Lessons Learned: Strategic Risk Mitigation and Decision Support
The central philosophy of GM's ERM approach is that the responsibility for risk mitigation and opportunity seizing rests with the operational leaders of the company. No staff can or should address all the varied risks of the company; they lack the awareness, expertise, manpower, and authority. But ERM can provide – and has at GM even at this early stage – enormous value beyond the core and critical functions of risk identification and risk education. This is essential to have enterprise risk management rather than enterprise list management. GM's ERM is able to
Exhibit 34.5 Risk Template
provide this value because of a combination of a unique perspective and expertise in a set of analysis, facilitation, and decision-support tools of particular relevance to risk mitigation and opportunity seizing.
Through the risk identification process, ERM staff is exposed to the entire range of global functions and issues, along with internal assessments of corporate strengths and weaknesses, in a way that is typically limited to senior management. Risk identification also requires engaging with internal and external thought leaders and experts to think through emerging risks and blind spots to create an information base similar to a partner at a strategy consulting firm. The assignment to focus on risk and opportunity, with a corporate perspective and without operational responsibilities, gives a frame of mind and freedom for strategic thinking that is often helpful to decision makers.
At GM, the unique perspective within ERM is made more valuable with a set of tools that helps decision makers better understand and evaluate issues involving external risks and opportunities, and thereby improve their decisions. Any list of top risks will have both internal risks – typically involving execution or compliance – and external risks, whether from shocks, predictable events, evolutionary changes, or actions from outside actors like competitors, current or potential partners, dealers, suppliers, governments, or unions. Internal execution risks are usually managed with special focus from operating units, while compliance risks are typically addressed by education and controls monitored by specialized staffs such as security, information technology, human resources, legal, tax, and audit.
External risks, on the other hand, are more difficult for operating leaders to evaluate and react to appropriately. There is a natural human tendency to think that tomorrow's external environment will be like today's, only better. Operating leaders tend to focus on their own strategies, worldviews, and "day jobs," failing to fully consider external players and uncertain events.
Even in a negotiation, the tendency to focus on the company's perspective can be a problem. Of course, the negotiating team is aware of the other party at the table – whether a union, supplier, or potential partner. But even experienced negotiating teams can benefit from thinking through systematically what is truly important to both sides and how to improve negotiating leverage and to frame issues. However, the biggest blind spots for negotiators usually relate to parties not at the table or to the aftermath of a deal. For example, GM often engages in bargaining with its labor unions while those unions are simultaneously bargaining with other companies in the industry. Understanding the perspective and issues in those parallel negotiations can be important to the outcome at GM, particularly since there is often an expectation that the pattern established with one company will apply to others. Union locals or subgroups can also have powerful effects on the final outcome. In other contexts, predicting possible rejection by regulators may lead to a different strategy on a merger or acquisition deal, or understanding legislative risk might alter a corporate initiative. Identifying stresses and differences in interests in advance can lead to favorable restructuring of a joint venture or early resolution of an underlying issue.
GM's ERM staff has adapted a set of tools designed to improve decisions in complex, multiplayer situations or issues. The approach usually involves organizing workshops with cross-functional leaders and subject matter experts, facilitated by ERM staff. When the issue or event is known – such as a major current negotiation or an announced change in fuel economy regulations 10 years in the future – the workshop focuses on answering three questions:
1. Who else can affect the outcome? (Players)
2. What can GM and others do? (Options)
3. What do GM and the other players want? (Preferences)
The importance of thinking through these questions systematically can be shown in a mistake from GM's past. Like other auto companies, GM relies on independently owned dealers to sell its vehicles. In the late 1990s, some GM executives saw the potential for significant strategic benefits from having a few company- owned dealers, such as an unfiltered exposure to shoppers and a chance to test new marketing and retailing concepts. Though it was recognized that dealers would oppose the idea and that it would be illegal in some states, extensive planning proceeded and a major initiative – GM Retail Holdings – was announced. Within days of the announcement, GM quickly realized this was a poor decision, and within months GM's CEO went to the annual dealer association conference to announce the termination of the initiative and to apologize for it.
What happened to cause such an unfortunate outcome? First, the leaders of the initiative misread GM's preferences. They thought that GM valued the potential benefits of the company-owned dealers more than they would regret an adverse dealer reaction. When the angry reaction came forcefully through many channels to numerous executives, it turned out that the assessment was wrong. Second, some options controlled by the dealers were not well understood. When dealers started pulling or threatening to pull some of those levers, GM recognized the decision's downside potential. Third, the executives forgot a player – state legislatures. Legislation was introduced in several states (where GM Retail Holdings was considering the placement of dealerships) that would make company-owned stores illegal competition for the independent dealers, and it seemed likely that the legislation would pass. If you miss preferences, options, and/ora player, your strategy, negotiation, or initiative can fail.