Management tool of business rationality

Management control should become the management tool ensuring business rationality and essential information for decision making in the risky business. Risk should always be treated as an element of the stochastic reality in which the company operates. Hence, it is necessary to complete the management control with the analysis of the impact of individual strategic options on the risk exposure and company financial situation, non-linear planning and stochastic approach for objectives setting and key risk measures indication, taking into account the investments at risk and development of risk adjusted performance measurement. Above mentioned adjustments should lead to an improvement in the predictability of the plans execution and better management of activity options, optimizing the capital requirement for financing operational activity. It is essential to identify, analyze and control the potential plans deviation of different decision options. Hence, it is important to build competences within management processes that will secure the precise risk analysis. The implementation of risk controlling elements to management control and the risk impact consideration in managerial information makes risk issues important for every manager. There were desribed in the blog various proposals for the development of risk issues into management control, which makes crucial to create the necessary competencies not only in management control, but also in various management levels. It supports to secure the execution of the company's strategic and operational goals thanks to both relevant managerial information presenting the impact of risk on the company's performance and efficient steering decisions-making at risk. Managers receive support for taking effective decisions concerning the allocation of resources within the company and an instrument for measuring performance based on RAPM. It creates a mechanism combining risk exposure with economic results and supporting risk reaction, what allows to develop the most effective strategies for the operation of the companies in the extremely volatile global business environment.

#managementcontrol@Risk

The essential task of management control is to secure relevant information concerning results at risk. Proper perception of risk requires not only treating risk as a negative factor that may worsen the planned economic results, but also as an opportunity. Hence, it is important to manage the relation of potential profits generated as a result of risk-taking to the costs of capital involved. Risk creates opportunity to work out additional profits, which are a reward for risk exposure. An alternative to potential profits is the possibility of incurring a loss as a result of unfavorable for the company environment developments, or faulty internal processes. Hence, the proper risk analysis becomes crucial for the preparation of right managerial information in order to eliminate intuition from risk-taking, which is the reason of many errors and losses. Decisions based on intuition and the assumption of linear phenomena usually contribute to the results significantly different from the plans. Intuition that is not supported by appropriate regulations and risk analyses does not mean the reliable support. Management control task should care that economic profit becomes the result of planned activities and not randomness. Managers should be aware of the importance of risk controlling for the proper management in the enterprise and appropriate risk-taking objectives should be included in the performance evaluation.

Consideration of risk in management control

Understanding the risk associated with the company’s operations is the basis for managing the range of plan’s deviations in order to strengthen the creation of value added. The adjustment of management controls by risk component must ensure that the value of the company and its financial rating are increased and the unintended spending of funds is avoided. Decision options should be evaluated based on risk-return assessment supported by risk management tools: development of traditional measures by risk analysis with decision templates and risk-oriented training for controllers and managers. The insufficient integration of the risk issues and management control results from:

● the lack of risk targets in the performance measurement and incentive system,

● the lack of risk consideration in the value-based results assessment,

● the lack of technical and methodological skills in risk analysis among controllers and decision makers.

Practice indicates that the areas of management control and risk management operate independently in many companies, not only due to the lack of resources, but also due to the lack of awareness concerning the need to integrate information from the risk area with decision-making and performance assessment.

The coherence of the management process is ensured by systematic consolidation of all factors influencing the enterprise profits and taking them into account in the performance measurement. Management supported by state of the art management control developed by a risk component, becomes more comprehensive and effective. The impact of risk on company’s operations should be considered during budgeting, capital allocation and measuring business results. It is essential in order to achieve this aim to use risk analyses, designing an efficient risk reaction and measuring the risk-return profile. Therefore, the area of management control should be developed by risk controlling, responsible for controlling risk-taking and noticing managers concerning the impact of risk on results of activity. Hence, risk controlling naturally becomes a complementary area to the traditionally perceived controlling. Risk controlling should be defined as a management method focused on controlling the risk-taking by company managers towards stabilization of the economic results improvement (both by taking advantage of the opportunities and by neutralizing the undesirable consequences of risk exposure). The main task of risk controlling is to stop to perceive risk only as a negative situation and to start to manage the effectiveness of risk-taking, including all factors that may lead to both losses and profitability increase. This requirement determines the target risk controlling structure.

Risk controlling consists of the following elements:

● capital adequacy and correct allocation of risk capital to individual responsibility centers, which in practice is transformed into risk limits recommendations;

● risk monitoring and control of risk exposure, which should be linked to the guidelines for achieving the required risk-return profile;

● risk adjusted performance measurement.

Market opportunities are inextricably linked to risk-taking. An efficiently designed risk controlling should be enabled to take advantage of opportunities, creating conditions for generating stable economic profits. This can be achieved only, if the strategy implemented in the organization ensures an optimal balance between the goals of growth and profitability and the associated risks. Management control should secure compliance of the projection of management results and the applied risk control policies with the volatility of the factors influencing the company's success. Risk controlling should participate in defining the risk tolerance, risk limits, accepted risk reaction instruments and reporting channels.

• Top management receives the necessary information about the risk exposure and potential impact of risk on the results of company operations.
• Managers are informed about the expectations concerning risk taking and noticed concerning the impact of their decisions on the execution of plans.

The foundation for the development of management control is constantly controlling the impact of risk on the profitability of the company. Addition of risk impact to performance measurement allows to rationalize decisions also in the area of risk taking.

Integration of risk issue into management control

Decisions are made usually with the lack of complete information – as was mentioned previously there can be indicated that managers are characterized by ignorance regarding future situation of the business environment. That is why risk should be considered during preparation of any action. Management control should provide useful information to managers, based on appropriate models and tools, creating the basis for solving decision problems. Information concerning risk arising in very turbulent environment that is characterized by VUCA is extremely important for future existence of company. Hence, there is crucial to secure the integration of risk management with management structures towards the integration and centralization of risk-taking control and the analysis of the effectiveness. It is an important driver of sustainable creation of future profitability.

VUCA is an acronym for the English words: unpredictability, uncertainty, complexity and ambiguity. This concept was developed by the American Military Academy in the late 1990s and describes a rapidly changing and increasingly complex world. VUCA began soon to be used by the business to analyze the confrontation with a constantly changing reality. VUCA is directly related to the management and risk management, describing the business environment characterized by randomness and rapid changes. VUCA word requires from managers the development of new patterns of thinking to act efficiently in the increasingly turbulent environment.

The role of management control is extremely important because there should be created in the company the mechanism of risk consideration mechanisms as part of planning, defining goals, securing resources for decisions implementation, performance management and steering the goals’ execution. As shown in Rieg et. al. (2021) the following management control developments should be implemented:

● definition in plans the objectives for risk-taking - goals are the basic tool to control the desired managers’ behavior, supporting the execution of the company's plans. Consistency of the management control system should be improved by adjusting the set of objectives management with risk measures (e.g. risk exposure limits, risk response costs, targets for risk adjusted performance measurement), linking them with existing control instruments and the incentive system. The increase of the certainty of achieving the strategic and operational objectives results from the limitation the risk exposure and achievement planned risk-return profile;

● operationalization of risk objectives by measures related to financial planning - the implemented measures should define the required value of the measure and the permissible deviation from the target. Management control should also define the system of monitoring the execution of the target values at risk as the part of the company's objectives system and initiate the corrective actions defending the target level;

● plans development towards stochastic approach – operating in turbulent environment requires the change from a deterministic approach to planning towards stochastic approach based on the risk analysis (identification of risks and assessment of its impact on the achievement of the company's objectives), setting a corridor of possible deviations of the company's results (positive deviations, negative deviations) from the plans. The range of potential values of economic profits should be identified and translated into risk limits and risk reaction instruments for each option. Plan should be designed as a set of options, controlled by risk measures and application of risk reaction instruments for each alternative - the acceptable cost of risk reaction should be planned based on the result of risk analysis;

● analysis of possible deviations from plans - risk materialization always leads to deviations from plans. The result at risk should be valuated for the by owners defined probability (confidence level), securing the safety of the plans execution;

● risk-adjusted performance measurement (RAPM) – the integration of the risk issues into the measurement of results and the assessment of managers' decisions. The performance measurement is developed by risk capital, necessary to finance risk-taking[4];

● consideration of risk in strategic controlling and strategy operationalization - development of the Balanced Scorecard (BSC) with key risk data, valuation of capital costs for given company unit based on risk analysis and consideration of risk data as the basis for evaluation in incentive systems.

The integration of risk and finance should secure efficiency of risk taking. The managerial information will not provide relevant information regarding the real picture of the financial situation of the company without linking the profitability measurement with the risk impact. Forecasted results should be connected to the volatility of risk factors affecting the success of a company, which should improve the efficiency of resources usage and increase the creation of value added.

Importance of management control

Management control should contribute in the company to the achievement of goals and secure the adaptation potential, which is the result of positive balance of resources exchange with the environment. Financial resources are an essential element for company functioning. The proper flow of relevant information is essential for the effective resources use and proper correlation of this process with the plans execution. Management control generates steering interactions, creates norms and determines the rationalized selection criteria for the decision-making. It means creating the necessary influence within company to achieve a required certainty of results. Companies operate on the basis of organizational culture defining routines, schemes and operational goals of organizational units. However, businesses unable to adjust flexibly the operational routines will not survive. Crucial conditions for an organization's survival in the volatile environment is its ability to adapt to changing operating conditions. It is always connected to funds spending. Company should ensure constant inflow of funds exceeding the reduction of resources, if it wants to avoid divestment of its strategic resources on the basis, of which it carries out its core activity. The positive balance of resource exchange with the environment creates the necessary flexibility of the operations of the company and creates conditions for generating added value. Properly functioning management control is a source of benefits for the company both in terms of internal efficiency improvement and market dominance. This scheme increases following market development complexity in order to secure the ability to analyze increasing volume of data. Management control should be future-oriented, focusing the attention of managers on the main areas and main factors for generating economic profits and creating criteria for assessment of the company's success. A properly designed management control provides the company management with access to information indicating, which areas of the company are profitable, create value at risk and should be optimized in order to achieve planned targets.

The main objective of management control is securing the execution of the company's goals. Hence, two above-presented complementary and properly functioning areas of management control allow to introduce the mechanism of efficient adaptation in the company to business environment’s volatility and to ensure the consistency of strategy goals and decisions at risk of individual managers. There is necessary to ensure the integration of management control with elements of risk management and adjusting its structure to the specific needs of entities.

Management control should equip decision-makers with tools to control the stability of economic results based on the introduction of new elements to the management process, adapting this process to the usage of the risk-taking in order to create a competitive advantage. Management control creates potential to improve management towards quick adaptation to market changes. That is why economic profit should be the result of consistent execution of plans and right decisions, programming the positive impact of randomness and not the result of randomness itself. Management focused on creating conditions for a stable improvement of economic profits should be developed by identification of risk factors influencing the operational activity of companies, risk analyses, limitation of risk exposure and measurement of the efficiency of risk-taking. Hence, tasks of management control should be presented in following way:

● support for managers that take risk;

● monitoring the efficiency of risk taking;

● risk adjusted performance masurement;

● risk reporting developed by risk impact on economic performance.

Management control equipped by above-presented tools contributes to the stabile control of economic results, linking profit improvement to the rationalization of the capital costs of the company activity.

Management control creates an information system that processes economic data concerning the company's activity. The value of information is generated only when it secures efficient use of resources. As underlined by C. Drury information gets value only when it creates the potential to make effective decisions. Decision-makers are able to assess the results of different options of activity based on access to relevant information. The company’s success is determined by the ability to create and deliver the timely and right managerial information. Management control should ensure that appropriate data and information is correctly reported, analyzed and clearly presents cause-and-effect relationships. The prerequisite is the consistency of reported data. Decision-makers creating the structure of managerial information should define, which drivers are important to the success of the enterprise and how many measures should be observed. The method of preparation of managerial information should reflect the way of the resource consumption in the organization. Effective management requires following elements in place:

● access to precise information on costs,

● monitoring of factors having a significant impact on the execution of objectives,

● reporting system of measures providing feedback interactions concerning the effectiveness of actions towards compliance with the goals.

Such an information system provides support for management decisions, based on both quantitative data and descriptive information.

Necessary developments of management control

The necessary developments of management control in companies towards the increase of plans’ execution certainty are imperative for securing the undisturbed, continuous increase of the economic profits. These developments should enable conscious and effective management the impact of risk on the functioning of companies. Disregarding risk in management control may lead to faulty decision-taking concerning running the business, contracts, loss of market opportunities and the lack of hedging the significant risks for the operational activity. The main task of management control is to prepare decisions that may be at risk in the highly volatile business environment. Decision-makers in each company require to obtain timely and reliable information. Managers operate in conditions of ignorance due to risk, which should be managed also by adjusting management control by a risk component. Obtaining correct data about risk and its impact on the economic results becomes the foundation for making effective decisions. However, there is paid insufficient attention in management control practice to issues of risk analysis, risk simulation, planning security or risk adjusted performance measurement. It requires the development of competences supporting the implementation of elements of risk management into everyday management operations.

Controlling czy controlling ryzyka a ślepota ryzyka

Centralnym zadaniem controllingu jest przygotowywanie decyzji zarządczych w warunkach braku pewności, co do ich skutków oraz wysoce zmiennym, obecnie otoczeniu biznesowym. Jednak tematom takim jak niepewność, analiza ryzyka, symulacja ryzyka, bezpieczeństwo planowania lub ocena adekwatna do ryzyka poświęca się zbyt mało uwagi w praktyce controllingowej - należy wręcz stwierdzić, że w wielu (jak wielu?) przedsiębiorstwach występuje ślepota ryzyka. Istotne jest zatem zbudowanie kompetencji dla integracji ryzyka do codziennej działalności controllingowej. Właściwe informacje zarządcze, które powinny pozwolić decydentom wykorzystywać szanse, jednocześnie unikając podejmowania nadmiernego ryzyka, obecnie staję się warunkiem koniecznym przyszłego sukcesu ekonomicznego przedsiębiorstw, tym bardziej, że funkcjonujemy w coraz bardziej niestabilnym środowisku biznesowym. To tak bardziej teoretycznie, a praktycznie to raczej już czynnikiem przetrwania na rynku. Racjonalne zarządzanie będzie zatem radzić sobie ze wszystkimi szansami i zagrożeniami rozwoju zewnętrznego i decyzji wewnętrznych. Zysk powinien być efektem realizacji planów i podejmowania właściwych decyzji jedynie z pozytywnym wpływem przypadkowości, a nie samej przypadkowości. Celem jest zintegrowania controllingu z elementami zarządzania ryzykiem oraz dostosowania jego struktury do specyficznych potrzeb podmiotów, w których pracują. W ten sposób kontrolerzy zapewnią decydentom narzędzia do kreowania stabilności wyników ekonomicznych, dzięki wprowadzeniu nowych elementów do procesu zarządzania, dostosowujących ten proces do wykorzystywania podejmowania ryzyka do kreowania przewagi konkurencyjnej. Zarządzanie rezultatami podejmowania ryzyka staje się koniecznością nie tylko dla wielkich koncernów, ale również, lub przede wszystkim dla pozostałych przedsiębiorstw. Zidentyfikowanie czynników ryzyka towarzyszących ich działalności, pomiar i określenie jego akceptowalnego poziomu oraz pomiar efektywności podejmowanego ryzyka to elementy zarządzania skoncentrowanego na tworzeniu warunków do stabilnej poprawy wyników ekonomicznych. Zadaniem controllingu w takiej sytuacji jest nie tylko sterowanie kreowaniem wyników, ale także w sytuacji wzrastającego ryzyka:

- wsparcie dla menedżerów podejmujących ryzyko finansowe,

- nadzór nad efektywnością reakcji na ryzyko,

- rozliczenie osiągnięć w warunkach ryzyka,

- informowanie o ryzyku i jego wpływie na wyniki ekonomiczne.

W ten sposób controlling przyczynia się do sterowania stabilnością wyników ekonomicznych zapewniając powiązanie ich poprawy z racjonalizacją kosztów finansowania funkcjonowania przedsiębiorstwa. Ale bez zbudowania controllingu ryzyka i prawidłowo ukształtowanego procesu zarządzania ryzykiem może to nie wystarczyć. Bo za rogiem niestety czai się VUCA...

PandemicVUCA i carsharing@Risk

Pandemia koronawirusa kreuje jednak dużą niepewność dla dalszej ekspansji ekonomii współdzielenia. Przykładem jest tzw. carsharing, jeżeli osoby zostają w domu, to popyt na tego typu usługi obniża się, ponadto, powstaje ryzyko korzystania z zainfekowanego auta. Także ryzyko niesie dzielenie miejsca pracy, chociaż jest pewnie efektywniejsze niż opłacanie całości kosztów przez jedną osobę – zaleca się utrzymywanie odstępu, czy minimalizowanie kontaktów. Z tego powodu w okresie pandemii utracił rację bytu model biznesowy Moia (Grupa Volswagen), wynajmu elektrycznych taksówek busów przez kilka osób, na które popyt całkowicie zamarł. Także model biznesowy Airbnb w trakcie pandemii i gwałtownej zapaści ruchu turystycznego przestał działać.

VUCA a CRO - zmiana roli

Przykładem sytuacji determinowanej przez VUCA jest zmiana roli osoby odpowiedzialnej w przedsiębiorstwie za ryzyko. W coraz większej ilości dobrze zarządzanych przedsiębiorstw pojawił się trend zmiany pozycji takich osób (określanych jako Chief Risk Officer, CRO). Wysokiej klasy eksperci w tym zakresie zostają awansowani z obszarów szeroko definiowanych jako middle office (obszary wsparcie) do grona osób zarządzających przedsiębiorstwem, włącznie z wejściem do zarządu. Wymogiem jest posiadanie kompetencji w zakresie zarządzania ryzykiem korporacyjnym (ERM), ryzykiem strategicznym, cybersecurity, ryzykiem zakłóceń ciągłości działalności, czy ryzykiem kredytowym. Konieczne jest stosowanie narzędzi kontroli zarządzania bazujących na controllingu ryzyka. Istotna jest odpowiedź na pytanie Co jest ważniejsze, określenie prawdopodobieństwa ryzyka, czy może uodpornienie przedsiębiorstwa, czy określonych instalacji na ryzyko i jak to zrobić? Stąd dyskwalifikujące jest stosowanie uproszczeń w analizie ryzyka, czy bazowanie na mapie ryzyka. W świecie VUCA zarządzanie ryzykiem musi zostać przeniesione na poziom najwyższego kierownictwa przedsiębiorstw (do niedawna zarządzanie, czy controlling ryzyka nie były pierwszym wyborem dla młodych pracowników). CRO ma za zadanie ocenić ryzyko w bardzo szerokim zakresie od ryzyka łańcucha dostaw po ryzyko zasobów ludzkich, będąc w stanie utrzymać wiele relacji z różnymi podmiotami (firmy ubezpieczeniowe, prawnicze, kontrahenci itp.), jak i wpływać na zachowania współpracowników w przedsiębiorstwie. Istotna jest także wiedza finansowa, pozwalająca oszacować wpływ na sytuację finansową przedsiębiorstwa materializacji ryzyka, co powinno pozwolić priorytezować istotność zarządzania poszczególnymi ryzykami. Generalnie CRO musi przygotować przedsiębiorstwo na zdarzenia, które jeszcze nie wystąpiły, a mogą wywołać efekt domina w jego otoczeniu[1]. 

[1] Przykładowo, takim zdarzeniem jest pandemia koronawirusa z 2020 r.

Paradoks ryzyka

Kiedyś uknułem tezę, że controlling ryzyka tym lepiej działa, im mniej się wydaje potrzebny. I Taleb to potwierdził, stwierdzając, że nie docenia się tych menedżerów, którzy zapobiegają występowaniu czarnych łabędzi. Bo jeżeli nie doszło do katastrofy, to za co go wynagrodzić premią?