Risk management techniques
Using the below article, develop a three- to four-page analysis (excluding the title and reference pages), of the techniques Dr. Kallman has identified for managing risks. In this analysis, compare Dr.Kallman’s techniques to the techniques recommended in the second article you researched. Explain why you agree or disagree with each authors’ recommendations. Describe other factors you believe should be considered in risk management. The assignment should be comprehensive and include specific examples.
Vol. 54 – Issue: September 01, 2007 Identifying Risk
by James Kallman
Creating a risk management program is a critical prerequisite to measuring risk. But once we have a clear understanding of our organization’s goals, the risk associates who will help and the standard operating procedures, it is time to roll up our sleeves and tackle the next step—risk analysis.
First, we should have a clear understanding of what types of risks we will be measuring. One way to categorize risks is as strategic, operational or economic. Recall that strategic risks are those opportunities that have long-term variations in outcomes. This includes reputation risk, quality risk, brand risk and others that have multi-year impacts. Operational risks are the traditional business and hazard risks that we have been managing for years. These risks have variations in outcomes within one operating period. Economic risks are political and financial situations that are created by micro- and macroeconomic events. Examples include exchange rate risk, kidnap and ransom risk, convertibility risk, and interest rate risk. We try to separate risks into these general categories because it facilitates the understanding of the associated perils and hazards. The better we can describe our risks, the easier it is to treat them.
Next in the risk identification step, we set up the parameters that will clearly define each risk and its characteristics. In ERM we have pure and speculative risks. For each type of outcome we have some established and some new terms to describe the risks. First, we have exposures for pure risks and projects for speculative risks. Exposures are those things that are subject to a loss in value. Projects (from the finance discipline) are activities that may result in a gain or loss in value. These risks are further defined by describing the cause of the change in subject’s value. Changes in pure risk exposure values are caused by perils; changes in speculative project values are caused by opportunities. Finally, we define those conditions or events that increase the probability and/or impact of the change. In pure risk, these are called hazards; in speculative risk, these are drivers.
We try to describe risks in great detail in order to facilitate their management. The better a risk is understood, the more obvious the solutions will be.
Now that we have a set of parameters to describe our enterprise’s risks, we can head into the thick of operations to help our risk associates identify their risks. There are seven proven techniques for identifying risks. Each has its advantages and disadvantages, so a risk manager should use all of these techniques to ensure due diligence.
Statistical analysis. When sufficient (and relevant) internal or industry data is available, a statistical analysis of outcomes is a popular method of forecasting mean values and standard deviations. Actuaries have numerous models to analyze loss data; managerial accountants also have many models to project future sales, costs and financial outcomes. One advantage of this method is that the results are generally accepted by decision makers. The numbers are “real” and reflect past performance. As long as the environments are reasonably stable, the forecasts from these loss runs and sales reports yield acceptable projections. The disadvantage of statistical analysis is that the analyst often lacks enough sufficiently reliable data to create statistically valid inferences—a large number of independent, homogeneous observations are crucial for proper statistical predictions. Fortunately, computer simulations (e.g., cat modeling) can help alleviate this challenge in many cases.
Another problem with this technique is that business environments can be so dynamic that past performance may not be a valid predictor of future outcomes. Companies are constantly changing products, services, processes, operating territories and many other variables. With such variation, past performance may be of limited value in predicting the future. In many organizations, however, the environments are sufficiently stable, allowing risk managers to base future risks off of historic information.
Contract analysis. People sign or agree to contracts on almost a daily basis. Examples include purchase orders, sales orders, employment agreements, mergers and acquisitions, and insurance contracts. Yet seldom do people carefully read or review these contracts with either their risk manager or general counsel. As a result, the organization may be exposed to many contractual risks. Therefore, it is prudent to read (or have a qualified attorney read) the contracts to identify these risks. Examples of risk that may be found in contracts include hold harmless agreements, exculpatory clauses or waivers. Some of these risks could place the organization in a vulnerable position. The advantage of this technique is that it forces the organization to carefully read through all of its contracts. A disadvantage is that usually a qualified (and expensive) legal counsel must be engaged to decipher the legalese.
Surveys and checklists. As familiar tool to risk managers, risk surveys and insurance checklists are quite popular. Some advantages of insurance checklists are that the intermediary usually provides them free of charge and often completes them for the insured. A disadvantage is that the hazards identified are often limited to those most commonly insurable. In contrast, risk management surveys are more comprehensive and help identify many unique risks. However, their disadvantages include greater cost and time required. Both checklists and surveys are good starting points to build an individualized risk register for your organization. This register can be updated as your organization grows.
Chart analysis. Charts provide an excellent visual guide to identifying risks. One of the best is an organizational flow chart. This illustrates the flow of materials, resourcesand time through the organization’s processes. Flow charts are lauded for their ability to identify bottlenecks and superfluous processes. A disadvantage of flow charts is they may only reflect the intended flows as dictated by policy. Actual flows may be modified in practice, making it important for the risk manager to verify the charts with the people actually performing the work. Another important chart to review is the organizational chart, which can identify any potential human resource bottlenecks.
Expert interviews. An organization’s experts can be external or internal. External experts include bankers, accountants, lawyers, auditors, safety engineers and consultants. Each brings a broad base of experience and knowledge to the risk manager. Their diverse familiarity with other organizations’ operations may enable the risk manager to discover new or unimagined risks. The disadvantage of using external experts is they charge for their services. Internal experts are not limited to senior managers. Often the person on the shop floor has specialized knowledge and experience that permits identification of many risks not imagined in the board room or anticipated by system designers. This practical, hands-on knowledge makes these workers vital risk associates. Strategic risk identification is the purview of C-level managers and board members. Their visionary skills should be enhanced with the ability to forecast variations from the intended long-range goals. The risk manager’s interview should facilitate this brain-storming session.
Financial statement analysis. Different financial statements are prepared for several audiences. For example, managerial reports are intended as internal tools to set goals and budget resources. They may contain accounts that are not reported in external reports that must follow generally accepted accounting principles (GAAP). For example, expected losses and incurred but not reported losses, plus a buffer for variation, can be reported in budgets. The organization’s annual report also provides a plethora of risk management information. Asset groups can be identified in the balance sheet; important variable expenses are identified on the income statement; and critical cash flows are revealed on the statement of cash flows. However, one of the most revealing parts of the annual report is the notes section. Significant and material disclosures are presented in the notes. The risk manager should carefully study and review this section with the CFO.
Personal inspections. Perhaps the most effective technique for identifying risks is for risk managers to get up out of their chairs, get away from their computers and books, and get out onto the shop floor. This is where the risk manager can observe the operational risks first hand. Personal inspections should be regarded as a required part of risk identification. Regular (and sometimes surprise) inspections assure the most effective application of this risk identification technique.
Investors, board members of public and private companies, bankers, and other business leaders should be looking to collaborate around a private-sector solution to the chronic problems undermining the financial services marketplace, says Mitchell Kertzman, partner with Hummer-Winblad, an nGenera board member, and previously chairman and CEO of Sybase, a billion-dollar publicly traded company.
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Bold proposal for new financial services industry operating model, based on findings of multi-million dollar research project
AUSTIN, Texas, Oct. 21 /PRNewswire/ — Saying that updated regulations and fresh capital are necessary but insufficient to solve the world’s economic and financial services crisis, nGenera Corporation proposed today a set of comprehensive design principles and initiatives that would resuscitate the financial services industry for the long-term. The high-level design recommendations are part of a research paper available immediately at the nGenera website (www.nGenera.com), entitled Risk Management 2.0. They were co-developed by Don Tapscott, influential nGenera business strategist and co-author of the best-selling business book Wikinomics: How Mass Collaboration Changes Everything, and colleague Bob Tapscott.
“To restore confidence in the bludgeoned financial services industry, we need a new operating model based on unprecedented transparency and the wide-spread sharing of intellectual property. This is completely feasible and affordable in a digitized world,” said Don Tapscott, chairman of the nGenera Innovation Network. “As financial instruments became more complex they became more opaque, which has proved disastrous. Sunshine is the best disinfectant, and sunlight is what smart digital tools would provide.”
“Investors, board members of public and private companies, bankers, and other business leaders should be looking to collaborate around a private-sector solution to the chronic problems undermining the financial services marketplace,” says Mitchell Kertzman, partner with Hummer-Winblad, an nGenera board member, and previously chairman and CEO of Sybase, a billion-dollar publicly traded company. “They need to rethink many assumptions of the industry’s basic modus operandi and we believe nGenera’s design proposal for ‘risk management 2.0’ is the kind of insightful approach to a new operating model that is needed.”
The research findings – available from the nGenera website home page or directly from the URL http://www.ngenera.com/convs/show/11565 was produced for nGenera clients as part of a multi-million dollar, proprietary research program. “Among the design principles,” said co-author Bob Tapscott, “investors would be able to ‘fly over’ and ‘drill down’ into a Collateralized Debt Obligation’s underlying assets. With full data, they can readily graph the payment history, and correlate information such as employment histories, recent appreciation (or depreciation), location, neighborhood pricings, delinquency patterns, and recent neighborhood offer and sales activities. Now that AAA ratings have proved worthless, currently investors don’t have a glimmer of what they are being asked to buy. And they won’t start buying until they fully understand what they are purchasing and know that the price is fair.”
About the Authors
Don Tapscott is chairman of the innovation network arm of nGenera Corporation, an Austin, Texas-based technology company serving a marquee list of Global 2000 customers. He is the author of 13 books, most recently Grown Up Digital: How the Net Generation is Changing Your World (October 2008).
Robert (Bob) Tapscott is provisional CEO of RISConsulting, specializing in cutting-edge financial risk and capital management solutions for large institutions worldwide. As a former CIO he has a diversified background in organizational creation and transformation having delivered bottom-line results from the successful design, construction, and implementation of new strategies, systems and processes.
Reference: nGenera proposes high-level design recommendations for risk management 2.0. (2008, Oct 21). PR Newswire. Retrieved from http://search.proquest.com/docview/448474876?accountid=32521+
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Risk management techniques
For a company to manage risks, it has to have techniques of identifying those risks before they happen. This way, the risks will be managed to avoid negatively affecting the company. Risk management involves the identification and alleviation of the foreseen risks avoiding affecting an organization. Dr. Kallman talks of various techniques of identifying and managing risks. According to Kallman, there are seven proven methods………………..
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