Risk Management ProcessLecture 05

By: Kanchan Damithendra

Risk Management

• Risk measurement and the means of attempting to deal with the risks we face are

collectively termed Risk Management.

• In a commercial contest this is often a well-defined and scientific process, attempting to

answer questions such as .

“How much will it cost ,if things go wrong”,

“what are the chance of the risk becoming a reality”

Why Risk Management?

• Risk management specifically deals with the uncertainties inherent in any development intervention.

• By identifying and evaluating these uncertainties development organizations are better placed to be able to make informed decisions and this will lead to fewer losses and more gains

• Proper risk management will reduce not only the likelihood of an event occurring, but also the magnitude of its impact

Direct Vs Indirect Costs

Success Stories…IN 2009………

The 9.0-magnitide earthquake that struck off the East coast of Japan was among the five most powerful earthquakes on record.

25,000 people died, went missing or were injured. 125,000 buildings were damaged and economic losses were estimated at $200 billion.

In the weeks following the catastrophic earthquake, 80% of the automotive plants in Japan suspended production.

Nissan's production capacity was perceived to have suffered most from the disaster compared to its competitors. Six production facilities and fifty of the firm's critical suppliers suffered severe damage. The result was a loss of production capacity equivalent to approximately 270,000 automobiles."

What was NISSAN’s Strategy???"During the next six months, Nissan's production in Japan decreased by only 3.8% compared to an industry wide decrease of 24.8%. Nissan ended 2011 with an increase in production of 9.3% compared to a reduction of 9.3% industry wide.“!!!!!

The company had prepared a continuous readiness plan encompassing its suppliers including:

an earthquake emergency response plan

a business continuity plan

Disaster simulation training.

Nissan deployed these advanced capabilities throughout risk management and along the supply chain.

Risk Management Scandals..Tokyo-Mitsubishi Bank derivatives loss (1997)NatWest trading loss (1997)LTCM hedge fund failure (1998)American Express CBO loss (2001)Enron bankruptcy (2001)Conseco bankruptcy (2002)Worldcom bankruptcy (2002)Parmalat accounting fraud (2003)National Bank of Australia trading losses (2004)AIG accounting fraud (2005)Amaranth Advisors hedge fund failure (2006)Bank of Montreal natural gas trading loss (2007)Lehman Brothers bankruptcy (2008)Toyota unintended acceleration recalls (2009)BP Deepwater Horizon oil spill (2010)MF Global bankruptcy (2011)JPMorgan “London whale” trading loss (2012)JPMorgan $14.6 billion in regulatory fines (2013)General Motors recalls (2014)

BP Deepwater Horizon oil spill (2010)

https://www.youtube.com/watch?v=KEgBmdWPnts

Risk Management Framework

Management Structure

Risk Appetite

The amount and type of risk that an organization is willing to take in order to meet their strategic objectives

• Totally subjective

• Based on perceptions

• Personal

• May be measurable or not

• May change very regularly as environment changes

Risk Culture

The system of values and behaviors present in an organization that shapes risk decisions of management and employees. One element of

risk culture is a common understanding of an organization and its business purpose

Risk Culture

A strong risk culture has below characteristics

• A clear and well communicated risk strategy

• Information sharing across the organization adopting the standards

• Rapid escalation of threats and concerns

• Visible & consistent role modelling by senior level managers

• Incentives which encourage the people “to do the right thing”

Risk Planning

This Risk Planning will help you to:

• Identify risks within your project

• Categorize and prioritize each risk

• Determine the likelihood of the risks occurring

• Identify the impact on the project if risk does occur

What is a Risk Management Plan?

• Methodology – Approach, tools, & data

• Roles & Responsibilities

• Budgeting – Resources to be put into risk management

• Timing – When and how often

• Risk Categories – Risk Breakdown Structure (RBS)

• Definitions – Risk probabilities and impact

Risk IdentificationRisk identification is the process by which an organization systematically and continuously identifiesrisks and uncertainties. It is intended to develop information on;

-sources of risk: sources of factors or hazards that may cause positive or negative outcomes

- hazards: are situations that create or increase the chance of loss or its severity

- risk factors: are speculative risks similar to hazards which influence the risks in financial

instruments

- perils: are causes of loss

- exposures to loss: are the objects or situations facing possible loss or gain

Sources of Risk

• Physical Environment:

• Social Environment:

• Political Environment:

• Legal Environment:

• Operational Environment:

• Economic Environment:

• Cognitive Environment:

Identification of Risks

• Brainstorming

• Delphi Technique

• Interviewing

• Root Cause Identification

• SWOT Analysis

• Assumption Analysis

• Diagramming Techniques

Brainstorming

What is it?Brainstorming is used solely for generating ideas; it does not involve analysis.

• Generate a variety of ideas in a short time

• Produce new and creative ideas

Brainstorming Activity

• Develop a fishbone diagram for below example

Risk – High employee turnover in the sales department leading to low productivity and low revenues

Identify the main factors and causes