Discussion - Enterprise Risk Management

CHAPTER 3

ERM at Mars, Incorporated ERM for Strategy and Operations

LARRY WARNER President, Warner Risk Group

This case study outlines the development of Mars, Incorporated’s EnterpriseRisk Management (ERM) program, from its initial phases in early 2003through the spring of 2012. The views expressed in this case study are those of the author, and may not be those of Mars, Incorporated (Mars). Additionally, as with any ERM program, Mars’ program has continued to evolve since 2012.

Throughout this case study, I have used first names for a number of key indi- viduals who contributed to the success of program. (Please note all names have been changed.) In speaking with other ERM practitioners, such early adopters of an ERM program typically help contribute to an ERM program’s development, evolution, and success. In this case study they helped spread and embed the pro- cess in their business units and in other units as they took on new roles. Most of the major improvements in the evolution of this program resulted from working with these individuals to address the needs of their business units. By identifying these players’ involvement in the early stages of the program and their subsequent roles, the case study reader should gain an understanding of the importance of and the need to cultivate relationships with these early adopters.

MARS’ ERM HISTORY In essence, Mars’ ERM program began with the company’s inception by Forrest Mars.1 Historically, the leadership at Mars had a serious commitment to risk man- agement. ERM represented one natural evolution from these practices.

In conjunction with the transition to nonfamily management in the early 2000s, the corporation established challenging growth, earnings, and cost targets. In order to achieve these objectives, the company undertook a number of key initiatives to ensure the achievement of these objectives. ERM became one of these.

In 2002, Roger, the CFO at the time, and I sat down and discussed how an ERM program might help better manage the business. We recognized that we lacked the experience to implement such a program on our own, and asked two of our existing service providers with ERM practices to make proposals as to how they might

39

www.it-ebooks.info

40 Implementing Enterprise Risk Management

assist us in this project. As Roger put it, “We need someone to transfer knowledge to Larry.”

One vendor pushed for a Committee of Sponsoring Organizations (COSO) structure. The other suggested we develop a program that leveraged Mars’ unique strengths. As a large, privately held, decentralized company, we agreed that the latter better met our needs.

At this point, we decided that we wanted to develop ERM and not what one might call an “enterprise compliance management” (ECM) program. This repre- sented a critical decision in Mars’ ERM development.

To kick things off, we took a risk management survey of the 15 or so managers on Mars’ global management team. We spent a couple of hours personally com- pleting the survey with David, who was to become the president of Mars at the beginning of 2003. This was a critical move in the development of the program, as we gained an understanding of his views on risk management and how we might develop the ERM program.

Following the survey, we recognized the need to gain an even broader under- standing of how the associates (Mars does not have employees) in the business viewed risk. We decided to conduct risk assessment workshops for a function (Service & Finance), geography (Canada), and product group (European Sugar). Working with our consultants, we selected a gap analysis methodology. In gap analysis, you evaluate the inherent risk (impact and likelihood) with limited con- trols (e.g., buying commodities at spot cost as opposed to with futures contracts) against management effectiveness.

We had the first workshop with the global finance team during our corporate meetings in the summer of 2003. The ERM team had a major win during this ses- sion. At the time, Mars was undertaking a substantial investment. During the ses- sion, the consensus of the group was that we, Mars, had undertaken a too aggres- sive time frame to be successful. By the next day, the corporation announced a change in the rollout of the project.

During the session, the CFOs of Europe and the United States both commented on how beneficial this workshop had been. This was critical for two reasons. First, it generated buy-in from additional senior management. Second, the CFO of Europe, Oscar, would soon be named the new CFO of Mars upon Roger’s retirement.

We began calling discoveries like the one in the global finance team’s work- shop the “known unknowns,” because many of the participants knew and/or were concerned about the issue before the meeting; however, it had never risen to such a level that it was formally brought forward to the group. We developed a sce- nario that explained such discoveries and how they could help the business. For example, two management team members have dinner after work. They discuss an issue that concerns them; however, for some reason this issue does not arise during team meetings, perhaps because they do not believe they have adequate expertise to challenge the group’s thinking, or one team member was so passion- ate about the issue that everyone else deferred. Over the years, we found that these “known unknowns” frequently held the key to a business’s success. In training workshop facilitators, we held identifying known unknowns as a major key to suc- cessful workshops.

In Canada, the general manager asked us to help his team evaluate their newly finalized strategy and provide an additional day of action planning based on our

www.it-ebooks.info

ERM AT MARS, INCORPORATED 41

findings. While the workshop did not turn up any major known unknowns, the participants felt the process enabled them to evaluate properly the risks with their strategy and make enhancements that would increase the likelihood of success.

Our final assessment with European Sugar had a major win, as it delayed a major product launch. The workshop identified key doubts in the potential success of the new product and its distinct format. The product team was tasked to return to the next management team meeting to address the issues identified in the risk assessment.

The participants in all three workshops deemed them successful and provided senior management with positive feedback. The ERM team also had major learn- ings. First, the workshops revealed a common risk aversion among most associates. To enable the company to grow faster, senior management knew that units had to take on more risk. Based on the initial success of our risk assessments, senior man- agement felt that ERM would be one tool to enhance growth.

The second major discovery revolved around the workshops themselves. To determine management effectiveness, we had asked participants to base their anonymous votes on limited controls (e.g., buying commodities at spot as opposed to with futures contracts). Universally, we received push-back, as the company had a control mind-set as one of its basic tenets. As such, the importance of control had become ingrained within all associates over many years.

Failure and Retrenchment

Based on the success of our three pilot workshops, we received the go-ahead to develop a full-scale ERM process. In early 2004, we put together a multifunctional, global team, supported by our consultant, to develop an ERM program. Over the next five months, we held monthly meetings to rough out a program. Three of the regional presidents acted as our advisers.

In June we presented our program, including a unit to pilot its implementa- tion, to the Mars management team. At the end of the presentation, David, Mars’ president, looked at us and stated that this looked like a major software transition, and we had done that once and were not going through that again. The rest of the management team agreed. David looked at me and said, “Larry, I know you can scare people when it comes to risk. I want you to take your team and develop a process that will generate a risk discussion mentality for the units. I want you to work with several of our larger units—China, Russia, Australia, and Europe.” He asked us to begin in China in three weeks and build the process around our annual operating planning process.

I believe it is important to note here that ERM is an evolutionary process. I believe that having our first approach rejected ultimately led to our successful development of a more practical, less complex approach. Looking back, I doubt that our initial approach would have worked at Mars due to its complexity.

PHASE 2—SUCCESS There were three components of the proposal that were well received, which we kept with minor revisions and additions. First, our basic tenets for

www.it-ebooks.info

42 Implementing Enterprise Risk Management

development still existed, but we now had better clarity. Senior management clearly sought:

� A methodology to determine what is actually achievable by business units in the context of corporate performance objectives

� To improve alignment and accountability around the pursuit and execution of each business unit’s goals and objectives

� To foster a risk discussion mentality among business unit management teams

� A mechanism that enables managers to knowledgably and comfortably take risks in order to achieve growth goals that exceed overall market growth

� A tool to objectively track performance

Our original mission statement remained: “The objective of ERM is to provide the company with a proven, sustainable framework to proactively understand and deal with complex business risks, both tangible and intangible, existing and emerg- ing, across the entire organization.” This statement became the guideline against which we evaluated the development and evolution of the program.

Senior management also agreed with the major principles for the design of an ERM process:

� Create value. � Leverage the company’s unique strengths. � Work with existing organizational structure. � View risk as opportunity. � Encourage alignment and accountability.

While these represented great tenets to develop a program, we basically were where we had begun six months before, working with a clean slate.

While “create value” seems obvious, we did not know where this would take us as we began building a new program following our unsuccessful initial attempt. However, we had better clarity regarding senior management’s view of what was needed. Understanding and meeting the needs of senior management provided the keystone for the development of our program.

From the company’s perspective, “unique strengths” meant privately held and decentralized. Senior management similarly made working within an exist- ing organizational structure equally straightforward. They wanted the ERM team to build the ERM process into the annual operating plan without adding any staff. We were to use regional Service & Finance Staff Officers to assist us.

Based on our findings of risk aversion in our initial workshops, we knew that viewing risk as an opportunity meant a cultural shift. Finally, we understood that encouraging alignment and accountability meant a process that enabled unit man- agement teams to align and agree to the objectives they could legitimately achieve within the constraints of the risks identified in the ERM process. We found that these two things went hand in hand. By developing alignment around the risks to a unit’s operating plan and the optimal risk treatments, the ERM process would enable business units (BUs) to take on more risk to enhance their opportunities and capabilities for growth.

www.it-ebooks.info

ERM AT MARS, INCORPORATED 43

On the Monday three weeks after our presentation to the management team, our consultant, his two assistants, and I were blankly looking at each other across a table in a meeting room in the China office outside of Beijing. We had no idea what we should do. We decided interviewing everyone on the China management team might generate some ideas.

Based on the unit’s 2005 operating plan and these interviews, we developed a template that we thought captured their input. Each sheet reflected an initiative of the operating plan (e.g., grow Brand X 5 percent in 2005 and deliver operating plan profit). The template looked quite simple. It had a header for the objective with a block for a score next to it and two columns underneath—risks on the left and risk treatments on the right. (We initially used the term mitigation; however, at an ERM conference, one of the audience members pointed out that mitigation did not coincide with our stated objectives. Instead risk treatment better reflected “viewing risk as an opportunity.”) We spent several days filling the templates with the risk and risk treatments, which the business unit managers had identified with their 10 key initiatives for 2005.

We provided the templates and additional background in a preread package to allow the participants to prepare in advance of the workshop.

We started the workshop by having the management team force rank the initia- tives from 1 to 10 (or the total number of initiatives which they had). We compiled the results and projected them onto the screen, discussing the differences and/or alignment among the votes. We then asked them to agree or change the prioriti- zation, thereby beginning the alignment process. (This became the initial item in all future workshops.) Understanding the differences in rankings led the partici- pants to understand others’ views of importance, and in some cases gain a better understanding of the actual operating plan objectives.

We took the initiative voted as the top priority and began the workshop. We reviewed the definition of the initiative, and the management team edited and aligned behind the final definition. We then validated and added risks and then risk treatments. When we, the facilitators, sensed we had captured the major risks and risk treatments, we moved to an anonymous vote on the probability of success- fully achieving the objectives, using a scale of 1 to 9, with 1 representing 10 percent or less, 2 representing 20 percent, and 9 representing 90 percent or more. Voters would take into consideration the things they could control, their unit’s capabili- ties and resources, potential competitor activities, and so on.

When the votes appeared on the screen, we found them generally spread across a range of 4 to 5 on the scale (e.g., 3, 4, 5, 6, and 7). As facilitators, we led a discussion as to why someone might vote a 3 and others a 7. We found that hav- ing the lower-voting participants lay out their reasoning led to better discussions. The higher-voting team members would attempt to address the concerns raised by the lower-voting participants. Over time the facilitators could sense alignment in the room and have the participants take a second anonymous vote. The sec- ond vote’s results generally aligned around two numbers or were centered on one number with one or two outliers above and below the center vote.

The first workshop went exceedingly well. We then headed to Australia for our second workshop. This was a critical test for two reasons. First, one of the Mars regional presidents, who advised us throughout the initial ERM development process, participated. Second, our senior consultant had to go back to the United

www.it-ebooks.info

44 Implementing Enterprise Risk Management

States, so his two assistants were to help me build and facilitate the workshop— one as a co-facilitator and the other as the editor of the workshop templates and operator of the voting technology and workshop. Here again we had a successful workshop.

Our next workshop took place in Russia. We had several major learnings from this workshop. First, when you have a very strong and charismatic general man- ager (GM), it is important for the facilitators to ensure that the entire management team participates. To this end, we pulled the GM aside and requested that he with- hold his comments to the end. We would go to him to wrap things up. It became a common practice for facilitators to ask GMs to “work with us” to ensure that all team members participated, and to allow the GMs to wrap up with comments before the final vote. It was a way for facilitators to better control the process and to make sure the known unknowns became visible.

At one point the GM stopped the session and stated, “This process helps you focus on what’s important.” This became a mantra of our ERM process.

As Russia had gone through several currency issues in the 10 years the unit had been in operation, the GM and CFO asked for us to build a template of how it could effectively handle a currency crisis. We did as requested, and the management team felt they identified the actions they needed to take in the event of such an occurrence.

This activity may seem minor, but it highlights two key points that ultimately contributed to the ERM program’s success. First, business units have unique needs and frequently need help in maximizing the use of ERM. By ensuring that the pro- gram had some flexibility, units were more likely to leverage its benefits. Second, we learned to constantly try new things. Many of our evolutionary improvements to the process resulted from requests or suggestions from individual units.

Our final workshop in the 2004 pilot took place with a subgroup of the Euro- pean management team. Known to only a few key members of this team and a few senior managers at the corporate level, Mars had begun the initial phases of a major project. The Regional Staff Officer of Service & Finance (S&F) lobbied the Regional President of Europe to have our new ERM process validate their work. Here again we tried a new activity with them in the workshop. This enabled them to identify the low, high, and most likely outcome of their key objectives, based on an analysis of the risk involved. While this activity was helpful, they advised us that the template that we had used in the other workshops proved the most beneficial to them.

Based on the success of this workshop, the Regional President of Europe asked us to perform three workshops, one in each of the countries that would be partici- pating in the project.

During the interview process in one of the countries, it became clear to us that they had not progressed to the point needed to launch their project. We advised the European management team of this. The general managers of the two units in this country were not only greatly appreciative but also became two of the biggest advocates of ERM in each role they subsequently held within the business.

The participants in all three countries found this process better enabled them to prepare for implementation. They identified critical risks and solutions that enabled them to successfully achieve their objectives.

Ben, the new Regional S&F Staff Officer from Europe, cofacilitated each of these workshops with me. (Through this work, Ben became a major supporter of

www.it-ebooks.info

ERM AT MARS, INCORPORATED 45

ERM as he progressed to become the CFO of the company’s largest segment.) As the program developed, several of our earliest participants in the program (facili- tators and management team members) became our biggest advocates. This acted to increase the “pull” of the program through the business as opposed to corporate needing to “push” it through.

GLOBAL ROLLOUT Based on the feedback from the workshops and the support of the two regional presidents, the next phase was to move forward with a global rollout of the ERM program.

For 2005, we targeted 17 units for workshops to assess the risks of their 2006 Operating Plans. China, Australia, Russia, and virtually every general manager from the seven units in the European project asked to be included in the rollout.

Here again our design principles were reaffirmed. Management believed the process created value, helped units become less risk averse (view risk as an oppor- tunity), and encouraged alignment and accountability among the participants. Our remit to work within the annual operating plan reaffirmed “work within an exist- ing organizational structure.”

Many companies would find their planning process similar to Mars. Busi- ness units begin developing their annual plans nine to 12 months before Jan- uary 1, based on their long-term strategies within the context of the broader seg- ment and corporate strategies. They receive input from their segment management teams. Mars has six segments: Chocolate, Drinks, Food, Petcare, Symbioscience, and Wrigley. Late in the year they present their plan to management. ERM repre- sents one component of their presentations.

For the rollout, the ERM team developed formalized interview templates. Although we always interviewed the GM first, the team began to have joint inter- views with the GM and S&F head (CFO), who acts as the GM’s copilot. We found that these joint interviews provided much more detail and reduced the number of other business unit (BU) team members we had to interview. The workshops were time consuming to build, each taking approximately one person-week, or more for larger, more complex units. Any time savings proved beneficial, as the team had very limited resources. It also represented an evolutionary step in our process.

The ERM team entered the process with only three facilitators skilled in our new process—our consultants (Bill and Greg) and me. As we wanted to internalize the process, we had to train an adequate number of internal facilitators. Optimally, two facilitators would run a workshop with one operator, the person responsible for operating the voting technology, updating the templates as we spoke, and keep- ing notes.

These ERM workshops require atypical facilitation skills. A facilitator needs a great deal of knowledge of the business, good facilitation skills, and the ability to challenge participants. We found over time that some people, recognized as good facilitators for most activities, proved ineffective in ERM workshops as they lacked the ability to aggressively challenge the management teams from an operational or strategic perspective.

Oscar instructed both regional and functional S&F staff officers, who reported to him, to support us. (Regional S&F staff officers support the Mars CFO in the region, while functional staff officers oversee specific functions—e.g., Treasury,

www.it-ebooks.info

46 Implementing Enterprise Risk Management

Risk, Control, Strategy, etc.) Oscar directed the regional S&F staff to help us sched- ule the sessions and to act as our cofacilitators in their regions. Several nonregional S&F staff officers and George, who worked for me, were also to be trained and act as facilitators. All of these associates had the requisite skill set to be effective in the ERM workshops. The use of S&F staff officers to assist us reaffirmed both “work within an existing organizational structure” and “leverage unique strengths.”

We kicked off the rollout the first two weeks of August, conducting workshops at our three U.S. units—Food, Snackfood, and Petcare. All three were successful and we identified serious risks or (better said) opportunities for each plan. We trained George and Elizabeth (the Staff Officer of Strategy) during the Food and Snackfood workshops.

The votes at U.S. Petcare revealed a lack of alignment around the probability of success of several key initiatives to their plan. The GM complained that the team had just spent two weeks, including an off-site planning session, making major additions and revisions to the plan, but no one had raised the issue, which arose during the workshop; however, we pointed out that the intent of the ERM process was to identify these issues prior to the implementation of the operating plan. This would enable units to address these issues in time to increase the likelihood of success.

The following week, Elizabeth ran the Mexican workshop, training the regional staff officer and Jim, her direct report. In the meantime, I went to Asia for the China, Japan, and three Australian workshops. In Asia, the point of early supporters played a key role in our success. Mars China had found great value in our initial workshop and began to use the program as a key component of its operational and strategic planning process.

The new general manager in Japan had participated in the pilot workshop in Canada and in the UK project workshop as one of the GMs. He was keen to use ERM as a tool to help his team reinforce their growth and market position.

In Australia, we began the following week with our Snackfood unit. It was the first day on the job for the general manager, who was new to Mars. He felt the workshop proved quite beneficial as not only did he become familiar with his direct reports, but he gained an understanding of the issues confronting the busi- ness, which he felt would have otherwise taken months to learn.

In Australia, we had a major learning: We needed a process to ensure follow- up on issues identified during the workshops. John, the CFO for Australia with operational responsibility for the petcare unit, noted that in his preparation for the workshop he reviewed the output from the prior year. The team had actually identified their major risk for 2005 and the treatments to address this issue. Unfor- tunately, they had not used the prior year’s solutions, and had not met their targets for the issue. John became one of the biggest advocates and supporters of ERM as he moved on to CFO of the Russia unit and then U.S. Chocolate.

REPORTING Ultimately we conducted 18 unit workshops, one for our quant group, and a cor- porate one. At the end of the process we reviewed all of the output. We recog- nized the need for categorizing the differences between the votes to report risk using a color key for risk profiles (see Exhibit 3.1). In reviewing the voting scores,

www.it-ebooks.info

ERM AT MARS, INCORPORATED 47

Score

7.5 and greater

7.0 to 7.4

6.0 to 6.9

In cr

ea se

d pr

ob ab

ili ty

o f

ac hi

ev em

en t a

nd /

or in

cr ea

se d

le ve

l

of m

an ag

em en

t

ef fe

ct iv

en es

s

5.0 to 5.9

5.0 and less

Color

Green

Blue

Yellow

Orange

Red

Exhibit 3.1 Color Key for the Risk Profile Score

it appeared that five groupings existed. We had some actuaries review the data as well, and they came up with the same results.

Companies frequently like to use three colors in their corporate dashboards; however, most experts seem to agree that risk is not so cut-and-dried, and recom- mend four or five risk categorizations. As a workshop facilitator, one can gener- ally detect why a score was blue and not green. In discussions challenging such a vote, facilitators frequently heard general managers or other participants speak very clearly as to why an initiative is blue and not green.

Following the addition of risk categories, the ERM team developed a summary report, in priority order, consisting of each initiative, its definition, and each initia- tive’s risk profile (see Exhibit 3.2). These were compiled by region and submitted to the Mars management team and the regional management teams, along with the complete workshop reports.

Although senior managers reviewed these reports, it was too early in the pro- cess for them to understand fully the potential of ERM. This was highlighted in Jan- uary 2007 during my annual review with Oscar. David, Mars’ president, entered the “fishbowl” room quite perturbed at one of the largest units. The unit had advised of a significant surprise at year-end, which had an impact on the over- all business’s year-end results. David looked at me and asked whether this issue had arisen during my new process. I advised him that the unit had raised this as a potential issue, which could adversely impact them entering the new year. They

www.it-ebooks.info

48 Implementing Enterprise Risk Management

.

Exhibit 3.2 Summary Report

asked me to get them a copy of the complete report, and I took this to mean they had read but not kept the original.

The unit’s ERM workshop output had the issue as a “red” in their submission. While both David and Oscar agreed that they expected some units to have initia- tives with a red risk profile, they would not accept a unit to have a red issue and not address it or communicate the potential impact as appropriate. This became a basic tenet of the ERM process. This incident also proved a major win for ERM, as David became extremely interested in the quarterly updates, which began shortly thereafter.

To ensure that units used ERM throughout the year and communicated their views on risk to senior management, we developed an ERM dashboard template. This included the initiatives in priority order, the risk profile of each initiative for each quarter (beginning with the workshop in Q3), the risk profile trend—stable, improving, or declining—and a comment column for providing a view for year- end (see Exhibit 3.3). This became an excellent tool for communicating for several reasons. First, units that did not do so already had to review their risks and risk treatments quarterly. This helped them to have a risk mentality mind-set, which David had given us as a goal at the beginning. Second, senior managers could quickly identify units that were struggling with issues. For the first couple of years of the program, David would meet with the corporate controller, to review the

www.it-ebooks.info

ERM AT MARS, INCORPORATED 49

,

.

Exhibit 3.3 Quarterly Update

quarterly reports. Finally, it provided units with a tool to communicate to man- agement that things were on track, although the first or second quarter sales may not have appeared that way.

An excellent example of the latter point occurred the first year we used the reporting template. In a large market where the company had a strong number three position, the unit’s reported sales appeared to fall below its plan at the end of the first, second, and third quarters of 2006.

I had facilitated the unit’s workshop. As their two main competitors, which had a significant share of the market, planned to front-end load their activities (e.g., advertising, consumer promotions, trade discounts, etc.) into the first and second quarter, the unit decided to focus the vast majority of its activities into the second half, especially the fourth quarter. Each quarter the unit reported its key brands as having green risk profiles. Each quarter, Oscar had me contact and challenge the unit CFO on this point. Each quarter the unit CFO responded that the unit had back-end loaded its activity set into Q3 and Q4, and I confirmed to Oscar that this had been the case in the workshop as well. In the end, the unit delivered about 105 percent of its planned sales, and the ERM Quarterly Report gained a great deal of credibility.

One thing that we noted from both the pilot year and the launch year was that participants did not always seem to vote on the same thing on an initiative. For example, an objective may read, “Maintain market leadership while achieving growth and profitability targets.” A unit might have 35 percent market share, and it could hold market leadership at 25 percent. One participant may vote low because she believes market share will fall to 32 percent while another participant votes high because this will still represent market leadership. Similarly, divergent votes

www.it-ebooks.info

50 Implementing Enterprise Risk Management

.

.

.

.

.

.

.

.

.

.

.

.

Z.

.

.

Exhibit 3.4 Targets

on achieving growth and profitability may result as different participants vote on gross sales versus net sales, and earnings versus margins.

To resolve this problem, we changed the process for the 2007 Operating Plan workshops, conducted in Q3 of 2006, and all future workshops. We required units to specify measurable targets within each objective (see Exhibit 3.4).

Units could do this for all initiatives, including intangible ones. For instance, associate engagement targets would include specific numerical scores for the units and follow-up percentage targets for management. Similarly, “Have the right peo- ple for the right jobs” would become “Have one person for each critical job in the unit’s succession plan.” These objectives would have measurable targets by which the unit could report progress throughout the course of the year.

2007 OPERATING PLAN WORKSHOPS In 2006, we made two major changes. We added a strategic component to the work- shop. We also pushed most of the workshop development to the units.

In terms of a strategic component, we added a column to the existing workshop template that held the activities the unit needed to undertake to successfully imple- ment its long-term strategic objectives. The strategic component proved unsuc- cessful for three major reasons. First, we found that units without a completed

www.it-ebooks.info

ERM AT MARS, INCORPORATED 51

long-term strategy did not find this worthwhile. Second, the shift from the operat- ing plan in the morning to the strategic plan in the afternoon proved too mentally taxing. Workshop participants tend to be less effective late in the afternoon due to the mental focus required in the workshop, and the transition to the longer- term view in the afternoon seemed to make this afternoon lapse worse. Finally, we found the extra column in the strategic template unnecessary. Units preferred to use the standard workshop template for both operational and strategic issues. For all future strategic workshops, we used only the standard template.

For the 2006 Operating Plan workshops, we found it very time consuming for facilitators to build each individual workshop. To build each workshop, the two facilitators interviewed the general manager, the unit CFO, and several other unit management team members. They would then take the unit’s key operating plan objectives and compile the templates by adding the risks and risk treatments based on their interpretation of the interviews. Between the interviews and the workshop compilation, it could take as much as a person-week to build a workshop. As facil- itators typically had very senior positions, this did not represent an effective use of their time. This time-consuming process would greatly limit the number of work- shops that we could have, unless we could find a better solution.

At this time, the company was moving to increasingly standardized planning tools. The units could use these tools to develop their own workshops, with mini- mal guidance and support of the workshop facilitators. This aligned well with our objective to simplify the workshop development process and aided us in push- ing much of the workshop development to the unit. We developed a PowerPoint presentation that outlined the process, as summarized in Exhibit 3.5.

This new approach greatly reduced the time to build a workshop. By having initiative owners confirm the definition of the objectives, adding what they viewed as the major four or five risks and risk treatments, we not only reduced the time necessary to build a workshop, but we also improved the quality of the workshops. The latter was achieved because the facilitators no longer had to interpret what they had heard in the workshop. Instead, the actual owners populated this data, which the management team validated in the workshop. This had the additional benefit of increasing the ownership of the process within the unit.

TECHNOLOGY When the ERM program began in 2003, the ERM team consciously did not select a technology solution. The company did not want a technology solution to drive the process. By 2007, the program had developed to the point that we needed tech- nological support. First, we moved from using Word to Excel. This enabled us to develop a comprehensive Excel tool for workshop development and data capture. Second, we selected a software vendor whose product could most closely adapt to our process.

The Excel tool greatly streamlined the process for building workshops. It made it easier to define initiatives and for users to build individual templates in prepa- ration for workshops. More importantly, it enabled workshop operators to revise and add information to the templates more easily during workshops. This enabled workshop participants and operators to focus better on the process.

www.it-ebooks.info

52 Implementing Enterprise Risk Management

Exhibit 3.5 Sample Planning Process

# Activity Timing

1 The unit CFO provides the facilitators with the key operating planning documents, standard planning documents, and so on.

—

2 The facilitators hold a teleconference with the unit’s GM and CFO to identify relevant operating plan initiatives and strategic risks from last year’s assessment and add new operating plan initiatives and strategic risks.

1.25 to 1.5 hours

3 The facilitators prepopulate the workshop template with initiative definitions, based on the interview, the planning documents provided, and output from the prior year.

1.5 hours

4 Facilitators send the prepopulated workshop template to the unit CFO.

—

5 The unit CFO forwards each template to the unit’s Management Team and to the individual initiative owner.

—

6 Initiative owners confirm the initiative definition, including key metrics, adds four to five risks, and adds four to five risk treatments.

0.5 to 1 hour per initiative

7 The unit CFO consolidates the templates and forwards them to the facilitators and the unit GM.

1 hour

8 One facilitator has a review with the unit GM and/or CFO of the workshop template to validate the input and identify any key points.

30 minutes

9 The unit CFO distributes the final workshop template to the unit’s Management Team as a preread package.

—

10 Workshop. 8 hours

The software resulted in two major improvements in the process. First, it enabled units to update their risk profiles into a system. It also provided more flexibility than previously available using Word.

Data capture and reporting represented the other major improvements pro- vided by the software. Using the Excel tool following each workshop, we cat- egorized each initiative and risk by function (e.g., Service and Finance, Sales, Marketing, etc.). Similarly, we categorized these using the risk definitions, which the initial working group had developed.

AGGREGATION The company historically had very well-defined ranges of risk that it would take on in the areas of currencies, commodities, insurance, and so on. It had compre- hensive reporting that aggregated such financial risks. Although these areas were well managed at the regional, segment, or corporate level, their role frequently influenced decisions at the business unit level.

While companies can easily aggregate these types of financial risks, the ERM process presented other types of information. The output of the ERM workshops

www.it-ebooks.info

ERM AT MARS, INCORPORATED 53

produced both qualitative and quantitative data, as well as tangible and intangible risks. These included operational, supply chain, and human resources risks.

To aggregate these risks and identify emerging risks for regional, segment, and corporate management teams, the ERM team had two methodologies—human review and technology. In the early years, the ERM team would review all of the workshop output and summarize the three or four key themes for the corporate management team. In some cases, they would delegate the review of this informa- tion to the individual(s) responsible for the issue. In two cases, the ERM team led a short workshop with the corporate management team on one or two of the critical issues identified.

In many of the early workshops, the ERM team was surprised to find so many human resources issues across the world. Frequently, these rose to be near the top of the list in priority for many units. Bringing these out in workshops enabled the units to view these from the perspective of risk to the business. On a corporate, aggregated basis, this gave leadership a different perspective (i.e., risk) from which to view the issue, and over time how their initiatives worked to improve the risk at the corporate and unit levels.

Once the company moved to segments from regions, the ERM team aggregated the output from the individual units in the segment and conducted workshops with the segment management teams, to help them identify the key issues con- fronting their business in the coming year. These included themes and emerging risks identified across the entire business, but focused on their impact on the indi- vidual segment. This was done in conjunction with their overall planning activities, bringing risk into their evaluation process. Some segments found this quite useful in helping them to allocate resources and identify action plans to improve the like- lihood of the segment’s success in the upcoming year. Segments that found this helpful held these workshops annually.

In aggregating the risks in the workshops, we considered such issues as these:

� The number of business units impacted � The number of associates impacted � The number of business processes or functions impacted � The impact on our consumers and customers � The potential impact to our brands

This methodology worked very well with difficult-to-quantify risks. It also helped to identify emerging risks. The overall process identified issues that might be a nuisance in individual markets but when viewed on an aggregated basis had a potential impact on the segment or corporation as a whole.

The software solution provided another opportunity for aggregation. As workshop teams had categorized the initiatives and risks by both function and risk definition, we could run reports or aggregation by business unit; by geography (country, region, corporate); by corporate function (S&F, Sales, Compliance, Mar- keting); and so on. Once the system had three years of data, it could provide com- parisons by year, segment, region, and business unit. This enabled the preparation of summary reports, aggregating the issues identified and changes by year, thus allowing the identification of emerging risks, such as the increasing importance of

www.it-ebooks.info

54 Implementing Enterprise Risk Management

commodity pricing and availability. The reports provided a summary analysis of the data for the segments, which used this to supplement their ERM work.

Unfortunately, we lost our back-office support for these reports after the first year of developing the capability. As such we were unable to run these reports on an ongoing basis thereafter. The learning for others is to ensure that you select software that your team has the capabilities to fully utilize.

TEMPLATE EVOLUTION Over the years our template evolved. Some changes resulted from observations made by facilitators. Others came from participants, either during workshops or from periodic global surveys.

During a workshop, facilitators attempt to limit the number of risks and risk treatments to 10 to 15 each (as many as 20 for very large units). However, having so many risks and risk treatments can lead to clarity without perspective.

The initial template simply listed risks and risk treatments in two columns, without referencing which risk treatments applied to the individual risks. The ERM team found that referencing the risk(s) that the individual risk treatments addressed provided better clarity as to the process. Furthermore, this approach helped to better identify the most critical risks and risk treatments. To leverage this opportunity, participants had to identify the three or four most critical risks, defined as those most likely to adversely impact the initiative. They did the same for the three or four most critical risk treatments (i.e., those most likely to lead to success). This led to more robust voting, as participants had a perspective on the impact and likelihood that the most critical risk would occur, as well as the effectiveness of the most critical risk treatments in aiding the team to achieve its objectives.

Initially, when units identified key actions that they believed would increase the likelihood of success, they were included in the summary reports. However, the ERM team discovered that the failure to assign accountability for the activity frequently led to it not getting done. (I have heard this same issue arise in other companies’ programs.) Consequently, an “Action Plan” section was added to the bottom of the template. This improved the results; however, in one workshop the unit asked if they could assign each risk treatment to an individual. This worked very well.

Through experimentation it was found that adding both a responsible party and a completion date added to the robustness of the process. Typically, units would assign the tasks to either management team members or their direct reports. This helped identify situations where one associate or group had too many activ- ities to address properly those things needed to achieve an initiative’s objec- tives. More important, as the workshop progressed through the day, it frequently became clear that a unit might not have the bandwidth to complete all of their tasks in the time frame allotted. This led to changing deadlines and moving resources around the business in order to improve the likelihood of successfully achieving both individual initiatives as well as overall operating plan objectives. Exhibit 3.6 shows how a completed template from a workshop would appear.

www.it-ebooks.info

ERM AT MARS, INCORPORATED 55

Template for input in Workshops

Initiative

# Risks Risk Ref #

Action Plan

Risk Treatment Risk Treatment Owner

Greener Green

Due Date

Risk 1 Risk 2 Risk 3 All

1,3,6,8,9,10

1,2,3,4,5,8

3,4,8

2,7,8 5,8 9,10

3,6,7,8 Risk 4 Risk 5 Risk 6 Risk 7 Risk 8

Risk Treatment 1 B. Spinard

B. Spinard B. Spinard

L. Warner

L. Warner

L. Warner

G. Smith End Q4 2011

End Q4 2011

Q3 2012

Q4 2012

Ongoing

Q1 2012 June 2012 May 2012

G. Smith

Risk Treatment 2 Risk Treatment 3 Risk Treatment 4 Risk Treatment 5 Risk Treatment 6 Risk Treatment 7 Risk Treatment 8

Risk 9 Risk 10

1 2 3 4 5 6 7 8 9 10

Exhibit 3.6 Mars ERM Template

SPECIAL SITUATIONS The ERM team found that engaging key early supporters on an ongoing basis had mutually beneficial results for both. Most of the evolutionary improvements and best practices occurred as a result of these activities.

One major European unit sought to improve their growth rate. In 2006 Pete became the CFO, and in early 2007, Susan became general manager of this unit. Pete had participated in the initial South African workshop as well as his new unit’s 2007 Operating Plan workshop. Susan had played the key role in having the ERM team involved in the 2004 European project.

To turn the business around, Susan and Pete wanted ERM to play a key role in the unit’s growth program. They wanted to hold a series of ERM workshops to support the development of their program. The output would be built into and be monitored on an ongoing basis by their project management office (PMO). Over a period of 18 months, the unit held both the normal operating plan workshops as well as strategic ones. In order to increase the buy-in to the strategy by the entire business, they held a two-day workshop involving both the management team and their direct reports. This totaled approximately 30 associates. These associates were divided into several groups to conduct risk assessments of the proposed new strategies and to identify new activities and risk treatements that would improve the likelihood of achieving success. The output included changes to brands that the unit could best leverage. The process also developed support from multiple levels of the business, as they had an active voice in the process. This program of workshops contributed to the unit’s successful achievement of its performance objectives.

In 2007 the company acquired a U.S.-based entity. About a year later Pete became the new CFO and Maria became the general manager. Maria had been

www.it-ebooks.info

56 Implementing Enterprise Risk Management

general manager of Australia during the first ERM session in 2004, and has been a strong supporter of ERM ever since. They decided to use a similar approach to the one Pete had helped create in Europe, adding additional objectives. In addition to using ERM to assist in the development and stress testing of a comprehensive busi- ness strategy, they wanted to use ERM to assist in evaluating talent, embedding a new culture, and obtaining support from multiple layers of the business from their leadership team, the top 30 or so associates within the business. Over two and a half years, the unit held numerous workshops, both operational and strategic, to help them formulate their strategy and achieve their overall objectives.

Don had been the CFO for the first Australian Food workshop in 2005. In 2007, he became CFO of Japan. He used ERM to evaluate the unit’s strategy. In this case, the unit had the brand manager for each brand come into the room, present the brand’s strategy, and act as an equal member with the management team members in evaluating the likelihood of the brand successfully achieving its objectives. Here again, multilevel participation enhanced the buy-in within the business.

In 2010, Don became CFO of Petcare Asia/Pacific. Like Don, Richard, the GM of the business, had been a long-term supporter of ERM. They decided to use ERM with the regional management team to increase the probability of achieving their objectives. Over a two-year period, we held a series of ERM workshops to help support their development and evolution of their strategy. This included their brand portfolio, asset investment program, individual market investment, asso- ciate development, and so on. In addition to the standard workshop, we helped them with scenario planning to identify risk treatments for competitor activity, regulatory issues, and the like. In their meetings where no workshop was held, Don led the review of the risk profile, and the team voted on the risk profile of each strategic objective.

This team also took the standard template a step further. They categorized the risks and risk treatments by categories within each template. They added a fifth column that specified the actual activity. These were given to either the func- tional head of the region or the functional team underneath them responsible for the activity set—for example, Sales, Marketing, or Supply (i.e., manufacturing and distribution). The respective teams then provided periodic updates as part of the regional management team’s risk profile update process.

The team found this approach beneficial for the team. As their objectives became “Green” and had been achieved, they developed new templates to reflect their updated strategies.

MAJOR ACQUISITION When Mars made a major acquisition of a global confectionery company, the early supporters of ERM at Mars played a key role in the adoption of ERM at the acquired company. Jim, one of our original facilitators, took on a high-level role within the acquired business’ U.S. operations. At his urging, the U.S. GM agreed to have an ERM workshop for the 2009 Operating Plan in early 2009. This workshop was well received within the acquired business.

The GM of European Sugar, during our current state assessment workshop in 2003, had been a key supporter of ERM in various senior roles within Mars. When

www.it-ebooks.info

ERM AT MARS, INCORPORATED 57

he became a senior manager within the acquired company’s European operations, he introduced ERM in this region. Here again the process was well received.

Lee, the S&F Staff Officer for Mars in Asia, who had observed the first work- shop in China and overseen the process in the region thereafter, discussed ERM with Michael, the acquired company’s CFO of Asia. Michael was so intrigued by the process that he had us conduct a 2010 Operating Plan workshop for his largest unit in the region. Following our first workshop, Michael advised us that he had found the process robust, and complementary to their other activities. As such he asked us to conduct additional workshops for the other major markets in his region.

Within two years, we were conducting annual operating plan workshops at business units representing the same high percentage of the acquired company’s global sales that we achieved at Mars.

CONCLUSION In 2010, Mars received the Corporate Executive Board’s “Force of Ideas Award” for ERM. It was the first recipient in this category. The award was based on the view that Mars had successfully embedded ERM into its business model and that other companies had adopted its process.

The key factors in the success of ERM at Mars include:

� We ensured we aligned the program with the approved principles. � We focused on achieving our operational and strategic objectives. We did

not address compliance. We left that to the associates responsible for com- pliance, and assisted them in using our tools as appropriate.

� We focused on evolution and not revolution. As a result, the program had a continuous improvement process.

� Flexibility and not rigidity contributed to the program’s results. By assisting units in developing the workshops and updating processes that best met their needs, the program had a demand for services as opposed to a push. Furthermore, many of the evolutions of the program directly resulted from unit requests.

� The process proved to be a good identifier of talent and an opportunity for associate development for the business.

� The ERM team never overpromised what it could deliver. Instead, we set realistic objectives on our rollout and obtained senior management support throughout.

� The ERM team engaged and conducted periodic surveys of the business units, the Mars management team, and the Mars board’s advisers.

QUESTIONS 1. What represents the key success factors of the program? 2. What improvements would you make? 3. Does this represent an effective risk management program? If not, what is missing? 4. Would this program work for a publicly traded corporation of similar size? 5. How important do you view alignment and accountability among a management team?

www.it-ebooks.info