Tag Archives: People

Transforming Risk

1.0 Introduction

Recently we have had discussions with different clients on improving the risk function. While each approached the issue from their unique perspective, the underlying need relates to strategically transforming aspects of their risk function.

What were the challenges these clients were facing?

  1. “My CRO seems to be spending too much time chasing data rather than doing analysis and proving insights.”
  2. “Our counterparty proposed a modification to our plain-vanilla options. We are unsure how to value it.”
  3. “I have 4 analysts who are spending 1.5 to 2 hours each to generate my end-of-day P&L report. How do we improve the efficiency of the process?”
  4. “How do we improve the confidence in our energy/ commodity trading and risk management (E/CTRM) system generated risk measures?”

2.0 Implications

What are the implications of these questions? If we think in just tactical terms, we may not be able to fully comprehend the overall implications of these questions.

In the first instance, what the executive leaderships is asking is beyond the ability to generate quality numbers or reports. The executive leadership is striving for insights and understand whether the risks being taken are aligned with the overall business strategy. Is the defined risk appetite aligned with organization’s level of risk tolerance? Can the CRO support planned or unplanned Merger & Acquisition (M&A) activity? Or will it be a case of risk lagging the business objectives?

In the second instance, the CRO has identified specific gaps in her capability – gaps related to exotic option valuation. But at a holistic levels, the question also exposes gaps in risk policy (can we do such deals? What aspects of the risk policy will we have to modify if we do such transactions?), risk modeling (do we have the right models to value and report?), E/CTRM / risk systems capability (can the risk system handle such deals? What customizations will we need to do to such systems?), and human capital (can we manage these instruments?).

The third instanced related to efficiency of risk operations bringing into questions of business processes, E/CTRM systems usage and gaps, and human resources.

In the final instance, the reliability of overall risk infrastructure – risk programs, E/CTRM systems, business processes, transaction and market data, and human resources – is in question.

3.0 Holistic Risk Model

How do we address these challenges? An ideal approach would be to look at the risk function in a holistic function. (Spoiler Alert! I am a consultant and as you might have guessed, I am introducing a model. Hazards of being a consultant. 🙂) Our Holistic Risk Model (HRM) (see figure 1 below) can provide one lens to view and address these challenges. HRM is a 5-layered model that aims to combine both the strategic and operational elements of a risk function. The 5 layers are:

  • Business Strategy & risk strategy layer
  • Policies and Regulations layer
  • Enterprise Risk Management / Risk Programs layer
  • Risk Organization, Business Process, Human Capital Layer
  • Risk Systems and Technology & Risk Models and Risk Measures layer

The issues raised by the above-mentioned 4 questions could be addressed using the HRM as shown below:

Holistic Risk ModelFigure 1: Holistic Risk Model (HRM)

Thus, these questions span across multiple layers and solutions to address these challenges need to span these layers as well. However, the first layer – business and risk strategy – will generally determine what solutions will be appropriate for an organization.

Let’s explore that in a little detail – an organization needs to know and understand what drives its competitive advantage – Is it trading? Is it logistics? Is it physically assets? Is it structural advantages accrued being a dominant player in one aspect of a value chain?

This will drive a company’s risk appetite and its risk strategy, which in-turn will have bearing on its risk culture, risk organization and investments in business processes and risk systems.

Let’s take the first client – If one is not aware of its business strategy and the importance of growth via M&A, then the solutions designed for addressing its need for insight may miss the point. The key will be designing processes which facilitates quick integration of new businesses; generation of management reports and ensuring data quality throughout the value chain. Governance structures to improve transparency and facilitates communications will be needed. Also, having a risk policy which factors addition of new businesses (and hence risks) will be crucial.

In the second case, while the immediate need is tactical – improving quantitative capability, the client will need to revise its risk policy to facilitate the trading of complex options. Quantitative capability – both human capital as well as systems – will have to be added or strengthened. Management capability in terms of managing newer risks may need to be upgraded.

In the third and fourth cases, the number of prioritized initiatives aligned with the bottom two layers of HRM could be in play – from immediate quick wins to improving data quality at source to designing of specific reports to development of a reporting data-mart to changing business processes to periodic training to designing key performance indicators (KPIs) to change behavior. However, the differences in company strategies will result in different solutions being relevant for the company. For example, one of the clients believes in “moving on aggressively” – analogous to moving to build the third floor even when the second floor is not fully complete. The other client has a process driven approach and therefore is at a loss to understand why the investments in E/CTRM systems have not paid off.

4.0 In conclusion

Moving beyond tactical considerations to a holistic risk model based approach can help you transform your risk function to a key pillar of business transformation.


Prashant_MugshotAbout the author: Prashant Shah is a Principal at AXCELERUS, a specialized E/CTRM consulting practice with global client-base and solutions for the full spectrum commodity transacting value chain.   Prashant focuses on risk management activities, risk reporting, front, middle and back-office processes and energy transacting/risk management (ETRM) systems.

Prashant can be reached at prashant.shah@axcelerus.com.


Navigating the ETRM/CTRM EcoSystem (TM)


When was the last time you thought of an ecosystem? Specifically, an energy/ commodity transacting and risk management (ETRM/CTRM) EcoSystemTM?


Usually, for most business and information technology (IT) personnel involved with ETRM/CTRM, the thought of ETRM/CTRM as part of a broader ecosystem is an after-thought. Their focus may primarily be on implementing an ETRM/CTRM solution for a specific business need. This siloed approach often ignores the wider organizational ETRM/CTRM EcoSystemTM. The result can be a complex, sometimes redundant web of IT systems.

What is an ETRM/CTRM EcoSystemTM?

ETRM/CTRM EcoSystemTM is an interplay of all systems, business processes and people that are important for the successful functioning of an E/CTRM system through its transacting value-chain.

Let’s take an example of a typical ETRM/CTRM system and its interactions and interconnectedness with other systems. An ETRM/CTRM system may interact with any of the following systems:

  • Other ETRM/CTRM applications
  • ERP/ GL systems
  • ERP / Inventory management applications
  • Price curves applications
  • Advanced risk analytics applications
  • Credit applications
  • Derivative Accounting Applications
  • Fax/ Email applications
  • Data marts and Operational data stores
  • Data warehouses
  • Reporting Applications
  • Instant messaging systems
  • Electronic Trading Exchanges


In addition, there are business processes – (a) internal to company and (b) each application specific – that together are instrumental in making these systems effective in meeting business needs. A transaction approval process, a confirm process, an end-of-day risk reporting process, and an interface to corporate accounting and financial reporting process are examples of business processes that form part of the ETRM/CTRM EcoSystemTM.

People form a critical component of the ETRM/CTRM EcoSystemTM. Systems and business processes are expected to help people become more effective in their work. However, for people to effectively use the systems and business processes, they need to understand and be trained on the interconnectedness and interplay of the various components comprising the ETRM/CTRM EcoSystemTM.

Navigating the ETRM/CTRM EcoSystemTM

As with any natural ecosystem, “habitats” exist within the ETRM/CTRM EcoSystemTM – these “habitats” are the key IT systems – ETRM/CTRM, ERP, Data Warehouse, and others. Specific people have a stake in these habitats. These are our stakeholders. These habitats are interconnected and their interactions are facilitated by business processes – the value chain that is important for managing end-to-end transacting processes. However, as in natural habitats, these ETRM/CTRM EcoSystemTM habitats also compete and cooperate in the ecosystem. Competition is for funding, functionality, resources and people time, while cooperation is driven by expected business benefits.

So, how do you navigate such an ETRM/CTRM EcoSystemTM? One optimal approach is to take a holistic view of the ETRM/CTRM EcoSystemTM. The goal is to maximize cooperation and lessen competition among the various habitats.

The holistic approach begins with mapping comprehensive business requirements for the entire ETRM/CTRM EcoSystemTM. Many times, the focus is on developing application or business unit specific requirements only. The next step is developing an “aligned” functional design on which the stakeholders agree. This looks across the entire ETRM/CTRM EcoSystemTM to improve cooperation across the ecosystem and reduce competition for housing key functionality in various habitats. It is vital to obtain agreement on, for example, where cash will be posted, where the sub-ledger will be housed, where the inventory will be managed and so on. There will be trade-offs and resulting implications of these trade-offs. A key objective is maximizing the company’s competitive advantage when planning for customizations and enhancements.   Design and pre-design phases are where the greatest flexibility exists in managing trade-offs. A tool such as CTRM-IQTM (1) can facilitate and expedite this process.

An additional element is the management of ETRM/CTRM EcoSystemTM implementations. Components of the ETRM/CTRM EcoSystemTM are best managed as part of a program. This helps in managing release cycles, customizations, and turning on key functionality.

The key to the ETRM/CTRM EcoSystemTM for an existing portfolio of systems is to view all IT systems in the ecosystem as “habitats” and understand the functions they serve. It may be prudent to “move” some habitats. Tools, such as AppRatTM (1) can assist in mapping and understanding the interactions among these habitats.


ETRM/CTRM systems form one habitat that are part of a broader ETRM/CTRM EcoSystemTM. Understanding the dynamics among key habitats helps in addressing many of the complexities of the web of IT systems and creating a holistic approach to managing key ETRM/CTRM systems.


About the author.

ImagePrashant Shah is a Principal at AXCELERUS, a specialized ETRM/CTRM consulting practice with global client-base and solutions for the full spectrum energy transacting value chain.   Prashant focuses on risk management activities, risk reporting, front, middle and back-office processes and energy transacting/risk management (ETRM) systems. Prashant can be reached at prashant.shah@axcelerus.com.


These materials and the information contained herein are provided by AXCELERUS, LLC (“AXCELERUS”) and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Your use of these materials and information contained therein is at your own risk, and you assume full responsibility and risk of loss resulting from the use thereof.