risks and global projects_project management

7/31/2019 Risks and Global Projects_Project Management

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Risk Management in Global Project


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Rohit Dayal Shah

[email protected]

Supply Chain Project Management


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Contents

Introduction ...................................................................................................................................... 4

Complexity of international projects .................................................................................................. 4

Risks associated with Overseas Developmental Project ..................................................................... 5

Political Risk and Response Strategy .............................................................................................. 5

Economic/Financial Risk & Response Strategy ............................................................................... 6

Cultural Risk & Response Strategy ................................................................................................. 7

Integrated Risk Management Model for Global Projects .................................................................... 7

Web-based Integrated Risk Management System .......................................................................... 8

Fuzzy Risk Assessment Model ........................................................................................................ 9

Conclusion ......................................................................................................................................... 9

Bibliography ...................................................................................................................................... 9

APPENDIX ........................................................................................................................................ 11

Appendix-1 .................................................................................................................................. 11

Appendix 2 .................................................................................................................................. 12

Appendix 3 .................................................................................................................................. 13

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IntroductionDue to globalisation, the world has become a smaller place and restrictions have reduced

improving the business environment. In order to increase market share and financial stability,

the scope of project management has increased as businesses are being conducted

internationally in a more collaborative manner (lientz, 2003). Some of the recent

developments are:-

Mergers and Acquisitions: Numerous projects have arisen due to mergers and

acquisitions in various sectors such as pharmaceuticals, energy, banking,

insurance, media, manufacturing, entertainment, etc.

International agencies and non-profit organizations have increased their activity

by increasing number of projects in different locations.

Multinational companies are undertaking new projects in many countries to

improve their profitability.

Internationalization of businesses has been possible due to progresses made in technologyand transport system. It can be further summarized due to following factor such as a)

Economies of scale, b) Standardisation of products & services and c) Advances made in

technology, e.g.- internet, mobile communication, logistics capabilities, etc.

The paper reviews the complexity of international project, classifies risks and risk

management approach. Finally it lays emphasis on usage of integrated risk management

model.

Complexity of international projects

International projects tend to be complex and very risky than domestic projects (Ijentz et al,

2006). Literatures by Han et al, 2007 and He, 1999 further support the statement by

observing more risks and high likelihood of loss/failure due to high exposure of global market

in which all information is not known and further, various uncertainties also needs to be

taken into consideration.

The complexity of international projects may be due to following factors:

Culture and Style: Cultural differences exist all around the world, sometimes even

simple communication can be misunderstood and may be blown out of proportion

Language Barriers

Technology Usage: Different organisations are accustomed to using technologies.

The standard of technology may vary in different countries

Regulations: Projects may need to undergo changes with regards to local rules and

regulations

Multiple Currencies: Dealing in different currencies and adding to it, currency

exchange fluctuations may increase the complexity in project planning and budget.

Taxation Policy

Different time zones: Creates a communication issues and hence there may be

delays in resolving simple problems.

Business Policy: due to high complexity, an organisation may have different

business policy in different country.


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These factors impacts immensely and they may affect the project in the following ways:

It may be a challenge to define the purpose of the project.

Defining scope may also be huge task as scope needs to different in different

countries.

Creating project management structure may also be another issue. Issues such ashow many project leaders should be designated, should there be only one or should

there be different in different countries.

Identifying, assembling and allocating team-members for roles for different countries

may be cumbersome.

Due to huge geographical distance and time difference, communication may be

difficult and hence there may be delays in resolving issues. Issues resolving may

further difficult as same issues needs to be tackled differently in different countries.

Planning of project may vary in different countries because to differences in available

technologies.

Risks associated with Overseas Developmental ProjectIn line with the literature provided by Wang et al, 2004, El-Sayegh, 2007 described risk

management as formal and orderly process of identifying, analysing and responding to risks

throughout the lifecycle of project to obtain the optimal degree of risk elimination, mitigation

and control. Kayis & Ahmad, 2007 further support the statement by stating risk identification

is very important step in risk management to possibly act against the risk.

Overseas development projects have different types of risks compared to domestic projects.

Figure 1 in appendix provides a detailed list of risks in overseas construction projects.

Different authors have categorized risk associated with international business in different

ways. Miller (1992) proposed that global business risks can be categorised in 5 types:

natural, societal, legal, political and governmental. Khattaba et al., 2007 argued that

societal risk and legal may be included in political risk therefore risks in international projects

can be classified in four types, however the paper discusses political risk, economic risk and

cultural risk only.

Political Risk and Response Strategy

Economic/ Financial Risk and Response Strategy

Cultural Risk and Response Strategy

Natural Risk and Response Strategy

Political Risk and Response Strategy

According to Howell, 2001, political risks are political events or societal events of the

country that impacts the business environment that causes sponsors to loose money or not

make profits as per expectation. Political risks may be caused by unfavourable policy

changes, amendment of laws & regulations, restrictions on fund repatriation and restrictions

on imports (Ozorhon et al, 2007).

It is the most common risk for any international project (Khattaba et al, 2007) as project maytake certain time-frame to be completed. During that time, there may be political election and


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therefore change of leadership which may have an effect on project completion. Furthermore

Ling et al, 2006, bought to light that government may change the policy to favour local

organisations. The policies focus on decreasing foreign ownership or limiting foreign

businesses to assume disproportional amount of risk. For instance, politicians of India in

election year may pass unfavourable resolutions to restrict foreign organisations to show

their interest in developing and nurturing local industries. Further the research conducted byKhattaba et al., 2007 indicated that political risks are major concern to Jordanians

international projects in which it was observed that host-society & interstate risks were

more riskier than host-government risks.

Response Strategy

Various researches showed the difficulty of international projects to mitigate political risks as

it is hard to forecast political risk. However Ling et al, 2006, came out with the suggestion for

project stakeholders to reduce the impact of political risks. It may be put forward in thefollowing points:

Political hotspots must be avoid while evaluating and selecting project

location

To lessen the impact of possible political risks, shorter time-frame project

should be given preference over longer duration project.

Maintain good relationship with local government

obtain insurance for political risks

Economic/Financial Risk & Response Strategy

Organization objective to achieve predetermined economic benefits may be compromised if

economic & financial are not managed in best possible level manner (Kangari, 1995).

Ozorhon et al, 2007 classified financial risks as domestic countrys macroeconomic

conditions such as foreign exchange rate, inflation and fluctuations in economic conditions.

The profitability of the overseas project is also by impacted by special taxation law for foreign

corporations and also on transferring of funds to their home country. For instance, in United

Arab Emirates (UAE), there is huge economic risks due to material & labour shortage,

inflation and fluctuating prices (El-Sayegh, 2007 and Ling & Hoi, 2006).

Response Strategy

Various researchers have suggested different mitigation strategies, they have been

elaborated below:

According to Ozorhon et al, 2007, the financial risks can be mitigated by making sure

that contract between the firms are clearly stated and duties, responsibilities and

liabilities of the firms are unambiguous.

Risks such as interest rate fluctuation, inflation, tax -rate increase, foreign currencyexchange rate, etc may be allocated to local party to diminish the effect. Wang et al,


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2001 concurred that risk of currency fluctuation could be avoided by making a dual-

currency contract wherein some section of project could be dealt in local currency

and other in foreign currency as per planning.

According to Dey et al, 2001, some part of financial risks could be also be dealt as

political risks, hence reduction in political risk may also mitigate financial risks.

Cultural Risk & Response Strategy

Project team members should be fully aware of culture of host country in order to

successfully manage the project. It is one of the important risks that need adequate

attention. Its can cause delays, misunderstandings and unproductiveness in the projects if

not managed properly (Low et al., 2001). Normally in overseas project, people from different

nationalities with different language, culture, background and perspective come together for

a project. These factors make co-ordination and communication very difficult. For instance,

Ling et al., 2006 observed that it was difficult for Singaporean firm to co-ordinateconstruction project in India due various cultural differences between foreigners and the local

people.

Response Strategy

Li et al., 2006 suggested that project manager should try change the foreign

personnel working culture instead of local people. Foreign workers should try to

appreciate local culture and try to win the trust of local people thereby making the

work environment very friendly and productive.

Pheng et al, 2000 concurred with the view that project manager role is very important

for the success of overseas project. Project Manager should be fully aware of thecross-cultural differences and should be able to manage and train his team well

accordingly. Author further identified five key skill-sets necessary for the overseas

project managers, leadership, communication, inter-personality, flexibility and

adaptability. Low et al, 2001 further emphasized the need for project managers

experience in the local environment to be the critical factor in the success of projects

success.

Integrated Risk Management Model for Global Projects

Different risk factors could be dealt in various ways; various methods of managing individualrisks have already been studied in the previous sections. However Dikmen et al., 2007

suggested that success of the company relies in combing the risks and dealing with them in

integrated responsive manner. Various methods of managing individual risks have already

been studied in the previous sections. Further He, 1999 and Han et al., 2007 supported the

author by specifying that identifying and assessing all the risks in overseas project life-cycle

is very complex, time-consuming and costly. Thus there is need for integrated risk

management model.

Various authors have come out with many integrated response strategy. He, 1999 came

forward with a model that combined risk probability analysis with risk impact assessment for

identification and managing the risks in overseas construction projects. Some other modelsare described below:


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Web-based Integrated Risk Management System

Han et al., 2007 developed the model which could continuously check for various risks

during the life-cycle of the project. It could be easily accessed anytime by anyone, from any

location in the world and with any device. The model is designed specifically for overseas

construction companies which has following objectives;

Identification of critical risk factors that may hinder the success of the project

Provides reliable decision for different phase of project taking in consideration

the criticality of the risk.

Identifies many alternative mitigation strategies for risks that may affect the

outcome of the project.

Monitors all types of risks and theiractual or residual impacts'

Figure 1: Integrated risk management process (Han et al., 2008)

Han et al., 2008 have grouped life-cycle of the project in five stages:

a) Establishment of a project plan

b) Bid preparation period

c) Contracting

d) Construction ande) Commissioning and operation

The risk management process has decision making capability from the bidding stage

to project completion. The risk management system prepares extensive decision

support models and calculates profitability of the project in different circumstances. It

helps stakeholders to evaluate merits and demerits of going ahead with the project

(Han et al., 2008).


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Fuzzy Risk Assessment Model

Dikmen et al, 2007 suggested the risk assessment model to rate cost overrun risk in global

construction projects by using the fuzzy logic concept. The model provided the process of

quantifying risk rating and hence could be managed accordingly by following the guidelines.

International construction organisation had already used the model for managing risks during

bidding process. The model is integrated into computer system and uses influence

diagrammatic method. Appendix 2 and 3 shows influence diagram of country risk and

construction project, both the diagrams are integrated by using fuzzy logic to create a

integrated risk management model for overseas projects. The author further elaborated that,

though the model was developed for their organisation, however it could be modified for

various variations such as different countries, different industries, risk-criterion, etc.

ConclusionThe paper describes the importance of overseas projects due to globalization. It further

investigates various risks of the global projects and the ways to manage them. Three riskscategories (political, economical & cultural risk) and their response strategy were discussed

in details. Among those political risk was quite difficult to manage because of its uncertainty

and choosing a good location, project-type and maintaining good relations were important

tools in managing the risk. Economic risk could be mitigated by having a proper contract and

sharing the risk with local counterpart. Cultural risks could be mitigated by making sure that

project manager has great cross-cultural skills. The individual should have good

understanding and respect for local culture.

Further it was analysed that dealing with individual risks differently is very cumbersome,

complex and expensive, hence there is need for integrated risk management strategy.However, it is suggested that different projects in different countries have unique risks and

should choose the risk management system accordingly.

Bibliography

Dey, P.K., and Ogunlana, S. O. (2004). Selection and application of riskmanagement tools and techniques for build-operate-transfer projects, IndustrialManagement & Data Systems, Volume 104 Number 4 2004 pp. 334-346

Dikmen, I., Birgonul, M. T. and Han S. (2007). Using fuzzy risk assessment to ratecost overrun risk in international construction projects International Journal of Project

Management, Volume25, Issue 5, July 2007, Pages 494-505

El-Sayegh, S. M.(2007). Risk assessment and allocation in the UAE constructionindustry , International Journal of Project Management, Article in Press

lientz, B. and Rea, K. (2006) Project Management for the 21st Century. 3rd ed.California: Elsevier, p.265-277.

Han, S. H., Kim, D.Y., Kim, H., and Jang, W. (2007). A web-based integrated systemfor international project risk management, Automation in Construction, Volume 17,Issue 3, March 2008, Pages 342-356

Zhi, H. (1995). Risk management for overseas construction projects, InternationalJournal of Project Management ,Volume 13, Issue 4, August 1995, Pages 231-237

Howell, L. (2001)., The handbook of country and political risk analysis (3rd ed.)., ThePolitical Risk Services Group,USA


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Kangari, R. (1995)., Risk management perceptions and trends of US construction, JConstruct Eng Manage121 (4).,pp. 422429

Khattaba, A. A., Anchorb, J. and Daviesb, E. (2007). Managerial perceptions ofpolitical risk in international projects, International Journal of Project Management,Volume 25, Issue 7, October 2007, Pages 734-743

Ling, F. Y. Y and Hoi, L. (2006). Risks faced by Singapore firms when undertakingconstructionprojects in India, International Journal of Project Management, Volume24, Issue 3, April 2006, Pages 261-270

Low, S. Ph., Shi, Y. (2001). Cultural influences on organizational processes ininternational projects: two case studies, Work Study, Volume 50 Number 7 2001 pp.276-285

Miller, K. (1992). A framework for integrated risk management in internationalbusiness, Journal of International Business Studies (1992).,pp. 311331

Ozorhon, D., Arditi, D., Dikmen, I. and Birgonul, M. T. (2007). Effect of host countryand project conditions in international construction joint ventures, InternationalJournal of Project Management Volume 25, Issue 8, November2007, Pages 799-806

Pheng, L. S., Leong, C. H. Y. (2000). Cross-cultural project management for

international construction,International Journal of Project Management,Volume 18,Issue 5, 1 October 2000, Pages 307-316 Wang, S.Q., Tiong, R.L.K., Ting, S.K. and Ashley, D. (2000). Evaluation and

management of foreign exchange and revenue risks in Chinas BOT projects,Construct Manage Econ 18 (2000)., pp. 197207


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APPENDIX

Appendix-1

Figure 1: Risk Identification for overseas construction projects (Zhi, 1995)


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Appendix 2

Figure-2: Influence diagram of country risk (Dikmen et al, 2007)


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Appendix 3

Figure-3: Influence diagram of construction risk (Dikmen et al, 2007)


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