It is apparent that the demand for efficient risk management tools is increasing in the contemporary business sphere (Gatzert & Martin, 2015). Numerous companies face various risks that have an adverse potential for decreasing the company’s profitability (Bromiley, McShane, Nair, & Rustambekov, 2015). One of the most recognized approaches to handling risks is Enterprise Risk Management (ERM) framework developed by Lam (2014). This paper aims to study the case of Heller Financial in the context of ERM implementation. The study’s purpose is to give a descriptive analysis of the situation, to differentiate between risk management applications and business applications, which were used by Heller Financial, and also to discuss possible solutions for credit, management, or operational issues based on the conducted research.
Introduction to the Problem
First of all, it is essential to introduce the organization and determine the factors that forced Heller Financial to implement the ERM approach. As it is stated by Lam (2014), Heller financial is a “commercial finance company with a market capitalization of more than $2 billion” (Lam, 2014, p. 264). At the end of 1998, the company’s net income reached a peak of $193 million, and it possessed over $14 billion in assets (Lam, 2014). The organization’s vision is the become a leading provider of commercial solutions for small and mid-size companies in the United States and several international markets (Lam, 2014).
However, when the company returned to the New York Stock Exchange, the situation changed significantly (Lam, 2014). More than 42 percent of the organization’s stock was released in the initial public offering (IPO), which generated more than $1 billion (Lam, 2014). This event changed the competition conditions immensely since Heller Financial was not only competing for the customers with other financial organizations but also competing for the investments against the broad range of public companies (Lam, 2014). The organization’s Chief Financial Officer recognized the increasing level of competition in his public statement. The following goals were identified: (1) to raise return on equity (ROE) to at least 15 percent, (2) to increase the company’s credit ratings, (3) to grow earnings in excess of 15 percent each year, (4) to maintain the company’s position in the market (Lam, 2014).
Each of the identified objectives was the subject of superior risk management solutions. Concerning the goal of increasing ROE to 15 percent, efficient capital allocation is required (Lam, 2014). Raising credit ratings is an overall purpose of effective risk management. Increasing operational excellence as well as credit efficiency and implementing a successful funding strategy requires strong operational risk management (Lam, 2014). Therefore, the necessity for the implementation of the ERm approach was identified.
Changes in Heller Financial
It is also of high importance to overview the internal changes within Heller Financial that influenced the company’s decision to implement the ERM method. During 1998, the organization’s domestic operations were distributed to five core businesses: “corporate finance, commercial services, leasing services, real estate finance, and small business finance” (Lam, 2014, p, 265).
Additionally, the company implemented the BEST Project initiative to eliminate redundancies and reduce the workforce by 15 percent by restructuring Heller Financial’s businesses to streamline processes (Lam, 2014). Also, the company acquired approximately $625 million in domestic and international assets that were related to Dana Commercial Credit Corporation. Through 1999, Heller Financial continued to reorganize its structure. For example, leasing services were divided into Global Vendor Finance, Capital Finance, and Commercial Equipment Finance (Lam, 2014). Also, the company’s expansion into new international markets implied that the range of vendor leasing products was widening (Lam, 2014). Thus, the organization evidently recognized its need for an efficient risk management approach.
Preparations for the Introduction of the ERM Initiative
It was proposed by senior management sponsors of the ERM initiative that managers and organizational leaders across the company also shared the understanding of the necessity of the initiative’s implementation (Lam, 2014). However, this assumption needed to be confirmed, and thus, as the preparational stage of the ERM introduction, Heller Financial decided to assess and evaluate its current risk management practices (Lam, 2014).
The assessment process comprised three principal aspects. Firstly, a survey, which aimed to investigate the overall attitude toward risk and return issues, was developed, and 38 members of Leadership and Credit Councils participated in it (Lam, 2014). Secondly, more than 35 managers participated in one-on-one interviews, which were designed to discuss the current state of the company and future implications and directions (Lam, 2014). Thirdly, an internal study and benchmarking analysis of the currently practiced risk management policies were conducted (Lam, 2014). There were two critical findings of this assessment process. Primarily, the strong management support for the implementation of the ERm initiative was identified. Also, the principal gap between the company’s current risk management practices was the insufficient quality of operational risk management.
Organization’s Risk Profile
As it is evident from the previous sections, the continuous changes in the nature of Heller Financial’s business called for significant structural improvements and the implementation of a strong ERM approach (Brustbauer, 2016). It is pointed by Lam (2014) that the structure of the contemporary commercial finance industry shifted from a buy-and-hold model to an originate-and-distribute model. This structural change was the primary reason for the shift of Heller Financial’s assets risk profile from traditional credit risks to integrated market-credit risk hybrids (Lam, 2014). Additionally, the company’s businesses shifted from transaction-oriented to more flow processes (Lam, 2014). These changes in the organization’s risk profile indicated the need to reinforce the focus on operational risk management (Lam, 2014). This demand was confirmed by Mike Litwin, Chief Credit Officer of the company, who also stated that the current risk management practices of Heller Financial are not efficient for handling risks and losses caused by human error or system failure.
Identified Objectives for ERM Implementation
“To incorporate a more sophisticated understanding of risk-return tradeoffs in its decision-making and become the best risk manager in its class,” the company identified the following objective for the implementation of ERM (Lam, 2014, p. 267). First of all, it was essential to create a profound understanding of risk management’s importance across the company. Secondly, it was identified that the company needed to establish a comprehensive enterprise-wide system of reporting credit, market, and operational risks. The third objective was “to reduce long-term write-offs” (Lam, 2014, p. 268). Further, it was essential to enhance credibility with the company’s principal stakeholders as well as to potentially decrease Heller Financial’s cost of funds (Lam, 2014). The final objective was to increase the organization’s overall market capitalization. Each of the identified goals was set according to the holistic vision of the company’s needs and potential weaknesses in the current risk management practices.
To properly implement the ERM initiative, it was critical to complete several organizational changes. For example, the position of Chief Credit and Risk Officer (CRO) was created, and Mike Litwin took this position. The CRO’s responsibilities included the strategic management of market, credit, and operational risks along with the centralization of the overall reporting and managing of risks across the company (Lam, 2014). Another important position, which was created in the process of restructuring, was the position of Operational Risk Officer (ORO). ORO was responsible for the centralized measurement, monitoring, evaluation, and management of operational risks (Lam, 2014). The introduction of these two positions aimed to facilitate the consistency of the company’s operational risk management approach across the organization, to provide a holistic overview of the company’s risk potential, and to share the experience of best ERM practices between various business groups.
Initial Phase of ERM Initiative
The initial stage of the ERm initiative was completed by the end of 1999. It is possible to mention several achievements, which were reached during this phase. The ERM assessment was conducted to obtain information about the company’s current risk management practices (Lam, 2014). Also, a benchmarking study was completed. In the course of this study, several dimensions of risk management were investigated, and the results of this study were benchmarked against other companies’ practices (Lam, 2014). Another important step was the development of the ERM framework document. Its primary purpose was to address risk awareness, risk management, and risk measurement, and also to put the terminology of the initiative into the common language (Lam, 2014). Additionally, a comprehensive plan for the implementation of Heller’s long-term ERM vision, a framework for operational risk management, and an enterprise risk report template were developed.
Implementation Phase of the ERM Initiative
During the stage of practical implementation of the ERm initiative, the following challenges were met. Primarily, the aspect of the organizational realignment should be mentioned since the company had to integrate operational risk management objectives into incentive compensation, roles, and responsibilities (Lam, 2014). Secondly, the organization’s data environment had to be reorganized to facilitate the efficiency of enterprise risk reporting and operational risk reporting (Lam, 2014). The third challenge was the proper implementation of operational risk management methodology because the new standard for operational risk reporting had to be developed (Lam, 2014). Despite the mentioned challenges, the implementation of the ERm initiative had brought numerous advantages in short and long-term runs.
In conclusion, it should be stated that the company significantly benefited from the implementation of the ERM approach. It is also essential to notice that the company used both risk management applications and business applications during the stages of the ERM initiative. One can argue that the combination of both types of applications was significantly efficient. It is evident that the company primarily aimed to improve its risk management practices; however, it is also apparent that Heller Financial had to employ the business applications, such as the creation of new positions in the company, to reinforce the implementation of the ERM initiative. Therefore, it should be noted that business application was employed efficiently. Considering possible solutions, which could be retrieved from this case, one can state that the primary lesson of Heller Financial’s example is the employment of operational risk management. Overall, the case represents an example of efficient use of ERM.
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Lam, J. (2014). Enterprise risk management: From incentives to controls (2nd ed.). London, England: Wiley.