISION
Time
VISION
Where you want
to Be? (Possible
Future)
INGREDIENTS
Capital, People,
Systems, Processes,
assetsSTRATEGY
How to get
There?
RECIPE
Culture, Structure,
Marketing, Products,
Pricing, Distribution
TODAY
CURRENT
Reality
Where are you
Now?
RISKS
Building Critical Success
Factors Capabilities

INNOVATION : What do you need to Change in your
Business Model
Channels
PROFIT FORMULACUSTOMER VALUE PROPOSAL
RelationshipProduct/
Service
Features
Revenue
Model
Costs
Structure
Brand/
Package
Process Structure &
System
Resources
Mix
Partnerships
SUSTAINABILITY ENGINE
Product/
Service
Ecosystem

INNOVATION Process: It can be CLOSED or OPEN!
CLOSED
Innovation
Model
Our current
market
Internal/external venture
handling
External technology
insourcing
External technology base
Other firm’s
market
Our new
market
License, spin
out, divest
Internal technology base
Our current
market
External technology base
Internal technology base
OPEN
Innovation
Model

Enterprise-Wide Risk Management (ARiMI)
Performance Management
Risk Management
Knowledge &
Information
Management
Linking Risk & Performance Management
ARiMI

Performance Management
Organization Mission, Vision &
Shared Values
Determine Business Model
(Value Creation, Value Capture,
Value Sustenance)
Drives Strategy
Map Key Resources & Processes to Identify Critical Success Factors
Financial Customer
Internal
processes
Employee / HR
Community and
Environment
Key Performance Indicators
Risk Management
Critical Success vs Failure Causes / Factors
Financial Customer
Internal
processes
Employee / HR
Community and
Environment
What FACTORS influence our
objectives and ability to
succeed by disrupting key
resources & processes
What CONTROLS we need to
put in place to mitigate our
risks
Knowledge & Information
Management
Enterprise-Wide Risk Management (ARiMI Model)
Drives Key
Objectives
Key Risk Indicators
Key Control Indicators
Processes, Results,
Incident & Loss Events

Learn from the PAST
Risks & Returns Profile &
quantification Analysis

Manage the NOW
Predictive Scenario
Analysis

Anticipate the FUTURE
Communication ,
Training & Guidance
ARiMI

Build RESILIENCE & SUSTAINABILITY into your
Systems & Culture
75
1.  Continuous Strategic Anticipation
2.  Organizational Agility & Capability
Responsiveness
3.  Continuous Learning

4 – The DOWNSIDE of HUMAN
DRIVEN INNOVATIONS

As Humans GROW (need for more land, water, food,
energy and so on) all others must DECREASE

The Downside of Innovation Hurts Humans too!

There are more Disruptive Technologies in the
pipeline..
Source: Mc Kinsey Global Institute
While the benefits of New Technologies may
seem obvious to many..

It is also important to
consider the
NEGATIVE effects so
that they can be
managed properly.
Otherwise the
consequences could
be DISASTROUS for
us..

Effective Risk
Management is
necessary to manage
those threats & guide us
to a positive future

Last recommendations ..

Best Countries to Go to INNOVATE
Cornell University, INSEAD and the World Intellectual Property Organization. The full report is available at http://www.wipo.int/
publications/en/details.jsp?id=4064
#3 UK
#13 Iceland
#7 Ireland
#2 Sweden
#5 Finland
#4 USA
#15 Canada
#6 Singapore
#14 HK (China)
#1 Switzerland
# 9 Holland
#10 Germany
#8 Denmark
#12 Luxemburg

Risk Managing Change - Don’t Swim Naked!
þ  Think Long-term if you want to build something sustainable. And
Keep Reframing. (business model & environmental scanning)
þ  Assume that what can Happen will Happen! So Prepare Accordingly
þ  Nurture a Risk-Aware Culture to support resilience and capacity to
Learn and Change
þ  Recruit and promote people who are risk-smart and ethical
þ  Develop a real Risk-adjusted Performance Management system – to
motive people to take risk effectively
þ  Build in Redundancy for important resources and processes in your
system
þ  Save for Rainy Days & Opportunistic investment (create capital
buffers in ‘good times’)
þ  Strengthen your crisis management & Business continuity programs
& Stress-test your systems regularly

✓ RISK QUIZ FOR YOU!
What Kind of Risk-Taker and Manager
are YOU?
20 quick QUESTIONS and You will find the ANSWER
TAKE QUIZ NOW at www.arimi.org

A recognized expert with more than 20 years of experience both as a practitioner &
trainer for large MNCs, Governments & Charities.
Areas of expertise include ERM, risk decision-making processes, Data Analytics,
Corporate Governance, Business Ethics, Social Responsibility, risk-aware culture, risk
communication and crisis management, Business Model/Strategy Risk Management,
corporate learning systems development.
MBA from the University of Chicago Booth, an MSc in
Insurance & a LLM from the University of La Sorbonne,
Master Degree in Advance Business Research from UNISA –
University of South Australia
Marc has an MBA from the University of Chicago Booth GSB, MSc in
Insurance from the Université De Paris I - Panthéon-Sorbonne, LL.M.
from Université Panthéon-Assas (Paris II) and Master’s Degree in
Advanced Business Practice from University of South Australia. He is a
Fellow in Applied Risk Management (FARM) from the CARM Institute.
ARiMI – Asia Risk Management Institute, ESSEC
Business School
Work
Education

What do I do?
I help managers & leaders to use Risk
Management to:
þ RESOLVE difficult operational and
business challenges
þ TAKE & MANAGE risks effectively to
build sustainable & profitable growth
models

Risk Management is a continuous journey, not a
destination!
Marc Ronez is on Linkedin & WordPress
You can find his profile & read his blogs at:
P: www.linkedin.com/in/marc-ronez
B: theriskmanagementparadox.com
B: riskmanagementdemystified.com
88

ARiMI – Asia Risk Management Institute

90
For more information on ARiMI,
check our website at:
www.arimi.org
Developing Effective Leaders & Decision-
makers for complex & volatile times

Important Note: Please note that that this presentation and its
contents, is the intellectual property of the Asia Risk Management
Institute Pte Ltd. It has been prepared for this A*Star ERM Day 2017
event and it cannot be used for any other purposes without the
specific written consent of the Asia Risk Management Institute.
Whilst any third party information contained in this document has
been obtained from sources believed to be reliable, no
representations are made as to its accuracy or completeness.
Further, ARiMI expressly disclaims any responsibility for liability or
loss arising from use of such information or from any of ARiMI's
comments upon it.

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