Teaching the Importance of ERM

Enterprise Risk Management (ERM) is so global and diverse that it has rapidly been incorporated into the syllabus of business schools around the world. On the one hand, this is beneficial to those of us working for communications providers. A new generation of managers will come to work understanding the importance of risk management and keen to see it implemented in practice. On the other hand, it raises the bar for expectations – especially with how well we adapt the general concepts of ERM to the specifics of the communications industry. Managers in well-established risk silos will need to speak the same language as MBA grads with a textbook grounding in ERM. This article, from FT.com, explains how business schools have adopted ERM, but is focused on developing business leaders for the energy sector. For example:

Risk management is covered by most schools, at least as an elective or component of particular programmes, but this is not sufficient. While it is right to include all the tools well-trained managers need to master to be prepared to handle risk, as business educators we must help energy sector leaders address the “human element” – how people react on the ground in response to problems arising and in relation to their individual interests.

Whilst the energy sector has a different risk profile to that of the communications sector, we need to show the same fundamentals of risk management can be applied to our industry too. That involves more than teaching – we must also learn how to make ERM truly relevant to comms providers.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

2 Comments on "Teaching the Importance of ERM"

  1. 1. What do you suggest about a natural disaster case for a telecom operator?
    Eg. Huge storm damaged few BTS and may be data center too.
    Is that a responsibility of Enterprise Risk Management or Commercial Dept Responsibility (Some cases where ERM is not present as yet) or Revenue Assurance to manage and keep track of the loss and report to the Top Management etc etc.? Is this a revenue Leakage?

    2. What about the Payment Receivable cases? Eg. Say Interconnect bill, payment from BT did not reach T-Mobile bank for last two months. BT got one month’s credit according to the agreement. Now who (ERM, Commercial, Interconnect, Finance Receivable or Revenue Assurance) is responsible to follow this up and record and report to the higher authorities? Is this a revenue leakage or loss as a whole?

  2. @ Gopal,

    ERM’s main job is to anticipate risk before it turns into an incident, and to validate that the degree of risk is in line with what is appropriate for the investor’s expectations. That is looking forward rather than calculating the specific cost of disaster damage after it occurs. However, the ERM function should be informed about cost so it can reset its calculations, if it underestimated or overestimated the possible cost of damage.

    The costs of repairing damage belong with the functions that manage the relevant locations and technology, as appropriate. The cost in terms of reduced revenues due to inability to provide service most naturally falls to the commercial function responsible for that service, but it can also make sense for RA to validate these numbers. However, care is needed here to avoid too many overlapping and confused responsibilities. The golden rule is that calculations are performed by people with the best data and the best understanding. Other functions, like RA, may scrutinize those calculations, but should not seek to override unless there are clear signs of error.

    I don’t get hung up on what is or is not a revenue leakage, as the terminology is imprecise anyway. Many would say the inability to provide a service means that opportunities are lost, and hence there is a revenue leakage. However, I tend to be cautious about the idea of opportunity leakage, because it begs the question of how far you go with this idea – if somebody in the call centre is rude to a customer, and the customer decides not to upgrade their package, is that also opportunity leakage? When it comes to leakage, it is best to stick with cases where the revenues would have been reliably predictable, were it not for the leak.

    In your second example, BT are taking advantage of their creditor by delaying payment. This is not straightforward leakage if BT eventually pay. However, there is a cost to the creditor. This cost is best measured according to how much profit/interest the creditor could have made if it had been paid sooner. This is a judgement call, but typically the calculation will be based on an assumed rate of return which may be between the company’s WACC and the interest it earns on amounts on deposit. RA could reasonably include this as a leakage in their calculations, though typically they do not bother to do so. The receivables function should be looking more closely at this kind of thing through their ageing analysis, and clearly there is a link to manage cash with the Treasury, the significance of which depends on the size of the outstanding amount relative to the company’s overall cashflows. In my experience, the receivable will tend to be managed by a function specifically assigned to the task of handling interconnect payment and settlement, but it could be a more generalized billing receivables team.

    The overdue amount is not ‘lost’ whilst the business thinks it will recover the payment. This is a judgement call too – clearly the situation is different if a reliable payer is just a few days late or if an unreliable payer goes bankrupt. The amount outstanding should not be considered lost until a decision is made to write-off or provision the debt in the books. This decision will involve the function responsible for the receivable and may be overseen by others in Finance.

    As with the first example, ERM’s role is to think ahead, rather than to report on historic issues. They are hence more interested in the future chances of customers defaulting, and how that compares to the company’s bad debt provision. They should be informed of major defaults, as they may need to revise their analysis of risk. However, this is an area where ERM will usually have minimal input, because other functions will actively manage the credit exposure on a day-to-day basis.

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