8 best practices for aligning strategy, planning, and risk

8 best practices for aligning strategy, planning, and risk

Providing effective governance presents boards and management with a formidable challenge. Here’s how one company does it.

By Joanne Sammer; Kenneth W. Witt, CPA, CGMA; and Paul R. Bacon, CPA, CGMA

Success in business is influenced by many factors: effective strategy and execution; deep understanding of the business environment, including its risks; the ability to innovate and adapt; and the ability to align strategy throughout the organisation.

Massachusetts Mutual Life Insurance Co. developed a framework to address such factors. The “Pinwheel” (see Figure 1) illustrates how the CEO and other executives work through the company’s ongoing strategy and financial planning and analysis (FP&A) process at the enterprise level while subsidiary and business unit leaders work through their own process. It is essential that the two groups exchange information — the ultimate goal being that all parts of the organisation are aligned.

The MassMutual Pinwheel project

MassMutual, as the company is called, is a private, member-owned U.S. provider of life and health insurance with more than $650 billion in assets under management. While the company has been around a long time — it was founded in 1851 — it is by no means staid in its approach to business success.

When the 2008–09 financial crisis began to recede, MassMutual emerged stronger than many competitors. The experience convinced company leaders that more formal governance around strategy and risk was needed, including greater transparency and improved alignment between financial and strategic planning.

The company had an effective strategic planning framework. But it needed a better ability to evaluate business intelligence and assess the potential impact of strategic opportunities and risks. So it began developing the Pinwheel to help the organization become more strategically agile and aligned.

There are many strategic governance frameworks out there. MassMutual wanted one that met its unique needs, culture, and existing processes. The final framework design is based on best practices and competitive intelligence gleaned from interviews with other companies and consultants.

The Pinwheel’s development started with the CEO creating new strategy and corporate development (SCD) and enterprise risk management (ERM) functions reporting to him with a mandate to create a governance framework. The SCD and ERM teams now serve as go-betweens for subsidiaries and the strategic aspirations of the CEO and board.

The SCD team is intentionally eclectic, bringing in different points of view to build an effective process. The SCD and ERM teams rotate their talent pools every three to five years, moving to new positions in the business units, becoming key leaders, and promoting the Pinwheel process concurrently.

Figure 1: The MassMutual Pinwheel framework

Figure 1: The MassMutual Pinwheel framework

*Enterprise strategy drives subsidiary and business unit strategy.

Making the Pinwheel function

To develop the Pinwheel framework, MassMutual focused on keeping strategy aligned with risk and reward.

By increasing the focus on strategic risk management, the SCD and ERM teams have shown how driving strategy in one direction enables organisations to quantify and manage significant risk.

When the Pinwheel process began at MassMutual, the CEO led the way, and two of its ten business units were immediately on board. There was also much discussion about the framework and about the degree of implementation by each subsidiary.

This interaction amongst company leaders led to important changes, including an effort to simplify the framework and create a sense of ownership amongst users.

To reinforce the culture, the CEO gathers senior corporate and business unit leaders off-site three times a year. As well as fostering transparency, teamwork, and alignment, this ensures that the resulting information reaches the board of directors in time for its meetings. In effect, this creates a consistent cadence for leaders to run the Pinwheel for their businesses and provide information to the SCD and ERM teams before each off-site meeting.

The result: The leadership team is more engaged in what the company’s businesses are doing, not just divisional priorities. This makes them more collaborative and informed leaders. This helps foster a more unified brand and culture across the organisation.

The Pinwheel in action

Once the financial crisis eased, MassMutual’s Retirement Services division launched a line of stable-value funds in collaboration with Babson Capital Management LLC, a subsidiary.

This expansion met two key customer requirements: the need for more choice and more stability in investment funds for retirement. The response was overwhelming, exceeding the $4 billion sales target by 50%.

But the success and reward were not without risks. To identify liquidity and market risks arising from this new offering, MassMutual turned to the Pinwheel. The result highlighted the need for important risk-management actions, such as managing sales volumes with the risks to which these product offerings expose MassMutual.

Here are eight steps for implementing a similar framework.

Step 1: Evaluate business intelligence

A sound understanding of global business conditions and trends is fundamental to effective governance and planning.

One widely used tool for conducting a thorough review of the external factors having potential impact on the business is a PESTEL analysis: political and regulatory, economic, social and consumer, technological, environmental, and legal.

Another key element of the business intelligence process is to consider what actions the company can take to influence regulation that might affect its brand.

Step 2: Refine strategic purpose and vision

For MassMutual, this is an opportunity to influence and revise its purpose, vision, strategic priorities, and aspirations — keys to the enterprise strategy.

MassMutual defines its purpose as: To help people secure their future and protect the ones they love. Its vision: To be the best company in the industry based on superior financial strength, high dividends, and delivering a high-quality customer experience.

Consistency and clarity of purpose and vision are important, but so is professional scepticism.

Step 3: Define goals and aspirations

Examples of MassMutual’s 2020 aspirational goals include:

  1. Serve 10 million customers.
  2. $1 trillion of life insurance in force.
  3. Become a top-five retirement plan and life insurance provider.
  4. Have a cost structure (combination of selling and administrative expenses) in the top quartile in the industry.
  5. Surpass 90% of employees proud to work for MassMutual.

Long-term aspirations are also a key catalyst for disruptive and innovative thinking beyond what is known as “momentum growth” embraced by most strategic-planning frameworks.

Step 4: Develop strategic priorities

Strategic priorities set by the CEO and leadership team become the pillars universal to all subsidiaries that set in motion the drive to achieve the aspirational goals. All subsequent operational or tactical planning and resource allocation is based on promoting these strategic priorities. Examples of MassMutual’s strategic priorities include:

  1. Relentless customer focus: a deeper understanding and connection to the customer.
  2. Enhanced distribution: reaching broader market segments in innovative ways.
  3. Collaboration and solution development: innovation to serve new and existing customers and distributors.
  4. Brand and cultural alignment: a high-performance culture that embodies capabilities as well as integrated branding and customer experience.

Strategy and planning is a dynamic process, and disruptive innovation is essential for cultural change and strategic agility. Management and the board must continually consider new initiatives that may contribute to achieving the organisation’s long-term vision and aspirations.

Step 5: Identify critical initiatives

MassMutual identifies those critical initiatives that are the most important and ensure alignment to purpose, vision, and aspirations. Some of these initiatives will be sponsored by the CEO to ensure they are funded and managed.

Important considerations for this step include:

  • Which initiatives and investments are critical for the successful execution of our strategy and achieving our performance objectives and long-term goals?
  • What are the key non-financial metrics that drive performance? Relevant non-financial indicators might include customer satisfaction or market penetration.
  • What strategic, operational, and compliance risks are associated with these initiatives?

Step 6: Integrate projects, operating plans, and budgets

Detailed projects are then incorporated into the three-year operating plan and one-year budget to monitor and track performance.

Important considerations for this step are to:

  • Determine key project milestones, measures, and owners.
  • Define metrics for financial and non-financial performance indicators.
  • Align incentives with the achievement of financial and non-financial performance targets.
  • Identify key risk indicators that need to be monitored.
  • Establish sound ERM practices across the company (operating risk).

The SCD team then compares the trajectory of these plans to long-term aspirations and industry and competitor outlooks. Gaps are identified and communicated to the leadership team and become an off-site agenda discussion.

The partnership between the FP&A function, the ERM function, and the CFO comes strongly into play at this stage. This is when assumptions, underlying plans, and projections are tested by developing “base,” “best,” and “stress” scenarios.

Step 7: Monitor critical initiatives

Evaluation and monitoring to manage risks and the overall impact on the organisation is an ongoing process. MassMutual’s expansion into the stable-value business exemplifies this step in action.

For MassMutual, monitoring is a continuous, multi-layered process. In addition to quarterly monitoring of progress against the three-year operating plan and one-year budget, the company has initiated bottom-up “huddle boards” that provide critical information across all levels of the organisation.

Step 8: Assess strategic performance

Effective governance requires a tailored information strategy for the executive leadership team and the board of directors (see Figure 2 for factors the board should consider — and how frequently — to assess strategic performance). This should include:

  • Essential information needed to monitor and evaluate strategic execution of the organisation.
  • Risks to the achievement of long-term objectives.
  • Risks related to conforming to compliance and reporting requirements.

In assessing strategic performance, it is critical to separate performance into “management actions” and “external actions”. If management is executed flawlessly, yet the stock market or interest rates do not perform in line with the plan’s assumptions, it is important that leaders have this knowledge. Conversely, strong markets may mask areas where management actions are in need of evaluation.

Figure 2: Typical board information requirements for strategic oversight

The management accountant’s role

Regardless of whether the organisation follows a Pinwheel-like framework such as the one MassMutual uses or some other approach, management accountants have an important role to play. Whatever framework the company chooses, the focus should be outward as well as inward.

By looking at external factors, management accountants can identify what customers want, where competitors are operating and expanding, and whether the company’s strategy is aligned with the resulting demands.

Management accountants can also play an important role in aligning and integrating various functions within the organisation to smooth the planning process.

For example, integrating the ERM, FP&A, and budget functions can help to manage risks effectively and to allocate limited capital more quickly and efficiently.

Finally, management accountants need to ensure that any model their company uses is resilient enough to accommodate changes and stress. Will the model be relevant when the company grows or contracts following mergers, acquisitions, or spinoffs? The model must have the flexibility to deal with change in an appropriate way. In many cases, such changes are to the company’s benefit — the model must be able to recognise that and adjust accordingly, in alignment with the company.

Joanne Sammer is a freelance business journalist; Kenneth W. Witt is an AICPA technical manager for management accounting; and Paul R. Bacon is vice president and chief underwriter at MassMutual.


Key steps to take before implementing a Pinwheel framework

  • Understand how formal governance aligns strategy with risk and reward.
  • Initiate a formal process for implementing the framework based on the organisation’s culture.
  • Reinforce the desired culture and cascade “topdown” to subsidiaries.
  • Create incentives for leaders to support and adopt the process and framework.
  • Align with performance and enterprise risk management (ERM) best practices.
  • Build in significant collaboration between CEO and subsidiary/business units.
  • Clarify the management accountant’s role in each step.

 

Note: The Pinwheel process at the CEO and subsidiary level took MassMutual 24 months to implement.