Talking innovation and disruption with Telstra’s CRO

Kate Hughes talks to StrategicRISK about how risk management is helping Australia’s largest telecommunications provider become a global technology player

It’s 6.20am and Kate Hughes’s phone goes off. The chief risk officer for Australia’s largest telecommunications provider, Telstra, has been called to activate the crisis management team to deal with a major outage affecting thousands of customers.

By 7am, an action plan is in place and Hughes can begin her day. But an hour later she receives a report from a whistleblower alleging bad behaviour of a senior executive, which sees her launch an immediate internal investigation through her fraud team. Then, a few hours later, Hughes is alerted to a customer privacy breach, so it’s then a call to the regulators to alert them of the incident.

It’s not even lunchtime, and Hughes has already fielded more incidents than most chief risk officers would see in a month.

Hughes has agreed to an interview with StrategicRISK to discuss how risk management is helping Telstra navigate a strategic business model change from a traditional domestic telecommunications provider to a global technology company.

But first, a history lesson.

Telstra is one of Australia’s most well-known companies. The country’s largest telecommunications provider builds and operates networks around Australia and markets mobile, internet access, pay television and other entertainment products and services.

But the pace of digital change has not been kind to traditional telcos, forcing Telstra, and most of its competitors, to pivot from their historic business model.

Today the company has its sights on being a global technology company.

Last year the company invested almost $1.2b in acquisitions, including a controlling stake in 15 new businesses. It also expanded its reach in Asia through acquiring Pacnet in Singapore and launching TelkomTelstra in Indonesia, and activated new business units such as Telstra Health.

This pace of change, coupled with the profound shift in the way people connect and communicate, means Telstra faces a challenging set of business risks that threaten it achieving its growth ambitions and financial targets.

This is where Hughes comes in.

“Most people say to me, I’ve got one of the most interesting jobs in the company and I would agree that I do. There’s very little that I’m not across, or not involved in, or not able to add value to,” Hughes says. “I get to make decisions about the kind of ladders we use in the field, I get to talk about the risks of having handbrake alarms in some of our cars, and I also get to talk about the risks of technology disruption as it will impact on our strategy to be a world-class technology company.”

The risk function at Telstra has evolved significantly over the past three-and-a-half years under Hughes’s leadership. The 160-strong risk office now looks after the group’s risk management, compliance and privacy functions, as well as its law enforcement capabilities, fraud investigations, enterprise resilience, security, and health, safety and environment arms.

Hughes, who reports into chief financial officer Warwick Bray, admits she is lucky to work for an executive team who take risk management seriously.

“It’s a privilege to be involved in something that helps our executives make better decisions,” she says.

And with the pace of change that Telstra is facing, that decision-making needs to happen quickly.

“We can be disruptive or we can be disrupted and we’ll probably be both. That’s not necessarily a bad thing. I think disruption creates solid incentive to be more innovative and that’s good,” she says.

Telstra is undergoing a major internal simplification process, driven by the risk of not being able to keep up with younger, more agile, tech start-ups.

“I’m in a meeting every Tuesday morning on this to see what am I doing to help us get there,” Hughes says, adding that she sees the company’s simplification and disruption impetus as an opportunity to show the benefits of risk-based decision making.

“Everything we do requires us to do a risk assessment and that shouldn’t be seen as an onerous, bureaucratic thing, but actually built in to our processes every day.

“Part of the business case is doing a risk management assessment. You don’t tack it on the end, it’s not done at five minutes to midnight, it’s not done once we’ve agreed to everything else … it’s part of the process.

“That is the evolution of risk management – to take it out of the academic, out of the process, and make it much more part of the business conversation so that it actually adds value to the commercial decision-making challenge that your leader has,” she says.

Hughes cites an example with the head of Telstra property, who had to decide how to allocate his spending when it came to upgrade work on the group’s exchange sites. By applying a safety rating to every exchange, Hughes team was able to prioritise which sites should be worked on first.

Back to where it started

In some ways Hughes has come full circle to her role at Telstra.

After graduating with a commerce degree with majors in economics and finance, she took up a role at the NSW Treasury. One of the first companies she audited was Telstra, sitting in the very same Melbourne offices that she does today.

She then moved to the Sydney Futures Exchange where she was responsible for surveying the open trading floor for rouge or illegal trades during its final year of operation.

“I was one of about four women in a room of 400 men that had some pretty bad behaviours,” Hughes recalls.

From there, she moved to the Australian Securities and Investments Commission (ASIC), the country’s corporate, markets and financial services regulator. And it’s this insider experience which has proved invaluable to Hughes at Telstra – one of the country’s most highly regulated companies.

“One of our big risks is going to be a rapidly changing regulatory environment,” she says. “It will go to things like how we regulate data ownership and data sovereignty in the long term.”

Regulators around the world are struggling to keep up with the implications of new technology – and most are doing so at different paces, not to mention with vastly different strengths of legislative iron fists.

For a company with global expansion plans, this adds a huge layer of complexity.

“How do you grow in those countries where your company’s cloud strategies aren’t going to fit with theirs, for example,” she says.

“[Regulation] has the potential to certainly change how we develop and market products. It’s one of the material risks that we talk to the board about. What you have to get very good at doing is staring over the horizon beyond your normal two to three-year period, out to five to eight years and start to think about what regulation will matter then.”

In a disruptive environment, Hughes also sees the potential for corporates to challenge existing regulation.

“If you look at Uber and Airbnb as two business model challenges, everybody talks about those as being challenging at a business model level, but what for me was most interesting is that they challenged existing regulator models as well. Uber drivers never stopped and said ‘I need a taxi license’. So what would happen to us if we fundamentally changed [current] regulation? We do a lot of black swan thinking about some of those risks,” she says.

Cyber and security challenges

In the nearer term, Australia is set to bring in data loss notification laws which will force companies to advise customers when their details have been unlawfully accessed.

“It’s not going to be a huge issue for us because we’ve always thought long and hard about who we should tell when we’ve had a breach of some kind,” Hughes says.

This stance was put the test last year. Just two weeks before Telstra’s $697m acquisition of Pacnet was finalised, the Asian telecommunications business was hacked by an unknown third party which gained complete access to the company’s network including emails and other administrative systems.

Telstra said it wasn’t told about the breach until after the deal’s completion on 16 April.

In that instance, Hughes says Telstra voluntarily went to eight different regulators about the breach.

“Each one had different expectations about whether or not we would or should tell them,” she says. “We’ve always felt better to be upfront and honest. The worst thing you can do is look like you’re hiding it.”

But Hughes fears that the new breach notification laws could result in consumers getting “notification fatigue”, where they fail to act on important data breaches because they are being alerted of them so frequently.

Instead, when it comes to cyber security, Hughes is turning the lens to the company’s employees, which are often considered the weakest link in any cyber security programme.

“We run drills to see if we can trick our employees into doing something that they shouldn’t have,” she says, such as clicking on a link or opening a suspect attachment.

In the first drill, 30% of employees failed. That dropped to 18% in the second round.

What’s in a name?

Managing major reputation crises is also something that Hughes is well versed in.

In 2005, she was asked to join a company in the midst of a major corruption scandal that saw it on the front page of the papers for more than 400 consecutive days, and its shareholder value slashed by almost $1bn overnight. That company was the Australian Wheat Board (AWB), which was accused of paying millions of dollars in bribes to Saddam Hussein’s regime in Iran in exchange for lucrative wheat contracts.

“Part of my job was to build the right internal controls, the right risk processes and the right compliance controls to ensure we never ever did that again,” she says.

For four years, Hughes worked with a new management board to help turn the business around.

“Leadership in good times is always a pleasure. The hardest job you will ever do is lead in tough times when there’s bad news on the front page of the paper and your employees feel embarrassed to work for you,” she says.

Hughes believes reputation isn’t a risk as such, but an “outcome of other things you didn’t do very well”.

Regardless, when you’re an organisation the size of Telstra, reputation is incredibly important.

“This year we have put in place much more formal metrics to measure the impact of our resilience on reputation,” Hughes says.

For example, during network outages, Telstra can map social media mentions against the network issues to give an indication on the importance of resilience to its customers.

“It’s also a really good predictor of consumer behaviour, so how many of these [incidents] does it take before a consumer, one, rings up and complains, two, gives us a negative rating, or three, possibly changes services. That’s critical insightful data that we work with marketing, media and communications teams on,” she says.

Hughes is one of the most passionate advocates for strategic risk management that you will meet. But she’s far from traditional.

“The one thing I rarely say to people is that I’m the chief risk officer; what I often say is I’m an executive at Telstra, because part of my job is not just talking about the risks, but talking about the opportunities. At the end of the day my real job is to make sure that our executives know how to make decisions.

“Helping people consciously choose to take risks is good because it means that they’re doing it utterly informed.”

Hughes says that risk managers must move from talking about the “what” – the list of risks and risk registers – to talking about the “now what”.

“Being the person who forces people to sit through three-hour long risk workshops so we can satisfy ourselves that we’ve got 25 pages of risk registers is an academic exercise that has never sat well with me,” she says.

“Doing [risk management] for the sake of governance, whilst necessarily, is not necessarily always valuable. Doing it because it helps [the company] make a better decision, save money, spend it more wisely … and potentially be a disruptor yourself because you’ve found a hole in the market that no one else has, that’s where the real value comes from.

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