PwC Risk Management Report
1. INTRODUCTION
1.1 Aim
The aim of this report is to review PricewaterhouseCoopers commonly known as PwC, design, assess and critically review the risk management plan. The assessment of the risk management plan will be evaluated upon theories related to risk, analyzing the market, identifying risks with SWOT and PESTLE analysis, applying risk management tools, and the plan to manage those risks using ETA and LOPA.
1.2 Company & Purpose
PwC is a global professional services company based in London, United Kingdom. In 1998 it was merged between Price Waterhouse and Coopers & Lybrand, which resulted the company to be one of the largest accounting and auditing firms in the world (Ismailanji, 2017). Currently, PwC has 775 offices operating as separate entities in 160 countries with annual sales of USD$67.92 billion as of December 2017 (Hoovers, 2018). PwC’s core offerings are assurance, tax and advisory. The services that PwC offers are in variety industries, the customer base is wide as well. Over the past five years, PwC was active in acquiring Digital Creative consultancy in 2013 and Booz & Company in order to grow its consulting segment (Ismailanji, 2017).
1.3 Company Strategy
PwC’s strategic aim is to be the leading professional services firm (PwC UK, 2017). The company aims to do that by building their strategy on being technologically enabled, delivering exceptional client value, attaining sustainable profitable growth, leading by example and empowering their own people (see Figure 1.3: PwC Strategy 2017) The core of the strategy and the businesses model are the people (PwC UK, 2017). Attracting top talent is an important part of the business along with investing in innovation and long-term growth (PwC UK, 2017).
Figure 1.3: PwC Strategy (PwC UK, 2017)
1.4 Market & Market Size
For this report, PwC will be looked at in the management consulting market. In 2018 (see Appendix A), as projected from research conducted from 2011 to 2016, the market size is USD$139 billion and is projected to grow to USD$158 billion by 2020 (Clairfield International, 2016). According to Consultancy.uk. (2016), PwC holds 11% of the market share.
1.5 Main Competitors
As seen in Figure 1.5, the main competitors for PwC are other global leading consulting firms such as Deloitte, EY, KPMG, McKinsey & Company, Boston Consulting Group and Accenture (Consultancy.uk, 2016).
Figure 1.5: Estimated Market Share (Consultancy.uk, 2016)
1.6 Risk management process/method in place:
PwC manages various risks through internal control systems, which have to be reviewed by the Executive Board because it is clear strategic priority for the board. Additionally, the Executive Board has the day-to-day responsibility for implementation and monitoring of the risks (see Appendix B). Controls to identify, evaluate and manage risk are done by the Risk Council that consists of senior managers. The various sectors in the business have to report to the Risk Council annually and the internal audit team reviews the effectiveness of the financial systems, operational systems and controls. Clients are an important part of the business for PwC; therefore they take client acceptance procedures very seriously in order to protect the company reputation (PwC UK, 2017b).
2. Literature Review
2.1 Definitions of Risk
There are numerous definitions of risk, the three main dictionaries define risk in different ways. The word “risk” is a mid 17th century word from French risqué, Italian risco ‘danger’ and rischiare ‘run into danger’ (Oxford, 2018). Therefore, according to Oxford (2018), the definition of risk is a “situation involving exposure to danger”. Cambridge (2018) defines risk as “the possibility of something bad happening” and Merriam-Webster (2018) defines risk as the “possibility of loss or injury.” Risk is something uncertain, but can be predicted.
To make risk more subjective, it can be identified in a form of a mathematical equation. The Institute Risk Management (2012) defined risk “as the combination of the probability of an event and its consequences (ISO/IEC Guide 73). The emphasis for organization should be on limiting consequence and reducing frequency of the event occurring (Papadopoulou, 2018). Both the events and consequences imply opportunities for benefit or threats for success (IRM, 2012). Therefore, the acceptance criterion would be:
(Source: Papadopoulou, 2018)
2.2 Theory on Risk Management and Importance of Risk
Risk management is a central part of any organizations strategy planning and management. The Institute of Risk Management (IRM) defines risk management as a “process whereby organizations methodically address the risks attaching to their activities with the goal of achieving sustained benefit within each activity and across the portfolio of all activities. (IRM, 2002)” The focus for these organizations would be the identification and treatment of these risks. The main objective of implementing the process is to add maximum sustainable value to all activities of the organization. The process should be continuous and be flexible for changes as the organization evolves. One of the critical attributes of the process is that it has to be integrated into the culture of the organization, and has to have all the risks surrounding the past, present and future activities of the organization.
According to the IRM (2018):
Risk management protects and adds value to the organization and its shareholder through supporting the organization objectives by providing a framework, improving decision making, contributing efficient allocation of resources, reducing volatility, protecting assets and image, developing orgs knowledge base and optimizing operational efficiency.
International standards for risk management are in place by industry groups in order to implement risk management systematically and effectively. As suggested by the IRM, risk should not just followed by organizations, it should also be applied for any short or long term activities considering the various stakeholders involved.
2.3 PwC Business Issues
It is a challenge to find any internal issues that PwC might encounter due to the careful selection of information that goes public about the company. According to Hinge (2017) leading business challenges for management consulting firms worldwide, the main business issues are:
1. Attracting and developing new business
2. Attracting top talent
3. Effective use of technology
4. Succession planning/ retaining talent
5. Maintaining a positive public image
For PwC, maintaining excellent client-relationships is very important additionally cyber security, reputation and complying with regulation (PwC, 2017).
3. Risk Identification
To analyze the external factors for PwC, an analysis was conducted using the PESTLE framework (Table 3.1).
3.1 PESTLE Analysis of Professional Services Industry (EU)
Political Economic
• Employment Laws
• Taxation laws and tax rates imposed by the government
• Financial regulations (Ismailanji, 2017)
• Competition Laws
• Political Stability
o BREXIT
o Fiscal Policy in Eurozone supports growth and recent monetary policy is making it easier to access funding (Ismailanji, 2017) • Disposable income for businesses
• Labour Market Conditions:
o Conditions improving
o More jobs and lower unemployment rate
o Skill level of workforce
• GDP of the EU is expected to grow (Ismailanji, 2017)
• Market Condition & Business Cycle (Ismailanji, 2017)
Social Technological
• Entrepreneurial activities are encouraged by the government and practiced by the society
• High quality education = skilled workforce
• Culture: determines how businesses operate • New technological developments that can impact business (Ismailanji, 2017) ex. blockchain, AI
• Impact in cost structure: large network of offices, need quality technology for communication
• Protection against cyber security attacks
Legal Environmental
• Legal framework for enforcing contracts
• Intellectual Property protection
• Laws for acquisition and mergers of firms: there is an increase in client demand for specialized services
• In the EU, activity will remain strong over next 5 years (Ismailanji, 2017) • Climate change and regulations affecting the services players in the consulting industry can bring (Pwc UK, 2018)
Table 3.1: PESTLE Analysis for Management Consulting Industry in the EU
To analyze PwC as an organization, SWOT (Table 3.2) will be used to determine the company strengths, weaknesses, opportunities and threats. This tool helps to give the overall strategic position for PwC.
3.2 SWOT Analysis
Strengths Weaknesses
• Brand loyalty, returning clients
• Highly experienced in the industry
• Large international client base
• Operating in the international market = access to bigger pool of talent and information
• Runs as a network of firms with separate legal entities to provide best service (PwC UK, 2017)
• Quality talent pool of employees • Consistency of quality of work highly dependent on human capital which is difficult to control
• Codifying tacit knowledge of employees & ensuring consistency
• Ability to maintain efficient communication with the PwC firms across the world
• Keeping up with country regulations and changes
Opportunities Threats
• Understanding how to implement new technological discoveries to the firm
• Acquiring other firms to provide more specialized services for consulting
• Access to niche markets (Ismailanji, 2017) • Not being able to keep up with the technological changes
• Uncertainty of the UK EU referendum
(PwC UK, 2017)
• Legal actions that could affect the firm
• Information security and cyber attacks
(PwC UK, 2017)
Table 3.2: SWOT Analysis of PwC UK
3.3 Risks for PwC
The risks identified for PwC were grouped using the IRM method (please see Appendix C for the mind map):
Financial Risk:
Across all segments that PwC operates in, market risk is important to consider. Market risk is the possibility of financial loss due to fluctuations in the market value of assets (ECBC, 2008). Since PwC is operating in the professional services industry, it is highly dependent on other businesses to be their customers. If there were to be another market crash or a recession, all businesses would be undergoing financial difficulties. According to Global Management Consultants report published by IBIS World, “corporate profit is essential to industry growth because consulting services are primarily viewed by majority businesses a luxury expense, making them one of the first costs to be eliminated in lean economic times. (Ismailanji, 2017) ” Therefore, the demand for consulting services and revenue is linked to the economic cycle (Ismailanji, 2017). Lack of capital could therefore also cause a hindrance in innovation for PwC.
Strategic Risk:
The long-term strategic objectives of PwC would be largely affected on its reputation. The deterioration of the company reputation would result in dramatic consequences for the business. One of the key resources for the PwC is its employees and talent pool, with bad reputation; it will not be able to recruit top talent. Maintain a positive public image is considered as one of the leading business challenges for management consulting firms like PwC (Hinge, 2017). Additionally, businesses would be less inclined to turn to PwC for services.
“Moreover, in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations.” (Eccles et al., 2014)
Operational Risks:
Reputation and quality of service delivered heavily replies on PwC employees. Employees represent a key asset of management consulting firms (Freedonia Group, 2016). Succession planning, retaining and attracting top talent are some of the leading business challenges for consulting firms (Hinge, 2016).
Compliance:
Regulatory issues can also post a risk to the strategic changes of the organization. The company needs to be aware of the changes happening in the government. For example, the instability caused by the result of the EU referendum can affect many employees working for PwC in the EU. Since PwC is headquartered in the UK, it will have an impact on all locations of the business.
Hazard Risks:
Power shortage that could affect the system shutdown for the entire organization. Without access to the computer systems or access to the Internet, the daily operations of the business will have to halt. Hermione Hudson the Head of Assurance in PwC mentioned in the PwC Transparency Report that decision-makers heavily rely on information and systems (PwC UK, 2017).
3.5 PwC Risk Matrix based on the Analysis
Ref. Identified Risk Significant Probability (S: 0 to1) Likelihood Probability
(L: 0 to1) Risk
Score
(S x L) Consequence
(1 to 5) Rank
A Market Condition 0.4 0.2* 0.08 3 4
B Company Reputation 0.8 .15 0.12 4 3
C Employees 0.9 .3 0.27 5 1
D Regulation 0.5 .8 0.4 2 5
E Power Shortage/system shut down 0.9 0.1 0.09 5 2
*Average taken from Ipsos (2017)
**Estimations based on the research about the external environment and internal capabilities of PwC
Table 3.5 Identified Risk and Analysis
Figure 3.5: PwC Risk Martix
4. Risk Management and Mitigation Plan
PwC’s risk management plan varies in each legal entity. Currently, the Risk Council overlooks the company risk management along with the executive boards. PwC takes their risk management seriously and does have plan in place, but they are not shared with the public in detail. The main of the mitigation activities is to ensure that value that PwC delivers is protected. The risks identified in this paper and the mitigation activities can be seen in Table 4.1.
As seen in the Risk Matrix in the previous section (Figure 3.5)
Ref. Identified Risk Mitigation Activity
A
Market Condition
Board of directors need to adopt the market risk strategy and ensure that the CEO adheres (ECBC, 2008).
Determine the causes of market downturn by evaluating the political and business landscape
Executive Board should re-evaluate business strategies in place
Offer valuable consulting services to businesses undergoing tough economic times in order to gain new clients or retain previous ones.
B Company Reputation Understand the vulnerability of the situation by accessing risks and damages, reinforce values and brands, regain trust by embedding sustainable solutions and resolve the crisis by demonstrating ownership (Smith-Bingham, 2014)
Executive Board should take responsibility in carrying out risk management plans for actions to take in case of negative publicity.
C Employees
Quality service and people are the core value offerings of PwC. To mitigate, it’s important to recruit top talent and have a risk culture. (Krivkovich & Levy, 2015) Additionally, it is important to apply and utilize the PwC Code of Conduct across all separate entities to ensure consistency.
Hiring quality talent based on educational background and/or experience & have quality training procedures in-place
D Regulation Work with policy makers on alternative policies if possible. For instance if it affects the employees. (McKinsey & Company, 2018)
E Power Shortage/system shut down Identify source of power shortage
Determine the key aspects of the organization that rely on power and delay estimation (BC General, 2011)
Assign responsibility to managers within PwC for distributing the information required for company operation
Have backup power in place across all offices, review fire safety protocols
Table 4.0: Risks Identified & Mitigation activities
4.1 Solutions & Strategies to Manage Risks
PwC can use various risk management tools to manage the risks they may encounter. In this report, Event Tree Analysis (ETA) and Layers of Protection Analysis (LOPA) are recommended.
Event Tree Analysis (ETA):
ETA is a tool used to identify risk assessment and is a major tool in consequence analysis (Papadopoulou, 2018) .The following ETA was constructed for Reputation Management for PwC
Figure 4.1: ETA for Reputation Management
Layers of Protection Analysis (LOPA):
LOPA is a tool that identifies players of protection for a firm in order to prevent the accident from turning into a serious incident with damaging consequences. The layers in LOPA act as barriers in order to minimize the effects of an accident (Papadopoulou, 2018). The following LOPA was constructed for the potential of reputation damage.
Incident: Poor service delivery to a client
Consequence: Reputation Damage
Figure 4.2 LOPA for Poor Service Deliver to an Important Client at PwC
5.0 Conclusion
5.1 Meeting the aims of the report
The aim of this report was to critically evaluate PwC’s design and review the risk management by using theories related to risk, analyzing the market situation, and internal capabilities of the firm. The aim of the report was met as all of the factors mentioned were explored and tools such as ETA and LOPA were used to manage some of the risks identified for PwC.
5.2 PwC’s current risk management plan
The amount of transparency about the risk management plan for PwC is very limited. From the website and annual reports, it is evident that there is a risk management plan in place and it is effective. Since each PwC firm worldwide operates independently, there are individual risk management plans in place according to the area of operation. There is Risk Council and the executive team of the organization regularly reviews.
5.3 Recommendations
Many of the major risks for PwC rely on the people. My recommendation to improve the plan is to have other employees aside for the Executive Board to have the opportunity to work with the Risk Council. Employees know the issues of the organization and are first to be exposed to any hazards that might occur. Therefore, transparency is important in the organization. Since each PwC entity is separate, effective communication is of essence. A consistent format of risks evaluation should be in place, for example, the tools used. This way each PwC entity can ensure that most aspects of the business and its risk are being considered for.
6. Personal reflection
6.1 Three Reflection Points
Reflection Point #1:
It is very important to do very thorough research about the company in questions as well as evaluate the external environment. All stakeholders need to be considered when conducting a risk management analysis.
Reflection Point #2:
At first, I thought it would be relatively easy to come up with the barriers for LOPA, or the decision criteria for ETA. However, it was very challenging to think of could be the steps the company will need to take in order to manage their risks and also the outcomes they may encounter. The tools are built on assumption of what might occur with the background research in mind. Furthermore, it requires a systematic way of thinking about the potential events.
Reflection Point #3:
Prior to this assignment, I did not know much about PwC. I was surprised to learn that each PwC office operates as a separate entity and that it is not a multinational corporation. Their branding is so consistent and employees are well managed to the point it seems as though they are all working under the same rules. Having each office, as a separate entity is a clever strategic move for PwC to ensure that according to each region the regulations are carefully followed and the employees know the market they are operating in well. However, this also imposes more challenges and risks.
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Appendices:
Appendix A: Size of Global Management Consulting Market
Appendix B: PwC Principle Risks
(Source: PwC UK, 2017 Transparency Report)
Appendix C: PwC Risk Management MindMap