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Risk Management

Student Name: Martin Norberg Student Number: 11284960 Course: Management Consulting principals Course code: BMGT43560 Lecturer: Kathleen O’Reilly Date: 17/11/2011

Table of Contents INTRODUCTION RISK MANAGEMENT BUSINESS ACTIVITIES RELATED TO RISK MANAGEMENT HOW TO BUILD RISK INTO AN ORGANISATION’S BUSINESS MODEL DELAYING PRODUCTION COMMITMENTS TRANSFERRING RISK TO OTHER PARTIES IMPROVE THE INFORMATION MANAGEMENT RISK MISMANAGEMENT TRENDS IN RISK MANAGEMENT THE FUTURE OF RISK MANAGEMENT CONCLUSION LIST OF REFERENCES BOOKS E-­‐JOURNALS WORLD WIDE WEB 2 2 3 4 4 5 5 6 6 9 9 10 10 10 10

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Introduction In this report one will analyse the consultancy area Risk management. One will describe the essence of Risk management, the trends, the future and enhance theories with “best practice-­‐” but also “worst practice-­‐“ examples from different industries.

Risk Management Risk management is a logical process that aims to eliminate or at least minimize the risk level associated with a business. In essence, the process identifies any type of situation that can result in damage to any resource in possession of the company, including staff, and then take action to correct the factors that are very likely to result in such damage. (Wickham, Wickham, 2008) At the core of effective risk management strategies is the desire to find ways to deal with the uncertainty that exists in all companies. The first step in the process has to do with evaluating the use of the resources they currently stand. This step involves understanding the logical flow of the production process and how it relates to the successful production of goods and services for sale to consumers. When there is a firm grasp of how the organization functions, it is then possible to proceed to refine this process with an eye to deal with this uncertainty. When the business model is understood, it is possible to identify specific risks that are present throughout the production process, including the delivery of goods and services to buyers. Because these risks are identified, they are analysed for ways to change the The risk management process (IRM, 2002) 2

process so that the end result is still achieved, but the degree of risk is minimized or removed altogether. Risk management can be an extremely complicated process, or require anything other than to make some minor adjustments. (IRM, 2002)

Business activities related to Risk Management

Business activities and decisions include various activities. (1) Strategic long-­‐ term objectives can be affected by areas, such as capital availability, sovereign and political risks, legal and regulatory changes, reputation and physical environment changes. (2) Operational day-­‐to-­‐day risks that the organisation is confronted with on its strive to reach the overall strategic objectives. (3) Financial risks concern the management of finances of the organisation and the risks of availability of credit, exchange rates, interest rates and other market exposures. (4) Knowledge management concern the effective management and control of the knowledge resources, the production protection. External factors, such as area power failure and unauthorised use or abuse of intellectual property. Internal such as system malfunction or loss of key employees. (5) Compliance concern issues such as health and safety, consumer protection, data protection and employment issues. (IRM, 2002) Drivers of key risk (IRM, 2002)

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The actual process of risk management will vary from company to company. The focus may be on employees' safety measures, or equipment maintenance. In other companies can risk management demand rewriting policies and procedures in order to exempt the company environment of potential risk situations.

How to build risk into an organisation’s business model Companies that have successfully lowered their business model risk have done so by (1) delaying production commitments, (2) transferring risks to other parties or (3) by improving the quality and level of the information management.

(Girotra K., Netessine S. Harvard Business Review, 2011)

Delaying production commitments The most obvious way of doing this is to speed up the production process. This usually means producing in higher cost locations, which is the opposite of supply chain orthodoxy. However, Karan Girotra and Serguei Netessine (Harvard Business Review, 2011) say that often the gain from reducing demand uncertainty outweighs the added costs and that this approach lies behind some remarkable innovations. For example, the Spanish clothing retailer Zara does something different than the rest of the industry. The common approach is to managing costs by organizing their sourcing, production and distribution as efficiently as possible which results in a need for 12 to 18 months, to design, produce and deliver a new line of clothing. This means big bets on the demand on future consumer demand and preferences. Having this risk results in inventory write-­‐downs or stock-­‐outs (if the demand is much higher then expected). What Zara has done, is to create a hyper fast supply chain that turns a new line in two or four weeks, which makes it a lot easier to keep up with consumer preferences. There is of course a higher cost for this, but Zara’s success shows that managing demand risks can trump a focus on costs.

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Transferring risk to other parties Another way of managing risk, especially asset related risk, is to pass the exposure to someone else. One obvious way is of course to insure the company against risk, and thereby transfer the financial risk to an insurance company. But from a strategic perspective, it involves changing your contracts with other stakeholders, such as employees, suppliers and consumers, in the value chain.

A perfect example of this is when the customer-­‐contact service provider LiveOps changes the terms for the employees in order to always try to balance the right employee utilisation to meet the customer demands. LiveOps uses a pool of loosely affiliated freelancers, who are usually stay-­‐at-­‐ home parents and cannot take a job with fixed hours, but are available during many times of the day, and they can work from home. LiveOps computerised system allows them to work remotely in their free time. And most important, they will only get paid when they are actually on support calls, which mean that the employees themselves bear the risk of their underutilisation.

Improve the information management Sometimes it is not possible to shorten the production process or change the relationship with the stakeholders in the value chain. In that case the business can improve the quality of the information on which they base their commitments. Internet based furniture retailer MyFab is a company with an interesting business model. Instead of large stocks of furniture, they provide a catalog of potential designs, and let customers vote on them, the most popular ones goes into production and shipped directly to the customers. Their voting system is a perfect example of improving the quality of information. The process of making and delivering the furniture has been greatly improved. The information they get from their customers enable them to predict customer taste and demand more precisely then their competitors, reducing its exposure of stock-­‐outs and excess inventory.

(Girotra K., Netessine S. Harvard Business Review, 2011) 5

Risk Mismanagement

In the aftermath of the global financial crisis, people wonder how Wall street could mess up to badly and what went wrong with all there complicated models? Failure in risk management takes essentially six forms, most of them were exemplified in the past/current financial crisis. For example risk assessments are typically (1) based on historical data, such as change in house prices over time. But rapid financial innovation such as securitised mortgages has made such data unreliable. The other forms are (2) focusing on narrow measures, (3) overlooking knowable risks, (4) overlooking concealed risks, (5) failing to communicate and finally (6) not managing in real time. (Stultz RM, 2009, Harvard Business Review)

Trends in Risk Management Today’s risk management success is closely linked to the culture companies (and countries) develop around risk.

One of the biggest trends today in risk management is closely linked to one of the biggest problem businesses and society have ever faced, “brain drain”, the large-­‐ scale immigration of individuals with technical skills or knowledge. Boston Consulting Group (BCG) is talking about the talent crisis and managing talent risk as one of the future key aspects for organisations. Human capital will replace the financial capital as the engine for economic prosperity. Economies will struggle to stay competitive and companies will compete for talent on an unprecedented scale.

BCG has come up with a holistic approach for companies and governments to face and structure their efforts to solve this risk for “brain drain”. (1) Strategic workforce planning means modelling labour supply and demand for different job families to understand current and future imbalances and develop strategies for addressing them. (2) Ease migration, innovative migrating systems by states and companies are necessary to attract the right talent globally. (3) Foster brain circulation, there are strategies that can help turn the “brain drain” into “brain gain”, as students and professionals come home to

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apply skills learned abroad. (4) Increase employability, develop an efficient education system that includes practical and theoretical skills, lifelong learning and up skilling. (5) Develop a talent “trellis”, talent development is key to ensuring a sustainable pool of highly skilled resources. Focusing on going from career tracks to a trellis, building the skills required for the jobs tomorrow, could do this. (6) Encourage temporary and virtual mobility, which covers easy opportunities in short-­‐term work or study in another location. (7) Extend the pool, because the pools today are currently under-­‐utilised. Countries and companies need to set up policies to tap into the skill sets of women, older professionals, the disadvantaged and immigrants.

“Global mobility of talent is becoming as critical as the global mobility of goods and capital. The seven responses to the global talent risk are indispensable for companies and countries to win their share in tomorrow’s global high-­‐skills marketplace. The largest gains, however, will come from coordinated efforts among states, companies, international organizations, academia and civil societies worldwide as they think beyond national borders and recognize the global benefits of mobile talent.” (BCG, 2011)

Source: Boston Consulting group

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McKinsey consulting describes another trend, where companies are struggling to own its risk. “Only when a firm is the natural owner of its risks can it optimally manage its risk exposure” (McKinsey, 2010) The continue on by saying that firms of all kinds found that their risk-­‐ management systems did not work out as planned in the recent financial crisis. These investments in systems, may for these companies feel like a waste of money. As the global economy is continuing to struggle, all these firms that bought into the promise of risk management find themselves at a loss of what to do next. McKinsey argues that risk management needs to be completely rethought, from the bottom up, so that a firm’s risk practices and systems fully deliver on the promise of risk management. They call this a “new risk paradigm”: (1) Improved transparency, understanding and modelling of risk. (2) A clear decision on which risks to “owning” and which risks to transfer or mitigate. (3) The creation of a more resilient organisation and processes that help the firm to be proactive in risk mitigation. (4) The development of a true risk culture and finally (5) get a new approach to regulation, for those operating in regulated industries.

Accenture sees risk management as the next big thing, which enables long-­‐term competitive advantage. “…risk management at the top-­‐performing companies is now more closely integrated with strategic planning and is conducted proactively, with an eye on how such capabilities might help a company move into new markets faster or pursue other evolving growth strategies.” A survey made by a group of consultants at Accenture gives us the key trends/challenges in risk management among companies in different industries. The top five challenges are; (5) Data management (availability, consistency, organisation), (4) Improving risk management and modelling, (3) Implementing regulatory demands, (2) aligning with the overall business strategy and (1) reducing costs.

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The future of Risk Management

As business volatility increases and as risks become more complex and widespread, the exposures remaining in many companies point to the need for increased focus in several key areas. Accenture identified the biggest coming challenges in risk management of the future. (1) The types and magnitude of risk are increasing. Regulatory risks for example is a common concern; “One of the big challenges of risk management is to comply with rapid and continuously changing regulatory requirements. Staying up to date is not easy considering that different authorities constantly change new guidelines and recommendations. Accenture’s analyse shows that more than a quarter of companies do not (2) measure major risk items and emerging risks, such as political risks, reputational risks and 27 to 28 per cent do not even measure financial risk, which includes business and market risks. (3) “Bottle necks” in organisations prevent effective integration of risk management structures. More effective organisational structures are and governance systems are essential if this integration problem is to be addressed. (4) Performance gaps between expected out come of risk management and what is actually achieved. By managing the change efforts by rigorous discipline and a focus on outcomes the value opportunity can be realised. According to Accenture (2011) the main challenge for the risk organisation will be (5) reducing costs and aligning with the overall strategy. (Accenture, 2011)

Conclusion

Whist risk identification can be carried out by outside management consultants, an in house approach with well communicated, consistent and coordinated process and tools is likely to be more effective. The inside ownership of the risk and risk management process is essential to overcome future challenges for the organisation. Where the single largest risk aught to be the trouble of integrating the Risk Management with the overall Business Strategy in the reach for cost savings and economies of scale, but also to retain the talents and knowledge within the company as long as possible.

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List of references Books Wickham, P, Wickham, L, (2008) Management consulting 3rd edn. London: Prentice Hall

E-­‐Journals Girotra, K, & Netessine, S 2011, 'How to Build Risk into Your Business Model', Harvard Business Review, 89, 5, pp. 100-­‐105, Business Source Complete, EBSCOhost, viewed 14 November 2011. Fox, J 2011, 'Can Risk Managers Manage Risk?', Harvard Business Review, 89, 11, pp. 158-­‐159, Business Source Complete, EBSCOhost, viewed 14 November 2011. Stulz, RM 2009, '6 Ways Companies Mismanage Risk', Harvard Business Review, 87, 3, pp. 86-­‐94, Business Source Complete, EBSCOhost, viewed 14 November 2011. Kaplan, R, Mikes, A, Simons, R, Tufano, P, & Hofmann, M 2009, 'MANAGING RISK IN THE NEW WORLD', Harvard Business Review, 87, 10, pp. 68-­‐75, Business Source Complete, EBSCOhost, viewed 14 November 2011. Buehler, K, Freeman, A, & Hulme, R 2008, 'The New Arsenal of Risk Management', Harvard Business Review, 86, 9, pp. 92-­‐100, Business Source Complete, EBSCOhost, viewed 14 November 2011.

World Wide Web

Accenture, 2011, http://careers.accenture.com/SiteCollectionDocuments/Accenture-­‐Global-­‐Risk-­‐ Management-­‐Study-­‐2011.pdf (Accessed at 11 November 2011) McKinsey, 2011, http://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Risk/W orking%20papers/23_Getting_Risk_Ownership_Right.ashx (Accessed at: 11 November 2011) Boston Consulting Group 2011, http://www.bcg.com/expertise_impact/capabilities/risk_management/default.a spx (Accessed at 11 November 2011) Institute of risk management, 2002, http://www.theirm.org/publications/documents/ARMS_2002_IRM.pdf (Accessed at 9 November 2011)

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Risk Management

...Paula Abadía Risk management Companies in every part of the world are exposed to many different threats and unexpected things; these are called risks. Risks can be any factor affecting the performance of projects, and causing a negative effect on them. In order for companies to be successful, they should always take into consideration the process of risk management. Risk management is a logical process or approach that seeks to eliminate, or at least minimize the level of risk associated with a business operation. It ensures that an organization identifies and understands the risks to which it is exposed. This process also guarantees the creation and implementation of effective plans, to prevent losses or reduce the impact if a loss occurs. Risk management has five main steps. First, identify and analyze exposures. Companies need to asses not only key risk areas, but also every single risk area that can harm their business. Along with this step of identification and analysis, the likelihood and impact of the risks should be measured. Companies should rank risks in order of importance, before moving to the next step. The second step is examining risk management techniques. In this step, companies must develop all the possible options that can help to manage risks successfully. The third step is the selection of the risk management technique. The chosen technique must be based on the previous analysis that the company should have done, so that it is the best alternative for...

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