risk management is the name given to a logical and systematic method of identifying, analyzing,...
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Risk Management is the name given to a logical and systematic method of identifying, analyzing, treating and monitoring the risks
involved in any activity or process.
What is Risk Management?What is Risk Management?What is Risk Management?What is Risk Management?
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The Risk Management process:
Establish the contextEstablish the context
Identify the risksIdentify the risks
Analyse the risksAnalyse the risks
Evaluate the risksEvaluate the risks
Treat the risksTreat the risks
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‘Risk’ is dynamic and subject to constant change, so the process includes continuing:
Communication & consultationCommunication & consultation
Monitoring and reviewMonitoring and review
and
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The Risk Management process:
The strategic and organisational context in which risk management will take place.
For example, the nature of your business, the risks inherent in your business and your priorities.
Communicate & consultCommunicate & consult
Establish the contextEstablish the context
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The Risk Management process:
Communicate & consultCommunicate & consultMonitor and reviewMonitor and review
Analyse the risksAnalyse the risks
How likely is the risk event to happen? (Probability and frequency?)
What would be the impact, cost or consequences of that event occurring? (Economic, political, social?)
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The Risk Management process:
Communicate & consultCommunicate & consultMonitor and reviewMonitor and review
Evaluate the risksEvaluate the risks
Rank the risks according to management priorities, by risk category and rated by likelihood and possible cost or consequence.
Determine inherent levels of risk.
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The Risk Management process:
Communicate & consultCommunicate & consultMonitor and reviewMonitor and review
Defining types of risk, for instance, ‘Strategic’ risks to the goals and objectives of the organisation.
• Identifying the stakeholders, (i.e.,who is involved or affected).
• Past events, future developments.
Identify the risksIdentify the risks
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The Risk Management process:
Treat the risksTreat the risks
Develop and implement a plan with specific counter-measures to address the identified risks.
Consider:
• Priorities (Strategic and operational)
• Resources (human, financial and technical)
• Risk acceptance, (i.e., low risks)
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The Risk Management process:
Document your risk management plan and describe the reasons behind selecting the risk and for the treatment chosen.
Record allocated responsibilities, monitoring or evaluation processes, and assumptions on residual risk.
Communicate & consultCommunicate & consultMonitor and reviewMonitor and review
Treat the risksTreat the risks
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The Risk Management process:
Communicate & consultCommunicate & consult
Risk Management policies and decisions must be regularly reviewed.
Risk Management policies and decisions must be regularly reviewed.
Monitor and reviewMonitor and review
In identifying, prioritising and treating risks, organisations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns, or government policies).
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Risk Management OptionAvoidanceControlAssumptionRisk TransferKnowledge & Research
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AvoidanceUse an alternate approach that does not have the risk. This
mode is not always an option. There are programmes that deliberately involve high risks in the expectation of high gains. However, this is the most effective risk management technique if it can be applied.
ControlControlling risks involves the development of a risk reduction
plan and then tracking to the plan. The key aspect is the planning by experienced persons. The plan itself may involve parallel development programmes, etc.
AssumptionSimply accepting the risk and proceeding. However, there
can be a tendency within organisations to gradually let the assumption of a risk take on the aura of a controlled risk.
Risk TransferMeans causing another party to accept the risk, typically by
contract or by hedging. Liability among construction or other contractors is often transferred this way.
Knowledge & ResearchThis mode is not "true" risk handling, but rather a technique
for strengthening other techniques.
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The Principles of Risk Management
Every project manager and business leader needs to be aware of the practices and principles of effective risk management. Understanding how to identify and treat risks to an organisation, a programme or a project can save unnecessary difficulties later on, and will prepare managers and team members for any unavoidable
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Organisational ContextStakeholder InvolvementOrganisational ObjectivesM_o_R ApproachReportingRoles and ResponsibilitiesSupport StructureEarly Warning IndicatorsReview CycleOvercoming Barriers to M_o_RSupportive CultureContinual Improvement
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A fundamental principle of all generic management methods is that all organisations are different. Project managers, programme managers and risk managers need to consider the specific context of the organisation in order to ensure thorough identification of risks and appropriate risk treatment procedures.
Organisational Context
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•It is easy for a management team to become internalised and forget that stakeholders are also key participants in everyday business procedures, short-term projects and business-wide change programmes.
•Understanding the roles of individual stakeholders and managing stakeholder involvement is crucial to successful. Stakeholders should, as far as is appropriate, be made aware of risks to a project or programme.
Stakeholder Involvement
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•Risks exist only in relation to the activities and objectives of an organisation.
Example :- Rain is a negative risk for a picnic, a positive risk for drought-ridden farmland and a non-risk for the occupants of a submarine.•It is imperative that the individual responsible for risk management understands the objectives of the organisation, in order to ensure a tailored approach.
Organisational Objectives
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The processes, policies, strategies and plans within the M_o_R framework provide generic guidelines and templates within a particular organisation.These guidelines are based on the experience and research of professional risk managers from a wide range of organisations and management backgrounds.Following best practices ensures that individuals involved in managing the risks associated with an organisation's activity are able to learn from the mistakes, experiments and lessons of others.
M_o_R Approach
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Accurately and clearly representing data, and the transmission of this data to the appropriate staff members, managers and stakeholders, is crucial to successful risk management.
Reporting
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•Fundamental to risk management best practice is the clear definition of risk management roles and responsibilities.
•Individual functions and accountability must be transparent, both within and outside an organisation
Roles and Responsibilities
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A support structure is the provision within an organisation of standardised guidelines, information, training and funding for individuals managing risks that may arise in any specific area or project.This can include
a centralised risk management teamstandard risk management approachbest-practice guidelines for reporting and reviewing organisational risks
Support Structure
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This establishes the regular review of identified risks and ensures that risk managers remain sensitive to new risks, and to the effectiveness of current policies.
Review Cycle
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A supportive culture is essential for ensuring that everybody with risk management responsibilities feels confident raising, discussing and managing risks.A supportive risk management culture will also include evaluation and reward of risk management competencies for the appropriate individuals.
Supportive Culture
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Types of Risk
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TYPES OF RISK
Liquidity Risk
Credit Risk
Market RiskIndustry &
Service Risk
Management & Operational
Risk
Political Risk
Legal RiskSystem Risk
Disaster Risk
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INDUSTRY AND SERVICE RISK
Economic Risk
Service Risk
Market Structure
Business Dynamics
Competion Risk
Customer Relation Risk
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MANAGEMENT AND OPERATIONS RISK
•Risk to property
•Changes in technology
•R&D Risk
•Personal Risk such as Labour Turnover, training risk etc
•Enviromental and Pollution control
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MARKET RISK
•Raw material rates
•Quantity,Quality,Interest rates etc
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•Elections
•War Risk
•Country and Area Risk
•Insurance Risk like Fire,Strikes etc
•Fiscal/Monetary Policy Risk including Taxation Risk
POLITICAL RISK
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•Credit Worthiness risks
•Provisions for doubtful and bad debts
CREDIT RISK
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•Financial Solvency and Liquidity Risk
•Tax Risks
•Borrowing limits,delays
LIQUIDITY RISK
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•Natural Risks
•Man made Risks
DISASTER RISK
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•System Capacity
•System Reliability
•Data Integrity
SYSTEMS RISKS
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Operational Risk
Four Principles of ORM
•Accept risk when benefits outweigh the cost.•Accept no unnecessary risk.•Anticipate and manage risk by planning.•Make risk decisions at the right level.
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HR Related Risks IntegritySkills- confidence level-difficult to adjust-stress-
change managementRecruitment & Retention-costObsolescence and reskilling Industrial Relations-redeployment- impacting
operationsAgeing profile
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LEGAL RISK
Environmental risk
Employee liability
risk
Product liability
risk
Compliance default
risk
Tax compliance
risk
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Product liability risk Manufacturing companies are exposed to this risk. The risk is
minimized by outsourcing the work. Employee liability risk This relates to the deduction and payments of employee welfare
statutory dues like provident fund, ESI contribution, bonus, gratuity, wages etc. Further, the obligation to provide equal opportunity to all is a vital area.
Compliance default risk This is one major area where most of the companies are caught in
the wrong foot. A company is required to comply with the provisions of various laws e.g. Companies Act, Income tax Act, Labour legislation and industry specific special legislation such as Banking Regulation Act by banking companies, Electricity Act by electricity companies etc.
Tax compliance risk Tax is a governmental due and timely payment of tax is a must for
a company. Environmental risk The protection of environment is a vital issue and companies are
required not to create environmental hazards. Pollution control measures are prescribed for protecting the environment.
IPR protection risk Intellectual Property Rights protection is a major risk for many
companies especially in the knowledge and R&D sector.
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TATA CORUS
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Types of RisksIndustry & Services Risks
Business dynamics : Globally the steel manufacture has undergone a major churning by way of M&A resulting in fewer players in the industry.
Economic risks: Corus is very strong in the manufacture of steel for packaging and transportation sectors and the industry demand from these sectors can cause worry.
Services risks: Market structure: Steel Industry is a industry
that is susceptible to cyclical ups and downs in tune with global economic trends.
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Competition Risks: Competition from existing steel players like Arcelor Steel, Thyssen Krup Stahl is a risk in this category.
Customer Relation Risk: Tata and Corus enjoy an excellent reputation in the eyes of all stakeholders and there is no CR risk.
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Management and Operations Risks: There are no major management and operations risk as there is no:Risk to property Risk because of clear and well defined work
processes Risk due to changes in technology /upgradation as
the Corus plant at Ijumuiden in Netherlands is one of the most energy-efficient plants in the world.
R & D Risks Agency Network Risks Personnel Risks as Tatas have a benevolent image
among their employees.
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Environmental and Pollution Control
Regulations Location risk as their plants are located close
to their markets
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Market Risks Raw Material Rates: The Steel Industry is
facing spiking of raw material prices viz. availability of good quality iron ore, coking coal etc.
Quantities, quality, suppliers, lead time, interest rates risks and forex risks viz. fluctuation of currency, interest rate risks.
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Political risks There are no political risks to Tata Corus as
the acquisition of Corus was expected to get regulatory approval.
Credit riskThere is no credit risk likely to be encountered by the merged entity.
Disaster risksThere are no disaster risks likely to be encountered as the plants located in Europe are fully equipped to cope with any eventuality.
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System risks The system risks that are being encountered are
that the system capacities are dedicated towards a narrow segment of the market which requires specialized needs.
Legal risks Legal risks like contractual risk arising out to
employee security benefits will be a major legal risk.Financial Risk The takeover was done at a higher price (of 608
Pence per Share) and this can be drag on the balance sheet of Tata Steel .