06 ERM
Enterprise Risk Management (ERM) Project Seaport Cruise Operations Summary Report to the Audit Committee February 5, 2013 Prepared and Presented: Jeff Hollingsworth Lauren Smith Vianney Muse Enterprise Risk Management (ERM) Project Seaport Cruise Operations Focusing on the Most Critical Risks to Seaport Cruise Operations Reviewed selected documents; conducted industry research Reviewed selected documents; Interviewed 10 Harbor Services representatives to identify key enterprise risks Reviewed goals and objectives Selected participants for the project (Mike/Marie) Facilitated risk identification workshop to identify key risks to goals/objectives (In lieu of one on one interviews) Analyzed workshop notes to consolidate similar mentions of risk Defined risks, risk drivers, and risk mitigation activities Prioritized risks based on frequency of mentions Some risk drivers may apply to more than one risk Resulted In 11 Risk Definitions Conducted Risk Assessment Workshop Used impact and likelihood matrix Used voting software Present to Executives Discuss Next Steps 1 Enterprise Risk Management (ERM) Project Combined Strategies and Goals for Seaport Cruise and Maritime Operations (CMO) From "Seaport Commercial Strategies" document, "Objectives"*** 1. By 2015, increase annual passenger volumes to over 1 million and annual vessel calls to over 250 2. Maintain the Seaport's financial independence. 3. Build broad public understanding and acceptance of Seaport activities contributing to economic sustainability of Seattle and the region. From "Cruise and Maritime Operations" document, "Key Goals"*** 4. Commercial Strategy Enhance regional economic development by increasing utilization of Port related facilities and volume of cruise passengers moving through the Port's terminals resulting in improvement of the Seaport's Net Operating Income 5. Asset Stewardship - Perform proper maintenance on current assets and align asset investment to support long term market demand. 6. Green Gateway/Environmental Maintain compliance with all local, state, and federal regulations. Collaborate with industry to reduce environmental impacts. Engage stakeholders and community to build understanding and support *** As defined on October 16th Workshop 2 Risk Assessment & Prioritization Workshop Results Seaport Cruise Operations - Risk Ranking Process Initial Prioritization Based Upon Assessments of Impact and Likelihood Risk Ranking Matrix Risk Ranking Overview Risk Ranking provides an initial means of prioritizing assessed risks based upon assessments of Impact and Risk Map Likelihood Risk Rankings are used to identify a risk's position on a Critical Risk Map (see chart to left) Risk Ranking Calculation Steps Major Multiply the Impact assessment (on a scale of 1-9 with 9 being the highest impact and 1 being the lowest) and the Likelihood assessment (on a scale of 1-9 with 9 being Impact Moderate the highest likelihood and 1 being the lowest) for each risk Reference the product against a range of values (see Minor table below) Assign one of four risk rankings (Very High, High, Risk Rankings Medium or Low) based upon referenced range Insignificant Risk is ranked if the product of Impact & as Likelihood is VERY HIGH Greater than 49.0 Rare Unlikely Possible Likely Almost Certain HIGH Greater than 27.0, but less than 49.0 Likelihood MEDIUM Greater than 9.0, but less than 27.0 LOW Less than 9.0 3 RISK ASSESSMENT WORKSHEET SEAPORT CRUISE OPERATIONS-RISK MATRIX LIKELIHOOD IMPACT Measure Description Description Financial (US$) Operational Compliance/Security Community Environmental Revenue shortfall of more Operational budget expense Multiple incidents of non- Sustained, longer than four Environmental compliance than 25% below increases that were not compliance with security days, multi-media negative regulations that curtail the projections in budget. forecast and that exceed regulations or national international and national usage of either P-66 and T-91 ALMOST CERTAIN budgeted costs by more than security threats that result in media coverage regarding by limiting the number of day Something already 50%. Force subsidy by closure of both Pier 66 and T- cruise and or cruise operators. the terminal could be used to 3 happening on a regular Almost Certain Critical dipping into the tax levy 91 terminal for 3 weeks For example a top/front page days a week and/or shortening basis. income. during the middle of the story. the season to June through cruise season. August. Both facilities impacted. Revenue shortfall of more Operational budget expense Multiple incidents of non- Sustained, 2-4 days, multi- Environmental compliance than 20% below increases that were not compliance with security media negative international regulations that curtail the projections in budget. forecast and that exceed regulations or national and national media coverage usage of either P-66 or T-91 LIKELY budgeted costs by more than security threats that result in regarding cruise and or cruise by limiting the number of day Something already 40%. Force subsidy by closure of either terminal for operators. For example a the terminal could be used to 3 happening on a regular Likely Major dipping into the tax levy 2 weeks during the middle of top/front page story. days a week and/or shortening basis but overall income. the cruise season. the season to June through temporary in nature. August. Only one facility impacted. Revenue shortfall of more Operational budget expense Multiple incidents of non- Local news focus for 2 days Environmental compliance than 15% below increases that were not compliance with security regarding cruise and or cruise regulations that curtail the POSSIBLE projections in budget. forecast and that exceed regulations or national operators. Makes evening usage of either P-66 or T-91 Something not happening Possible Moderate budgeted costs by more than security threats that result in news and the front page. for 3-5 days in mid cruise currently, but anticipated 25%. Force subsidy by closure of either terminal for season. to happen. dipping into the tax levy 1 week during the middle of income. the cruise season. Revenue shortfall of more Operational budget expense Isolated incidents of non- Local news focus for one day Environmental compliance than 10% below increases that were not compliance with security only regarding cruise and or regulations that curtail the UNLIKELY projections in budget. forecast and that exceed regulations or national cruise operators. Makes some usage of either P-66 or T-91 Something not happening budgeted costs by more than security threats that result in talk show coverage, and an for 1 day in mid cruise season. but it could in very Unlikely Minor 10%. Force subsidy by closure of a terminal for 1-5 article in the paper; not all TV infrequent cycles. dipping into the tax levy days during the middle of the stations provide cover or income. cruise season. mention the event. RARE Revenue shortfall of less Operational budget No compliance concerns No negative or adverse media No environmental regulations Something not happening than 10% below increases that were not security threats reported coverage on cruise industry; that restrict Port's use of the and not anticipated to Rare Insignificant projections in budget. forecast are limited to less through various channels; No facilities at P-66 and T-91. happen. than 10%. fines or legal judgments against the Port. Any closure is limited to less than 24 hours. 4 Risk Assessment & Prioritization Workshop Results Seaport Cruise Operations - Risks Prioritized to Risk Ranking Rank Risk Name/ Risk Definition Likelihood Impact Risk Ranking 1 RD11 Costs: Risk that rising operating costs could make continuing to use 5.50 7.40 40.70 Seattle as home port unsustainable. RD-3 - Environmental Constraints: Risk that environmental regulations could limit 2 5.80 6.40 37.12 facility use and growth thus reducing opportunities to increase the ROI and NOI. RD-5 - Increase of Maintenance Costs: Risk that the increased maintenance costs could result in more deference of maintenance 3 5.30 6.40 33.92 constraints and reduce the ROI and NOI associated with improvements and increased revenue. Deferral of maintenance could result in more frequent breakdowns which during cruise season could interrupt or delay sailings. 4 RD-1 - Future Investments: Risk that future investments could be more costly 6.10 5.30 32.33 and limit opportunities to increase the ROI and NOI. RD-7 - Cruise Lines Reduce Vessel calls: Risk that the cruise operators decrease their interest and vessels 5 4.60 6.90 31.74 devoted to the Alaska cruise market or to Seattle as a home port thus decreasing the number of passengers and vessel calls for the Port. RD-6 - Demand for Cruise Goes Down: Risk that the demand for Alaska cruises decreases resulting 6 4.50 7.00 31.50 in a reduced number of passengers and consequently a reduced number of vessel calls for the Port. RD-9 - Localized Event/Disaster Shuts Down Facilities: Risk that a sudden unexpected event, such as a 7 3.40 8.00 27.20 labor strike or medical outbreak or mechanical breakdown forces an extended shutdown mid-season for up to four weeks. RD-8 - Port Facilities Cannot Accommodate Increased Demand: Risk that the facility 8 5.20 5.00 26.00 size limitations do not allow the Port to reach the targeted number of 250 vessel calls. RD-2 - Seasonal Constraints: Risk that the constraints around seasonal facility use limit 9 5.50 4.50 24.75 opportunities to increase the ROI and NOI. A lack of year round diverse income streams. RD-10 - Area Wide Disaster Shuts Down Facilities For Entire Season: Risk that a sudden unexpected 10 2.60 8.70 22.62 event, such as an earthquake results in major facility damage thus forfeiting an entire cruise season. (Example: 9/11 type of event resulting in direct hit or ripple effect.) RD-4 - Lack of Regional Support for Cruise: Risk that at the State and Local government levels, there is little 11 4.20 4.90 20.58 support through incentives, lobbying, or outreach to cruise lines to invest in cruise operations at Port facilities. 5 Risk Assessment & Prioritization Workshop Results Seaport Cruise Operations - Enterprise Risk Map Showing Assessed Risks Cruise Operations Enterprise Risk Map Rank Risk Name Risk Ranking 1 RD-11 Costs 40.70 10 2 RD3 - Environmental Constraints 37.12 7 3 RD5 - Increase of Maintenance Costs 33.92 4 RD1 - Future Investments 32.33 1 6 5 RD7 - Cruise Lines Reduce Vessel Calls to Seattle 31.74 5 3 2 6 RD6 - Demand for Cruise Goes Down 31.50 7 RD9 - Localized Event/Disaster Shuts Down Facilities 27.20 4 8 RD8 - Port Facilities Cannot Accommodate Increased Demand 26.00 8 11 9 RD2 - Seasonal Constraints 24.75 9 Impact 10 RD10 - Area Wide Disaster 22.62 11 RD4 - Lack of Regional Support for Cruise 20.58 Likelihood Workshop participants assessed each risk on two criteria: The estimated likelihood of a risk's occurrence The estimated impact of a risk's occurrence on Seaport Cruise Operations' ability to meet its strategic objectives The assessments of Impact and Likelihood are used to develop Risk Maps to focus management attention on the most critical risk risks. 6 Seaport Division- Detailed Risk Overview: Seaport Cruise Operations Risk Definition RD-11 RD11 - Costs: Risk that rising operating costs could make continuing to use Seattle as a home port unsustainable. Risk Drivers Existing Risk Management Activities Fuel costs increase dramatically, expected to increase by Stay educated on upcoming technology to increase fuel $4-$5Million between 2012-2015 due in part to cleaner fuel efficiencies and keep updated on the cruise line's efforts requirement within 200 miles of shoreline (ECA) to use emissions averaging and other equivalencies to Cost to travel to Seattle from other parts of the country are stay in compliance with the Emission Control Area on the rise (ECA). Ongoing relations/communication with labor leadership. Labor costs put Seattle at a competitive disadvantage (i.e., Seaport leadership routinely meets with union costs in Seattle are very high) representatives. Unfunded security mandates Lease administration/management 8 Seaport Division - Workshop Results: Seaport Cruise Operations RD11 - Costs: Risk that rising operating costs could make continuing to use Seattle as a home port unsustainable. Risk Score = 40.70 Risk Map Critical 1 Major Impact Moderate Minor Insignificant Rare Unlikely Possible Likely Almost Certain Likelihood 8 Seaport Division - Workshop Results: Seaport Cruise Operations RD4 - Lack of Regional Support for Cruise: Risk that at the State and Local governmental levels, there is little support through incentives, lobbying, or outreach to cruise lines to invest in cruise operations at Port facilities. Risk Score = 20.58 Risk Map Critical Major Impact Moderate 11 Minor Insignificant Rare Unlikely Possible Likely Almost Certain Likelihood 9 Enterprise Risk Management (ERM) Project Seaport Cruise Operations Process Next Steps Possible Next Steps for Consideration Assess current mitigation efforts for identified risks or top priority risks Evaluate if sufficient to reduce or eliminate the risk? Evaluate if current mitigation is necessary to reduce or eliminate the risk? Ask whether mitigation is aligned with risk tolerance thresholds? Determine any budget impacts for risk mitigation Create integrated risk mitigation plans and identify sponsor and set timeline Implement and monitor integrated risk mitigation plans 10 Enterprise Risk Management (ERM) Project Seaport Cruise Operations Process Next Steps Items Open for Port Discussion Where does Port take ERM moving forward and what do we do with ERM results? ERM assessment versus performance audit Response to findings Mitigation efforts funding for Who is the audience for reporting ERM findings? Audit Committee versus Commission or both Division finance and budget Establish Roles & Responsibilities and Policies & Procedures What is the merit of establishing an ERM process and identify ERM roles and responsibilities Establish Initial Risk Reporting Framework Should formal reporting tools and approaches for ERM results be created? Define Risk Appetite and Tolerances Recommendation from Last Year's Consultants Formally define the Port's risk appetite and establish a consistent and documented approach to understanding risk drivers, risk management options, and governance for key risks 11
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