Aligning strategy decisions with risk appetite Presented by David Shearer Monday 10th October 2016 APM North West branch and Risk SIG conference Alderley Park, Cheshire

1. David Shearer
Project Management and Commercial Lead
10th October 2016
Aligning Strategy Decisions
with Risk Appetite

2. Need
‘Stable’
Consultancy
Business
Desire;
Growth and
Diversification
Culture;
Manage Growth Risk
Help the business
decide which
projects to take on!

3. Agenda
1. Risk Appetite Examples
2. Terminology
3. Standard Models
4. MWH Background
5. MWH Pilot Model

4. Risk Appetite Examples1

5. Risk Appetite Examples1

6. Risk Appetite Examples1

7. Terminology2

8. Terminology
A Short Guide to Risk Appetite (David Hillson & Ruth Murray-Webster, Gower Publishing, 2012)
• Risk Appetite – is the tendency of an individual or group to
take risk in a given situation.
• Risk Attitude – is the chosen response to a given risky
situation, influenced by risk perception.
• Risk Thresholds – quantified measures that represent upper
and lower limits of acceptable uncertainty against each
objective.
8

9. Terminology
The Institute of Risk Management
• Risk Appetite –The amount of risk that an organization is
willing to take in order to meet their strategic objectives. Uses
a ‘Fight or Flight’ response example.
• Risk Attitude – is the chosen position adopted by an
individual or group towards risk influenced by risk perception
and pre-disposition.
• Risk Tolerance – is about what you can allow an organization
to deal with (if push comes to shove).
9

10. Terminology
Risk Based Performance Management
(Andrew Smart & James Creelman, Palgrave Macmilan, 2013)
• Risk Appetite – is the amount and type of risk that an
organization is willing to accept, and must take, to achieve
their strategic objectives and therefore create value for
shareholders and their stakeholders.
10

11. Standard Models
• The Institute of Risk Management
• Committee of Sponsoring Organisations of the
Treadway Commission (COSO)
• Risk Based Performance Management
• A Short Guide to Risk Appetite
3

12. Risk culture Risk appetite
Standard Models
The Institute of Risk Management
culture aspects model
Toneatthetop
Risk leadership
Informed risk
decisions
Decisions
Dealing with bad
news
Reward
Governance
Accountability Risk resources
CompetencyTransparency Risk skills
<<<<<<<Riskuniverse>>>>>>>
<<Risktolerance>>
Risk
<appetite>
t0 t1time
performance
12

13. COSO
Interrelationships of Strategy, Management Decisions and Risk Appetite
Objectives
Tolerances
Sets Strategic
Goals
Standard Models
Formulates
Strategies
Establishes
Objectives
Manage risks
Appetite
State Risk
Appetite
Link to
Objectives
Facilitate
Alignment
Facilitate
Monitoring
13

14. Manage
Performance
Set Strategy
Manage
Risk
Appetite
Align Risk
Taking to
Strategy
Appetite
Communication
Culture
Governance
Standard Models
Risk Based Performance Management
14

15. Standard Models
A Short Guide to Risk Appetite;
The Risk Appetite – Risk Attitude (RARA) Model
Risk appetite Risk capacity
Risk thresholds
Residual risk
exposure
Risk actionsRisk attitude

16. MWH Background4

17. Background - Need
Diversification;
17
Developer

18. Background - MWH
Structure
• Very Strong Project Level Risk Process
• Defined Roles and Responsibilities
• Healthy Scepticism
Growth
• Growth Targets
• Process Constraints
18

19. “the board is responsible
for determining the Nature
and Extent of the Principal
Risks it is willing to take
in achieving its Strategic
Objectives.”
Background –
UK Corporate Governance Code
MWH;
UK Business / Board Level;
• Strategy, Defined Outcomes, KPIs
Project Level;
• Strong, well defined process
Business Unit Level
19

20. MWH Pilot Model
• Conversation and Journey
• Models, Rules and Tools
• Future
5

21. “Strategy without tactics is the slowest
route to victory. Tactics without strategy is
the noise before defeat.”
Sun Tzu – The Art of War (500 BC);

22. Model - Conversation and Journey
Stage 1
• What is slowing growth?
• Is the Risk Process really a blocker?
• What risks are we taking to grow (gain an opportunity)?
• Are we taking too much or too little risk?
• Can we be more innovative in our approach?
22

23. Model - Conversation and Journey
Stage 2
• Need to align risk with the growth strategy;
• Need to agree the Business Unit (mid tier) risk appetite;
• Need a mandate from the business on the “acceptable
risk in pursuit of our goal”
23

24. Model - Conversation and Journey
Stage 3
• How do we define the risk appetite at BU level?
• How do we simply measure risk across the portfolio?
• How do we define the lowest margin across the portfolio and
individual projects/opportunities?
• How do we know the process works?
24

25. Overall Strategy
Outcomes and KPIs
Risk Appetite Statement
Risk Appetite Statement
Risk Tolerance (Financial)
Risk Identification
Risk Analysis
Risk Reporting
Key Risk and Control Indicators
UK Business /
Board Level –
Rules
Business /
Unit Level –
Rules
Business /
Unit Level –
Tools
Model
25

26. Outcome 1
Our actions protect and benefit people and the environment
Model – Business / Board Level
26
Outcome 2
We are a sustainable, thriving and growing business
Outcome 3
Our clients consistently tell us that we deliver exceptional service
Outcome 4
All our employees feel valued and proud to work for MWH

27. Model - Business / Board Level
Extract from the “10
Rules of Essential
Business and
Contracting Policy”;
“Rule 2 –
Pursue and
Accept
Opportunities
Aligned with
Strategy that
Balance Risk
and Reward”
Extract from Risk Policy;
“The Company will accept reasonable project
risks, but not those that threaten the
Company’s financial well-being or those that it
has little ability to mitigate and control….
Project risks must be evaluated from the
perspective of what is in the best interests of
the Company as a whole…The risks taken by
the Company must not outweigh expected
project rewards.”
27

28. Model - Business Unit Level; Rules
Business Unit Level Risk Appetite Statement
Examples;
1. The Global Risk Policy and MAM applies in all cases. The business has a very low tolerance on Ethics
and Compliance and will not enter into any agreements that do not comply with MWH’s Ethic Policy.
2. The business had a very low tolerance on Health, Safety and Environment and will not enter into any
agreements whereby MWH cannot comply with MWH Policy and legal obligations.
3. The business has a low risk tolerance to appointment of appropriate PM and Tech Leads. The
business views this as critical and will not accept additional risk by appointing inappropriate personnel in these key
roles.
4. The business has a zero tolerance to progressing delivery without a signed contract. The
business accepts the need to progress projects during the planning stage in limited cases to support planning
or meet initial deadlines. There is a low tolerance to full mobilisation prior to the planning stage being completed
and approved.
5. Project risks across the business unit will be evaluated to ensure a balance of risks and no excessive
clusters of any risk types.
All figures and data are purely illustrative.
RAG;
28

29. Model - Business Unit Level; Rules
Target Margin
7%
time
performance
Appetite Boundary – Max
Margin 12%
Appetite Boundary –
Min Boundary 1%
All figures and data are purely illustrative. 29

30. Model - Business Unit Level; Tools
Project Risk Identification Matrix
Decision
Category/Rank 0 -- 1 2 -- 3 4 -- 5
Score Key Risk
Comments / Actions0-5 Y / N
Scope - Ability to Define
Specific
deliverables,
assumptions, and
exclusions.
Potential
ambiguity. No
RIBA level or
examples.
Client or MWH
unable to fully
define.
3 N
Scope - Design Detail Feasibility stage.
Simple detailed
design, Tech
specs for D&B
Contractor.
Detailed design;
multi-disciplinary
or complex.
5 Y
Scope - Key Discipline
Risks
Standard
Disciplines.
New
Technologies.
Remediation
design.
ORC trigger.
Remediation
Contracting.
Principal
Designer.
5 Y
All figures and data are purely illustrative.

31. Model - Business Unit Level; Tools
Project Risk Identification Matrix
Scope;
• Ability to Define
• Design Detail
• Key Discipline Risk
Client;
• Type of Client
• Experience With Client
Resources;
• In House Availability
• In House Skills & Experience
• Sub-Contract Experience
• Ability to Manage Sub-Contract
Contractual;
• Contractual terms
• Financial Implications
• Sub-Contract Flow Down
Financial;
• Incentivisation
• Grade / Rates
Other Risks
(inc review of 10 Essential Rules of Business and Contracting)

32. Model - Business Unit Level; Tools
Project and Portfolio Analysis
Project
Client
Scope
Client
Resources
Financial
Contractual
H&S/
Wellbeing
Env&
Communities
ClientService
Valued&
Proud
Live Projects
1 … -1 0 -1 0 0 0 3 3 4
2 … -1 0 -3 0 -1 1 1 2 0
3 … -5 -2 0 -1 0 0 0 0 0
4 …
Bids / Opportunities
5 … -1 0 -4 0 0 0 2 4 0
Pipeline
6 … -4 -3 -5 -1 -2 -2 3 0 0
Revenue
Expected
margin
RiskReserve
Maximum
Credible
Minimum
Credible
Factored
MinimumCred
£1500k £100k £80k £180k £20k £20k
£1500k £100k £80k £180k £20k £-100k
All figures and data are purely illustrative.

33. Model - Business Unit Level; Tools
Project and Portfolio Analysis
Margin RAG
Min Margin 1.00%
Risk Appetite Target 7.00%
Max Margin 12.00%
5%-ile 1.20%
Live Projects Mean 6.50%
95%-ile 11.85%
5%-ile 0.90%
Live+Bids Mean 5.5%
95%-ile 11.80%
5%-ile -2.00%
Live+Bids+Pipeline Mean 5.90%
95%-ile 10.90%
Expected
Margin
Max
Cred
Min
Cred
Factored Min
Cred
All figures and data are purely illustrative.

34. Model - Business Unit Level; Tools
Qualitative / Quantitative Analysis
Target Margin
7.00%
time
performance
Appetite Boundary
Max Margin 12.00%
Appetite Boundary
Min Margin 1.00%
Live 95%-ile
11.85%
Live 5%-ile
1.20%
Live Mean
6.50%
All figures and data are purely illustrative.

35. Model - Business Unit Level; Tools
Qualitative / Quantitative Analysis
Target Margin
7.00%
time
performance
Appetite Boundary
Max Margin 12.00%
Appetite Boundary
Min Margin 1.00%
Live+Bids+Pipeline
95%-ile 10.80%
Live+Bids+Pipeline
5%-ile -2.00%
Live+Bids+Pipeline
Mean 5.90%
All figures and data are purely illustrative.

36. 0
500
1,000
1,500
2,000
2,500
3,000
3,500
Resources
Model - Business Unit Level; Tools
Risk Graphs
All figures and data are purely illustrative. 36

37. Model - Future Developments
• Formalised Leadership Links
• Culture Shifts and Communications
• Improved Data and Data Governance
• Key Risk Indicators and Control Indicators
• Review & Adjustments to Models and Tools
37

38. Model –
Benefits to BU Commercial Team
• Better Understanding of Acceptable Risk
• Earlier Identification of Key Risks
• Fixed Process to Evaluate Risks Across Portfolio
• Ability to Model Scenarios
• Greater Visibility
• Ability to Influence Decisions
38

39. Model –
Benefits to Business Development
• Better Understanding of Acceptable Risk
• Growth Strategy Aligned with Risk Appetite
• More focused Marketing Activities
• Ability to Quantify Risks to Remove ‘Invalid’ Risk Perception
39

40. Model - Benefits to UK Board
• Clear Instruction of what is the Acceptable Risk
• Greater Visibility of
– Live Project and Portfolio Risk Profile
– Impact of Potential Projects
– High Risk Areas (Scope, Resources etc)
• Ability to Make Informed Decisions on Opportunities
40
Need: Help the business decide which projects to take on!

41. Model
BU Level Strategy with clear
Risk Appetite
Qualitative Project and Portfolio
Analysis Tool
Quantitative Project and Portfolio
Analysis Tool
Report
UK Board Level

42. Any questions?
42

43. This presentation was delivered at
an APM event
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