Strengthening the CFO's

role in Strategic Risk

Management to lead
Capital Intensive business
in Market Volatility
Capital-intensive business exists with lower margins. Management is
always expecting Return on Capital Employed (ROCE) above the cost of
capital. The major businesses are Oil & Gas, Infrastructure, Construction, IT
etc.
Market volatility, ceaseless pressure on margins and demanding
stakeholders increase the difficulties of thriving in an increasingly
interconnected, interdependent and unpredictable global economy. Many
organizations have yet to adapt to this new state of the economic landscape.
Doing nothing is no longer an option - they need to adjust and take action
now.
Many organizations are now transforming their businesses to strengthen
their organization to save costs, create more client-centricity, restore
stakeholder confidence and/or embed new business models. For many
organizations, long-term success depends on the success of
these transformation programs. To make it more challenging, the margin for
error continues to be small, and the environment in which transformation
needs to happen continues to increase in complexity.
Strategic Risk Management

 It's a process for identifying, assessing, and managing both internal

and external events and risks that could impede the achievement of strategy
and strategic objectives.
The ultimate goal
stakeholder value.

is

creating

and

protecting

shareholder

It's a primary component and necessary foundation

organization's overall enterprise risk management process.

of

and

the

It is a component of Enterprises Risk Management (ERM), it is by

definition effected by boards of directors, management, and others.
It requires a strategic view of risk and consideration of how external
and internal events or scenarios will affect the ability of the organization
to achieve its objectives.
It's a continual process that should be embedded in strategy setting, strategy
execution, and strategy management.

Concrete Steps to Increase the CFO's Involvement in

Risk Management
Build a tight link between risk management and other Business Process
Lead a corporate-level discussion of Risk Preference, Focusing on
Risk Choice and select optimal mix
Use Risk Analytics to communicate investment and strategic Decisions

Build a tight link between risk management and other Business Process
Focus on foresee issues which will emerging in the future instead of current
issues.

 On the basis of prioritization a guidelines to be issued for which

Business performance metrics would be effected.

Business

Planners

conduct

adhoc analysis of

upside

versus

risk,

focusing most, if not all, of other attention on a single "Center Cut" scenario.
Highlighting exactly where and how risk will affect the Business Plan
Incorporating systematic stress testing using macro scenarios which
will reflects possible impact on financial planning
Applying probabilistic "financial at risk" modeling
investment decision these efforts. (Cash in hand vs cash needs)

for

major

Lead a corporate-level discussion of Risk Preference, Focusing on Risk

Choice and select optimal mix
It is critical to have clear answers to the following questions before making
decisions:
o What is the company's competence in the market?
o Are the decision makers familiar with the risks involved including the tail
risks and understand their potential impact?
o Is the company capable of surviving extreme events?
Risk appetite articulates the level of risk a company is prepared to accept to
achieve its strategic objectives.
Risk appetite frameworks help management understand a company's
risk profile, find an optimal balance between risk and return, and nurture a
healthy risk culture in the organization. It explains the risk tolerance of the
company both qualitatively and quantitatively.

 Qualitative measures specify major business strategies and business goals

that set up the direction of the business and outline favourable risks.
Quantitative measures provide concrete levels of risk tolerance and
risk limits, critical in implementing effective risk management.-Test Responsive
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Use Risk Analytics to communicate investment and strategic Decisions
CFO plays an important role in financial and strategic aspects of investments
and the evaluation of major decision. He leads the discussion and rival
proposals and solutions and often hold powerful decision rights.
Major Projects with value at stake comparable to total risk from current
company operations are discussed and decided with qualitative list of
major risks.
The CFO is ensuring by defining right set of core financial and risk analytics
to run for each option to ensure this value stake is brought to light and
debated.

EXAMINING LEADING PRACTICES APPLICABLE TO CFOS

THAT CAN AUGMENT A COMPANY'S FINANCIAL HEALTH
Best Practices applicable for Company's Financial Health
CFO have several options to compete more effectively in the Risk
Management decisions. Improving returns starts with rethinking where to playand with four strategic steps that many companies often overlook when it
comes to improving performance.
Where to play: A more profit-focused portfolio

 The most pressing issue for leadership teams in capital intensive industries
is whether to stay in businesses in which margins have been relentlessly
driven down. Many companies are choosing to exit low-profit businesses that
once were considered to be core. As they rebalance their portfolios, they are
migrating up the value-added chain, investing in related sectors where new
technologies can provide competitive advantages.
Profit pool mapping is an important tool for assessing whether and where
it makes sense to do business. In heavy industries, management teams often
are so focused on volumes and tonnage that they overlook where the biggest
profit pools are. By understanding the sources and distribution of profits
across their industry, companies can gain an inside edge on improving
returns.
The premium end of the business typically represents a very large proportion
of the profit pool. The best opportunities often cluster there for companies
competing in capital-intensive industries.
Picking the right place to play in the value chain is also critical to improving
returns-and the most profitable spot varies across industries.
Best Practices applicable for Company's Financial Health How to win:
Four strategic steps to improving returns
1. Improve the cost base and review capex continually In capital-intensive industries where low returns have become endemic,
reducing costs and improving capex efficiency are important ways to improve
performance - New developing market entrants in capital-intensive industries
have built a strong competitive advantage by keeping capex relatively low. By
contrast, the focus on cutting costs at many established players means they
sometimes lose sight of improving capex. One way to get the balance right:

Develop a more disciplined approach to managing capex, and benchmark the

company's performance against the industry's leaders.
Cost discipline makes a critical difference. One-time efforts usually fail to
deliver savings that stick, as our research shows. One explanation is that in
tough times, management teams are quick to cut costs, but when the cycle
swings up, they tend to take their eye off cost improvement and focus on
growth-related priorities.
Developing a rigorous approach to cost improvement and nurturing the right
capabilities to optimize working capital can help capital-intensive companies
outperform.
2. Build the lowest-cost position
Geography is another key factor for improving returns. Investing in
geographies that offer the lowest landed cost position can create a strong
competitive advantage. It's particularly important in asset-heavy industries
where the one-time cost of closing and moving businesses is high.
The best-performing firms revisit their geographic footprint regularly, as cost
dynamics are constantly evolving.
Companies that can choose the lowest-cost geography up front gain a
competitive edge. Those in mature industries need to weigh the short-term
downside against the longer-term benefits of reducing complexity.
3. Use mergers and acquisitions strategically
Smart acquisitions can help improve performance significantly, but many
companies get off to a bad start by investing at the top of the cycle, when
prices are at their peak, simply because that's when cash is available.
Leadership teams that take a strategic, disciplined and long-term approach to

M&A instead of a tactical and episodic approach can improve returns

significantly.
Companies that nurture M&A as a core competence derive the greatest
value from them. Their leadership teams devote time to developing a
structured roadmap of the most attractive potential targets, making it easier to
acquire assets when the right opportunity comes along-and to target
acquisitions at the bottom of the cycle.
Companies that are most experienced in M&A build their capabilities over
time. They search hard for merger or acquisition candidates that will add to
their operating profit and fuel balanced growth. They pursue nearly as many
scope deals as scale deals, moving into adjacent markets as well as
expanding their share of existing markets. Most importantly, they create
Repeatable Models for identifying, evaluating and then closing good deals.
What they typically find is that there are plenty of good prospects to be
pursued and that the risk involved decreases with experience.
4. Service ace
For traditional capital-intensive industries, service can be a highly profitable
business in its own right, generating better and faster return on investment
than new production facilities, large-scale R&D programs or acquisitions.
Indeed, for many industrial manufacturers, investing in service is the only
way to sustainably grow profits in a tough economic environment. Investing in
a service business also lowers capital intensity.
Investing in a world-class service business can become a strategic ace,
elevating a company above competitors in an environment where
differentiation on products and cost is difficult to achieve. The range of
service opportunities, some larger than others, will vary by industry and

company. Here again, mapping profit pools can help identify the potential size
of service businesses and those with the greatest returns.
o There is no question that companies in capital-intensive industries operate
in a difficult environment today. But leadership teams that commit to a bold
ambition have opportunities to break away from the pack and achieve doubledigit returns significantly above the cost of capital.
Best Practices applicable for Company's Financial Health-Getting there
requires a strategic shift toward a more profit-focused portfolio:
Find the most attractive profit pools in your businesses.
Adopt a mindset of continual cost improvement and capex optimization.
Look for opportunities to drive down the company's landed cost footprint by
investing in the right geographies.
Develop strong in-house M&A expertise and a structured roadmap of
potential deals.
Invest in related service businesses
Leadership teams that take these steps will not only give returns a powerful
boost, they also will help to rebuild competitive advantage and position their
companies to win in a changed industrial landscape.

Reengineering Strategies to improve the link Between

Risk Management and Business Planning Process
Business process reengineering is one approach for redesigning the way
work is done to better support the organization's mission and reduce costs.
Reengineering starts with a high-level assessment of the organization's
mission, strategic goals, and customer needs.

 Within the framework of this basic assessment of mission and goals,

reengineering focuses on the organization's business processes--the steps
and procedures that govern how resources are used to create products and
services that meet the needs of particular customers or markets.
Reengineering identifies, analyses, and redesigns an organization's core
business processes with the aim of achieving dramatic improvements in
critical performance measures, such as cost, quality, service, and speed.
Reengineering recognizes that an organization's business processes are
usually fragmented into sub processes and tasks that are carried out by
several specialized functional areas within the organization.
The CFO Act focuses on the need to significantly improve the government's
financial management and reporting practices. Having appropriate financial
systems with accurate data is critical to measuring performance and reducing
the costs of operations
Management & Decision Support Structure
Investigate suggestion for reducing costs and to make them practical and
acceptable
Obtain definite prices and costs
Present recommendation in comprehensive report
People & Organization
Organize around outcomes and not tasks
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Have those who use the output of the process perform the process

 Built control in process systems

Treat geographically dispersed resources
Policies & Regulations
Develop policies and procedures
Comply with compliances
Environmental compatibility
Information & Technology
Information should go along with the process
Link all activities
Capture information at source
Create reports and real time online updates
Frame for Assessing Reengineering
Assessing the Organisation's Decision to Pursue Reengineering
Reassessing of Its Mission and Strategic Goals
Identifying Performance Problems and Set Improvement Goals
Engagement in Reengineering
Assessing the New Process' Development
Appropriately Managing of Reengineering Project

 Analysis of the Target Process and Developed with Feasible Alternatives

Completion of Sound Business Case for Implementing the New Process
Assessing Project Implementation and Results
Following a Comprehensive Implementation Plan
Executives Addressing Change Management Issues
New Process Achieving the Desired Results

FOCUSING ON RISK PREFERENCE AND CHOICES FOR

CFOs CONSIDERATION TO DELIVER ECONOMIC PROFIT
DURING TOUGH CONDITIONS
CFOs need to develop a stronger focus on the economic and performance
drivers of their business and need to understand how the effective allocation
of scarce resource will help them achieve financial objectives. The CFO must
build a performance management capability that can:
Provide visibility and analysis of information to support resource allocation
Support the decision-making process by providing the right information to
the right people at the right time
Demonstrate the financial impacts of different decisions and scenarios to
enable the organization to predict and compare outcomes
Incentivize executives and managers to make decisions that maximize
marginal contribution
Enable a data-driven view on resource allocations across the entire value
chain (to include corporate strategy; sales, marketing and customer service;

supply chain manufacturing and production; finance, HR, legal and

compliance)
Identify the most critical decision points that drive economic performance
With a unique perspective across the entire business, CFOs can provide
valuable insight into the decisions that create or protect marginal contribution
across the value chain. Armed with a detailed understanding of how and
where growth in sales leads to growth in profits, they can offer an objective
assessment of fixed and variable costs, and then identify how a reduction in
costs can maintain revenues while improving profit contribution.
Establish a clear, forward-looking line of sight on relevant data for critical
decision points
Finance must have access to a robust data set, built around the decisions
that drive most economic value in the organization, including assessment of
opportunity cost. This demands accurate, verifiable underlying data and an
understanding of how the data relates to value chain decisions. This will
enable the CFO to conduct scenario planning around these different decision
points.
Develop aligned performance management processes that drive rational
decisions
Finance must be able to translate insights and understanding into the desired
end product - rational decisions that maximize the desired economic return.
Aligning traditional resource allocation processes with business objectives
helps ensure repeatability and the sustainability of the organization.
Ensure compliance and make sure that finance's voice is heard
The CFO and finance function must be positioned appropriately within the
organization to be able to influence decision-making and action. Additionally,

finance professionals must improve communication and influencing skills to

ensure that their voice is heard and their advice is valued and acted upon.