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Enterprise Risk Management transformed the government of Puerto Rico. Learn how it can do likewise for yours across the U.S. and LatAm.

By Philipe Schoene, Cedrela Confidential

Time was when risk management was seen as a necessary antidote akin to stress tests in the banking realm. That changed circa 2004, when the Committee of Sponsoring Organizations (COSO) published the Enterprise Risk Management (ERM) guidelines and catapulted the practice to a higher plane.

The quantum leap, at first in the private sector, propelled companies to thrive by addressing risk appetite and tolerance as an interdisciplinary perspective. That, in turn, prompted the U.S. Office of Management and Budget (OMB) to issue Circular No. A-123, which called for the implementation of ERM in federal government agencies starting in 2016 — one year after David Lugo and Jorge Sánchez founded Cedrela Consulting Group in Puerto Rico.

Left to right: Co-founder and Partner Jorge Sánchez, and Co-founder and Managing Partner David Lugo.

Both gentlemen had caught on to ERM in their previous work, mainly in financial institutions. Shortly after Cedrela became a key consulting firm for the island’s government, Lugo and Sánchez began deploying the practice as a critical component of a broader strategy to lift Puerto Rico to a stronger financial and operational footing.

“Risk is bigger than accounting, which is why we take an interdisciplinary approach that takes into account the interplay between numbers and organizational dynamics.”

– Krystel Bravo, Cedrela Consultant

Today, the learnings have turned into a veritable guidebook that Cedrela is presenting to governments across North and South America — with a unique twist clients will find only in Cedrela.

“When looking at the scope of a project, the fundamental component is people,” Lugo explained. “The success of each project is defined by how well you can engage the client’s teams; not just the CEO, but the teams.”

Solving the Gov’t Puzzle

Puerto Rico, now at the tail end of what has been an unusual bankruptcy and restructuring process – the biggest of any state or municipal jurisdiction in U.S. history – is easily the toughest public-finance challenge in the country. Cedrela has been instrumental in its resolution. The task has been led by consultants Andrea Vázquez, Kaxiomara Custodio and Krystel Bravo at the firm. Their superpower: a keen understanding of the nuances of unpredictability when combining finance with people.

Consultants Vázquez, Custodio and Bravo explain Cedrela’s unique approach to government ERM in this Cedrela Confidential podcast.

“Risk is bigger than accounting, which is why we take an interdisciplinary approach that takes into account the interplay between numbers and organizational dynamics,” added Bravo.

It is a people-centered approach to government ERM organized around five pillars:

1. Assess the risks
2. Secure continuity
3. Embed in decision-making
4. Tailor the execution
5. Focus on your people

1. Risk assessment

To identify and know what the risks are may seem an obvious first step, but when dealing with multiple agencies and administrations across a sprawling bureaucracy and political structure designed to serve citizens but with oftentimes conflicting interests pulling in different directions, “it is anything but,” said Vázquez. “We look at various types of risks, since they vary depending on each agency’s mission, work and teams.”

2. Controls for continuity

Once identified, the main objective becomes addressing all risks in a way that ensures continuity from then on, shielded as much as possible from the leadership changes that usually stem from the electoral cycle. The key: implementing Standard Operating Procedures (SOPs) and management controls that each leadership and team generation can follow.

3. Decision-making integration

Next, leaders at every management level across the enterprise are encouraged and trained to integrate ERM as a seamless part of their daily decision-making, allowing them to anticipate challenges and find solutions proactively. The result: “agile responses to emerging issues,” assured Custodio.

4. Implementation

The execution of the SOPs as part of the new decision-making process then becomes tailored to each agency’s needs and situations as they occur and all strictly aligned with the agency’s strategy, the latter ensuring holistic prioritizing and adaptive implementation built for present and future. It is also aided by the latest technology, increasingly including such advances as artificial intelligence, big-data analytics, predictive modeling and other tools that provide real-time insights when needed.

5. The Human Factor

Finally, Cedrela’s exclusive people-centered approach, featuring four interlocked steps.

  • Active and engaged leaders. “It must start at the top of the management structure and flow across the entire organization,” Sánchez affirmed. “ERM works best when the senior team and all managers personally drive the process.”

  • Sustained training and internal communications. A process is implemented to ensure always-on explanation for everyone at the agency or government department. Added Custodio: “It’s about getting everyone in the team to act as if it were second nature—ingrained.”
  • Intra- and inter-agency collaboration.
  • Culture shift. “This is generally the result of the first three steps, but it has to be pursued with the explicit objective of changing the culture of the organization,” added Vázquez.

“This is not a short-term thing,” Sánchez continues. “It is a program, not a Band-Aid. Our job, as it is with every client, is to paint the truest and clearest picture possible, in this case related to risk management at the enterprise level. It’s the Cedrela way, to always say what must be said even if it’s uncomfortable to management. It’s how risks must be managed and turned into an aid to decision-making and results.”

It is, concludes Lugo, a process applicable to any government anywhere. “We’ve implemented it successfully in the toughest government challenge in the United States, and we’re confident the model can be just as successfully executed elsewhere across the U.S. and LatAm.”

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