ERM in action

Risk Management, May, 2008 by Harvey B. Lermack

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Implementing an ERM program would be a lot easier if there was a single path to success. Unfortunately, there are as many routes as there are enterprises and finding the right one usually requires sophisticated self-analysis. Only after examining inner operations, objectives and culture will the proper path emerge. Penn State University, Conrail and Bonneville Power Administration are three organizations that have found their way. Here is how they did it

Penn State is a large public university whose main campus, located in University Park, Pennsylvania, has about 43,000 total students. That campus is located centrally in the state about 200 miles west of. Philadelphia and about 200 miles east of Pittsburgh. The remote rural location helps to reinforce the collegial culture, as university activities dominate the local community. As with most universities, Penn State's organization is divided between the business activities (headed by the vice president of finance and administration) and the academic and research activities (headed by the provost). ERM risks, of course, include those related to both business and academics.

The university has a satellite system of 20 commonwealth campuses. They are located in large and small communities across the state and operate in a relatively independent manner under policies developed through the central administration in University Park. Activities and risks at each location can vary depending on the local community and administration, and whether it is a two-year (feeder to the main campus) or four-year campus.

Other university facilities include a medical school and teaching hospital located in Hershey and a law school housed jointly in State College and Carlisle. The university also conducts an online education program through its "World Campus," which was launched in 1998. In all, more than 90,000 students attend programs at Penn State.

The university's collegial culture is similar to that throughout academia. Members of the academic departments conduct teaching in a relatively independent manner and conduct research in a broad range of areas, funded by both governmental and private contributions. The wide variety of dynamic research projects and educational activities at the various colleges make the key risks difficult to identify. Updating them from a centralized department and dictating a widespread awareness of risk identification and management tools across the academic departments is another challenge.

The finance and business activities department operate more traditionally, and most functions, other than those unique to the education industry, are organized and conducted similarly to those in the private sector. The collegial culture and overall mission of the university, however, is evident throughout its business.

ERM was driven from the top. The senior vice president of business and administration saw the potential for an appropriately implemented and communicated ERM program to help such a widespread and dynamic organization. The initiative was included in the 2006-09 Penn State Strategic Plan, providing support and credibility across the organization.

To begin, a cross-functional committee was formed with members from almost every business department, and a representative of the research activity. The team interviewed the senior leaders at the main campus and at every satellite to catalog the most significant risks. Working through the committee and with administration and academic leaders, the top risks they identified became the vehicle to communicate ERM throughout the entire university.

Conrail was a large freight railroad operating in the Northeast United States until 1999, when it was purchased by two railroad companies that split its operations. The business was highly competitive, operating in a mature and consolidating industry with stagnant growth. Competitive pressure came from both large national and regional railroads, and from trucking companies, which had eroded the freight transportation market share historically dominated by rail companies.

Due to these factors, the company saw very little, if any, real growth over the preceding decade. In an attempt to succeed, the company defended its position against competition while it actively sought other lines to acquire or companies with which to merge.

The decision to implement ERM at Conrail resulted from the realization that stagnant growth and low revenues would continue to limit Conrail's strategic alternatives. In particular, the firm believed ERM could greatly help reduce its high risk-related costs, which totaled about $240 million per year.

Traditionally, railroads have been centralized organizations, run through authoritative geographical chains of command. Regional general managers at Conrail had broad responsibility and the authority to implement organizational policies, which were developed and coordinated through headquarters in Philadelphia. Primarily, the key risk-related issues dealt with operational activities.