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Enterprise Strategic Risk Modeling: Linking ERM to Financial Performance Management
Bonnie Ray, IBM T.J. Watson Research Center
In many enterprises, Enterprise Risk Management (ERM) activities are carried out by a risk organization operating under the direction of a Chief Risk Officer, separate from the planning and budgeting activities of the finance organization. In particular, strategic risks represent the largest challenge for corporate ERM, typically due to lack of historical data or incompatibility with existing modeling frameworks. Industry surveys find that strategic risks account for over 80% of the cases of significant shareholder value loss among Top 1000 companies during the last decade. In this talk, our speaker, Bonnie Ray, presents a novel framework for linking ERM activities to financial performance management. Key to the framework is a collaborative environment for building an "influence diagram", which allows identification of risks and mitigation actions that can be linked directly to drivers of the company's financial model. The framework also includes a set of rules to transform this diagram into a probabilistic model, allowing for the automatic generation of questionnaires to elicit risk information from domain experts, an aggregation technique to combine opinions of multiple experts, simulation capability to quantify the effects of the risks and the mitigation actions on key financial outcomes, and a cost-benefit analysis to help decision makers determine a mitigation investment strategy. Bonnie Ray illustrates each aspect of the framework and discusses how the framework is currently being used within IBM.
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Keywords: evaluation anamod, portfolio decision analysis portda, analytics bigdata, enterprise risk, strategy analysis, strategic risk, influence diagram infldiag, risk analysis riskanal, mitigation, multiple experts, implementation of da implda