ENTERPRISE RISK MANAGEMENT

INTRODUCTION TO RISK
• Rapidly changing economy creates an
expanding array of risks to be managed for
viability and success of company
• Companies face task of managing risk
exposures
• Challenges and demands of market,
customer expectations, regulatory
authorities, employees and shareholders
present company with lots of risks
 INTRODUCTION TO RISK
• Greater emphasis on successful identification,
quantification, mitigation and control of risk
• Unforeseen developments that threaten the
operations of a company are recognized early
enough and business continuity plans put in
place
• Info systems confronted with task of
anticipating possible changes to environment
 INTRODUCTION TO RISK
• Need to predict effects of undesired
outcomes on company performance
• Risks related to market slump inflation etc to
be analyzed for effects
• Attempts made to examine how risk affects
various functional areas and how they impact
others in a cause effect chain
• Critical factor for risk measurement is margin
of fluctuation
 DEFINING RISK
• OXFORD DICTIONARY DEFINES RISK
AS DANGER OR POSSIBILITY OF LOSS
OR DAMAGE
• IN BUSINESS RISK MGT COULD
INVOLVE EITHER A DANGER OR AN
OPPORTUNITY eg INVESTMENT IN
SHARES WHERE FLUCTUATION ARE
HIGHER IS A RISK WITH A GAIN OR A
LOSS
 DEFINING RISK
• PROJECT ESTIMATION AND SALES
FORECASTING ARE RISKS
• RISK IS ALSO A REFLECTION OF INFO
AVAILABLE TO TAKE GOOD DECISIONS
• DECISIONS MADE UNDER
UNCERTAINTY OR CONDITIONS OF
IGNORANCE ARE RISKIER THAN
OTHERS
 UNCERTAINTY
• Uncertainty is doubt about ability to achieve
desired outcome
• Doubt can be produced by incomplete or
incomprehensible data
• Uncertainty is the risk of an outcome not
achieving its desired results or not happening
at all
• Risk characteristics influence the level of
uncertainty
 LEVELS OF UNCERTAINTY
• None-outcome predicted with precision
• Objective uncertainty – outcomes
identified probability known
• Subjective uncertainty-outcome identified
probability unknown
• Exploration-Outcomes and probability
unknown
 WHAT IS ENTERPRISE RISK
MGT
• ERM IS A PROCESS EFFECTED BY
MGT APPLIED IN STRATEGY ACROSS
THE COMPANY
• DESIGNED TO IDENTIFY POTENTIAL
EVENTS THAT MAY ADVERSELY
AFFECT THE COMPANY OPERATIONS
AND MANAGE CUM CONTAIN THEM TO
LIMIT THE ADVERSE EFFECTS
 ERM DEFINITION BY COSO
• COSO IS COMMITTEE OF SPONSORING ORGANIZATIONS
• ERM IS AN ONGOING AND FLOWING PROCESS THRU THE ORG TO
THE STRATEGIC, TACTICAL AND OPERATIONAL PROCESSES
• ERM DESIGNED TO IDENTIFY HOW POTENTIAL EVENTS IF THEY
OCCUR WILL AFFECT THE ORG
• ERM ALSO ATTEMPTS TO STUDY THE CAUSE EFFECT CHAIN
RELATIONSHIP OF RISKS
• RISK MGT SHOULD BE VIEWED AS A CORE COMPETENCY AND
SHOULD BE PART OF EVERYBODYS JOB
• INVOLVES ALIGNMENT OF STRATEGIES PROCESSES SYSTEMS
PEOPLE AND INFO SO THAT EARLY WARNING BELLS ARE SOUNDED
FOR RISKS , NOTICED AND ACTED UPON
• RISK = LIKELIHOOD * IMPACT
• COST OF RISK = EXPECTED LOSS IF EVENT TAKES PLACE + COST
OF CAPITAL REQD TO COVER UNEXPECTED LOSS
 ENTERPRISE RISK MGT
• ATTEMPTS TO MINIMIZE NEGATIVE EFFECTS
OF RISK
• ENCOMPASSES
-ALIGNING RISK AND STRATEGY
-IMPROVING RISK RESPONSE
-REDUCES OPERATIONAL SURPRISES BY
ASSESSING ALL POSSIBLE RISKS ASSOCIATED
WITH OPERATIONS WITH MITIGATION PLANS
-IDENTIFYING AND
MANAGING MULTIPLE AND CROSS
ENTERPRISE RISKS
 NEED FOR ERM
• CHANGING CUSTOMER NEEDS AND WANTS
AND GAP IN UNDERSTANDING OR
DELIVERY OF PRODUCT/SERVICE RESULTS
IN MARKET AND REVENUE LOSSES
• ACCOUNTING AND REPORTING
DIFFERENCES SUCH AS UNJUSTIFIED
REVENUE RECOGNITION CONTROL
WEAKNESSES
• CALL FOR STRONGER CORPORATE
GOVERNANCE TO HAVE STRONGER
INTERNAL CONTROLS
WHY ADOPT ERM PROGRAM
• DEALS EFFECTIVELY WITH POTENTIAL FUTURE
EVENTS THAT CREATE UNCERTAINTY
• RESPOND IN A MANNER THAT REDUCES LIKELIHOOD
OF DOWNSIDE OUTCOMES AND INCREASES THE
LIKELYHOOD OF UPSIDE POTENTIAL
• IDENTIFIES AND HELPS DIFFERENTIATE RISKS AND
OPPORTUNITIES ALONGWITH EVENTS THAT HAVE A
NEGATIVE IMPACT WHICH REPRESENTS RISKS AND
EVENTS WHICH HAVE A POSITIVE IMPACT WHICH
REPRESENTS OPPORTUNITIES
• MANDATED BY CLAUSE 49 OF LISTINGS AGREEMENT
BY SEBI AND SUCH LIST APPEARS IN MANAGEMENT
DISCUSSION AND ANALYSIS
BUSINESS RISK CONTINUUM
POLICY
• Research by PWC led to the definition of
Business Risk Continuum Policy
• BRC highlights risk as 1.Opportunity
2.Uncertainty 3.Hazard
• All global companies deal with these 3
elements
 RISK AS OPPORTUNITY
COST
• Views risk as an opportunity cost
• Greater the risk greater the potential for
loss
• Managing risk as an opportunity is a
proactive function
 RISK AS UNCERTAINTY
• Company can determine how to be proactive
in preventing uncertain future events from
negatively impacting company performance
• Management of uncertainty seeks to ensure
that actual performance falls within defined
range
• Uncertainty has strong defensive element
because it involves sacrifice of opportunity to
mitigate losses
 RISK AS UNCERTAINTY
• Risk management seeks to reduce
variance between anticipated outcomes
and actual results
 RISK AS HAZARD
• Risk viewed as a negative event including
financial losses, loss of reputation
• Mitigation of degree of damage than can
be caused if an event took place
 DEVELOPMENT OF RISK
POLICIES
• Opportunity perspective-Is there anyway
opportunities can be identified by analyzing
risks
• Uncertainty perspective-How can company
meet its monthly targets and what are
consequences of failure
• Hazard perspective-What are contingency
plans should a negative event actually occur
 IMPORTANCE OF RISK MGT
• Risk is inevitable if objective to be
achieved
• Effective mgt of risk helps manage and
improve performance contributing to
-better service delivery
-effective management of change
-better contingency
management
 KEY AREAS TO BE
ADDRESSED
• Corporate Governance related focus on
managing risks
• Capability to achieve required outcome
• Need for improved reporting of risks
• Ability to understand onset of risk based
crisis and preempt
 OPERATIONAL RISKS AT RIL
• Rising cost of imported crude
• Cost inflation in upstream activities
• Cost inflation of steel
• EPC contract price inflation
• Shortage of rigs hampering exploration
• Availability of manpower and equipment is
limited
• not mentioned is what happens if govt withdraws
subsidy on retail price of fuel
 OBJECTIVES OF RISK MGT
• Protection against financial consequences of
accidental losses which are catastrophic in
nature
• Minimization of total long term cost for all
activities related to identification prevention
and control of losses and other consequences
• Creation of a system of internal procedures
providing a periodic assessment of fluctuating
exposure to loss
 RISK MGT FUNCTIONS
• Identification and measurement of risk
• Selection of appropriate risk mgt technique for
risk resolution which includes assumption ,
reduction transfer etc
• Development and maintenance of risk information
systems for timely and accurate recording of
losses , claims and other risk related costs
• Benchmarking of risk performance against agreed
performance mgt parameters
 CRITICAL SUCCESS
FACTORS OF RISK
• Ownership of risk mgt by senior mgt
• Risk policy clearly communicated and
understood by all
• Mgt of risk closely linked to achievement of
objectives especially 3rd party risks
• Adoption of risk framework that is repeatable
• Risk mgt should be embedded in processes
and be monitored and reviewed
• Appropriate use of business continuity
 ERM QUESTIONNAIRE
• HAVE SENIOR MGT IDENTIFIED CATEGORIES AND TYPE OF
RISKS INHERENT IN THE COPMPANY
• ARE THE EMPLOYEES AWARE OF VARIOUS CATEGORIES
AND TYPES OF RISKS IN THEIR AREA OF OPERATIONS
• IS SENIOR MGT UPDATED ABOUT RISKS(SEPARATE
DECLARATION IN BALANCE SHEET) SUCH AS ECONOMIC,
REGULATORY, MARKET CUSTOMER REQMNT CHANGES
• HOW ARE RISKS LIMITED
• HOW DOES SENIOR MGT RESPOND TO RISKS THAT MAY
ARISE FROM CHANGES IN COMPETITIVE ENVIRONMENT OR
FROM CHANGES IN TECHNOLOGY
• ARE ALL SUPPLY CHAIN RISKS COVERED
 PRIMARY DRIVERS OF ERM
• CORPORATE GOVERNANCE REQUIREMENTS
• GLOBALIZATION
• EMERGING MARKETS
• UNDERSTANDING OF THE THREE LEVELS OF RISK
• REGULATORY AND SOCIETAL COMPLIANCES
• COMPETITIVE ADVANTAGE
• PRODUCT INNOVATION
• TECHNOLOGY CURRENCY
• INFORMATION REVOLUTION
• BUSINESS PROCESS TRANSFORMATION
 FLAVORS OF RISK
• PURE RISK-FOCUS ON BAD THINGS
HAPPENING
• OPPORTUNITY/SPECULATIVE RISKS-
FOCUS ON POSITIVE RISKS eg
PROBABILITY THAT SHARE VALUE
GOES UP OR DOLLAR VALUE WILL FALL
FURTHER
• BOTH LOOK TOWARDS THE FUTURE
AND UNCERTAIN OUTCOMES
 CATEGORIES OF RISKS
• STRATEGIC-ALIGN RISKS WITH LONG TERM GOALS,
STRATEGIES,VISION, MISSION,CRITICAL SUCCESS FACTORS.
• TACTICAL-ALIGN RISKS WITH MEDIUM TERM PLANNING
ESPECIALLY MARKET RISKS,PRODUCT RISKS,COMPETENCY
AND CAPACITY RISKS ETC
• OPERATIONAL-ALIGN RISKS WITH ACTIVITIES PERFORMED
WHICH IF NOT CARRIED OUT TO EXPECTED OUTCOMES OR
ARE UNABLE TO BE CARRIED OUT FORM PART OF THE
OPERATIONAL RISK
• REPORTING-RELIABILITY OF INTERNAL CONTROLS AND
REPORTING
• COMPLIANCE-COMPLIANCE TO LAWS AND REGULATIONS
 CLASSIFICATION OF RISKS
• POLITICAL
• ECONOMIC
• BUSINESS OR OPERATIONAL
• LEGAL
• SERVICES
• CONTRACTUAL
• TECHNOLOGICAL
• REPUTATIONAL
• ENVIRONMENTAL RISKS
• CUSTOMER RELATIONS
• AGENCY NETWORK
 CLASSIFICATION OF RISKS
• PRODUCT/SERVICE
• ETHICAL CODE
• INFORMATIONAL AND REPORTING
• INTERNAL CONTROL
• MARKET RISKS
• FINANCIAL RISKS SUCH AS RUPEE APPRECIATION
• REGULATORY AND STATUTORY COMPLIANCE
• TRANSACTIONAL BUSINESS CONTINUITY
• COMPETITION
• GEOGRAPHIC
 CLASSIFICATION OF RISKS
• PROFESSIONAL
• PROCESS OR ACTIVITY
• HUMAN RESOURCES
• CREDIT WORTHINESS
• LIQUIDITY
• DISASTER
• CAPACITY AND CAPABILITY
• OBSOLESCENCE
• DATA INTEGRITY AND CURRENCY
• FOREIGN CURRENCY
• OIL PRICE HIKE
 BUSINESS RISK
• BUSINESS MGT IS ABOUT MANAGING
RISK DUE TO OPERATING ENVT WHICH
IS FULL OF UNCERTAINTIES
• EVERY DECISION MADE HAS AN
UNCERTAINTY OR RISK ABOUT IT AND
HAS IMPLICATIONS POSITIVE OR
NEGATIVE
• RISK CARRIES WITH IT AN
OPPORTUNITY FOR GAIN OR LOSS
 OPERATIONAL RISK
• RISKS ARISING OUT OF OPERATIONAL
PROCESSES NOT DELIVERING THE
EXPECTED/PLANNED OUTCOMES
RESULTING IN NEGATIVE IMPACT FOR
THE COMPANY
• IMPACT COULD BE FINANCIAL,SAFETY
RELATED,TECHNICAL OR
REPUTATIONAL
SOURCES OF OPERATIONAL
RISK
• LACK OF WELL ESTABLISHED
PROCEDURES AND CONTROLS
• POORLY TRAINED OR ILL MOTIVATED
WORK FORCE
• INCOMPETENCE
• INATTENTION OR LACK OF ATTITUDE
• FATIGUE,MONOTONY,BOREDOM
• POOR MAINTENANCE OR OBSOLETE
MACHINES
 MARKET RISK
• ALL BUSINESSES THAT SELL GOODS
AND SERVICES ARE CONCERNED
WITH MARKET RISK
• MARKET RISK IS ALWAYS
ASSOCIATED WITH SALE OF
PRODUCTS ESPECIALLY WITH NEW
PRODUCT DEVELOPMENT
 FINANCIAL RISKS
• RISKS ARISING OUT OF
UNPROFITABLE OPERATIONS OR
LACK OF SALES OR RISING
OPERATIONAL COSTS OR MOUNTING
ACCOUNTS RECEIVABLE
 PROJECT RISK
• PROJECT MGT PRINCIPLES INVOLVE
GETTING THE JOB DONE IN TIME,
WITHIN BUDGET, ACCORDING TO
SPECIFICATIONS LEADING TO
CUSTOMER SATISFACTION
• PROJECT MGT ADDRESSES THREAT
OF PROJECT DELIVERABLES
 REGULATORY RISKS
• ALL BUSINESS HAVE REGULATIONS
WHICH ARE REGULATED AT LOCAL
NATIONAL OR INTERNATIONAL LEVELS
• REGULATORY RISKS ARE RISKS
BORNE OUT OF DELIBERATE OR
INADVERTENT VIOLATION OF LAWS
AND REGULATIONS AND THE
ENSUEING IMPACT
 ENVIRONMENTAL RISKS
• PHYSICAL-GEOLOGICAL AND
CLIMATIC RISKS FROM PHYSICAL
ENVT eg FOR GROWING FRUITS
• SOCIAL-CUSTOMERS CHANGING
TASTES AND PREFERENCES
CHANGING VALUE SYSTEMS
• POLITICAL-CHANGES IN
GOVERNMENTS OR LAWS
 ENVIRONMENTAL RISKS
• LEGAL-RISK OF VIOLATION OF LAWS
• ECONOMIC-INFLUENCE OF GLOBAL
ECONOMY OR NATIONAL ECONOMY
• OPERATIONAL-MANNER IN WHICH
ORGANIZATION WORKS
• COGNITIVE-ENVIRONMENT OF THE
MIND.MGRS KNOWLEDGE MAY BE
INFLUENCED BY ABSENCE OR INNADEQUATE
INFO OR MENTAL INADEQUACY TO
COMPREHEND
 RISK IN NEW PRODUCT
DEVELOPMENT
• MARKET RISK-IS THERE A MKT DEMAND
FOR PRODUCT
• TECHNICAL RISK-ARE WE TECHNICALLY
ABLE TO DESIGN AND BUILD WORKING
MODEL FOR PRODUCT
• OPERATIONAL RISK-WILL WE BE ABLE
TO PRODUCE THE PRODUCT
EFFICIENTLY ON A LARGE SCALE
 RISKS IN NEW PRODUCT
DEVELOPMENT
• FINANCIAL-WILL THE NEW PRODUCT
BE PROFITABLE
• REGULATORY-WILL THE NEW
PRODUCT BE IN COMPLIANCE WITH
REGULATIONS ESPECIALLY PHARMA
 TYPES OF RISKS
• IDENTIFIED RISKS-RISKS HAVE BEEN DETERMINED
FOR EXISTING PROCESSES USING ANALYTICAL
TOOLS BUT NOT VETTED FOR FUTURE OPERATIVE
CONFIGURATION
• UNIDENTIFIED RISK-RISK NOT YET IDENTIFIED
• ACCEPTABLE RISK-PART OF IDENTIFIED RISK THAT
IS ALLOWED TO CONTINUE AFTER CONTROLS ARE
APPLIED. RISK IS ACCEPTABLE WHEN FURTHER
EFFORTS TO REDUCE WILL RESULT IN
DEGRADATION
• RESIDUAL RISK-PORTION OF RISK THAT REMAINS
AFTER EFFORTS HAVE BEEN EMPLOYED .
RESIDUAL RISK IS ACCEPTABLE RISK +
UNIDENTIFIED RISK
 ACTIVITIES IN RISK MGT
• Defining scope of operational risk mgt eg
market risk mgt
• Defining and putting in place requisite
roles and responsibilities and reporting
structures
• Identifying categories of risks,
prioratising ,mapping them onto business
processes to understand impact
 ACTIVITIES IN RISK MGT
• Attributing root cause of occurrence to each
risk and estimating the type of loss and
financial impacts
• Working with business to assign ownership
for each risk
• Assisting business to identify risks and
implement requisite controls and avoidance
procedures which involve measures
methods tools
 EXPOSURES TO RISK
• PHYSICAL ASSET EXPOSURE-
VEHICLES,BUILDINGS
• FINANCIAL ASSET EXPOSURE-
MONEY,INVESTMENTS,RECEIVABLES
• HUMAN ASSET EXPOSURE-
EMPLOYEES,DIRECTOR LIABILITY
• LEGAL LIABILITY EXPOSURE-PRODUCT
LIABILITY,EMPLOYEE
DISCRIMINATION,ENVT POLLUTION etc
 EXPOSURES TO RISK
• MORAL LIABILITY EXPOSURES-
ETHICAL AND VALUE BASED
COMMITMENTS AND OBLIGATIONS eg
ABC IN BLR MISS WORLD FOR
SPASTICS SOCIETY
 PHYSICAL ASSET
EXPOSURES
• PROPERTY TYPE-PERSONAL,REAL
(LAND,BUILDING);FIXED,MOVABLE
• LOSS/GAIN TYPE
• CAUSE OF GAIN/LOSS TYPE
 FINANCIAL ASSET
EXPOSURES
• FINANCIAL ASSETS HAVE A VALUE
DETERMINED AT ISSUANCE THAT
-MAY VARY DURING ASSET
LIFETIME -WILL BE INFLUENCED
BY RANGE OF OUTSIDE FACTORS
SUCH AS ECONOMY AND GOVT
POLICIES
 HUMAN ASSET EXPOSURE
• ALL STAKEHOLDERS ARE HUMAN
ASSETS
• KEY EXPOSURES CAN BE
-PREMATURE DEATH
-DISABILITY/POOR HEALTH
-OLD AGE/RETIREMENT
-UNEMPLOYMENT
-POVERTY
-PRODUCTIVITY
 COST OF RISK
• Measure of the impact of a risk
• Reflects the direct cost of losses sustained
in a period and indirect costs arising from
risks (intangible costs, misallocation of
resources, cost of risk reducing measures)
• Cost of risk = Risk mgt dept payroll + Risk
control expenditure + insurance + uninsured
losses + risk mgt service vendor fees
 ERM FRAMEWORKS
• ERM FRAMEWORKS DESCRIBE A
METHODOLOGY FOR DEFINING MEASURING
AND CONTROLLING/ELIMINATING RISKS
• FRAMEWORKS CONSIDER ACTIVITIES AT ALL
LEVELS
-ENTERPRISE LEVEL
-SUBSIDIARY LEVEL
-DIVISION LEVEL
-LOCATION LEVEL
-DEPARTMENT LEVEL
-PROCESS LEVEL
-EMPLOYEE LEVEL
 ERM FRAMEWORKS
• IDENTIFY RISKS
• EVALUATE THE RISKS
• SET ACCEPTABLE LEVELS OF RISK
• IDENTIFY SUITABLE RESPONSE TO RISK
• IMPLEMENT RESPONSES
• GAIN ASSURANCE ABOUT EFFECTIVENESS
• REVIEW
 VARIOUS ERM FRAMEWORKS
• TURNBULL GUIDANCE
• KING 2 REPORT
• RISK MGT STDS BY FEDERATION
EUROPEAN RISK MGT ASSOCIATION
• AUSTRALIA/NZ STD 4360-RISK MGT
• COSO ERM INTEGRATED FRAMEWORK
• INST OF MGT ACCT-ASSESSING INTERNAL
CONTROL ON FINANCIAL REPORTING
• BASEL 2
• STANDARDS AND POOR ERM
 COSO ERM INTEGRATED
FRAMEWORK
• EVENT IDENTIFICATION
• INFORMATION ACCESS AND
ANALYSIS
• RISK ASSESSMENT
• RISK CONTROL ACTIVITIES
• RISK CONTROL MONITORING
METHODOLOGY OF COSO ERM
INTEGRATED FRAMEWORK
• SET STRATEGY AND OBJECTIVES
-IDENTIFIERS
-ASSESS RISKS THRU RISK
MODELING -TREAT RISKS
-CONTROL RISKS

-COMMUNICATE AND MONITOR

 ERM AND CORPORATE
GOVERNANCE
• ERM TIES IN CLOSELY WITH CORPORATE GOVERNANCE BY
-IMPROVING INFO FLOW
BETWEEN COMPANY AND BOARD REGARDING RISKS
-INITIATING DISCUSSIONS
OF STRATEGIES FOR RISK CONTAINMENT
-MONITORING KEY RISKS
-IDENTIFYING ACCEPTABLE
RISKS -FOCUSING ON IDENTIFIED
RISKS -IMPROVING
DISCLOSURES TO STAKEHOLDERS ABOUT RISKS
-KNOWING
WHICH PROCESSES ARE AT HIGH RISK -LISTING
OF RISKS STATUTORY IN MGT DISCUSSION AND ANALYSIS
SECTION OF BALANCE SHEET
 CRITICAL SUCCESS FACTORS
FOR ERM
• OWNERSHIP OF ERM PROCESS BY SENIOR MGT
• CLEAR RISK MGT POLICY COMMUNICATED TO ALL
EMPLOYEES
• EXISTENCE AND ADOPTION OF A FRAMEWORK
FOR RISK MGT THAT IS REPEATABLE
• RISK MGT ACTIVITY IMBEDDED IN PROCESSES
• MGT OF RISK CLOSELY LINKED TO ACHIEVEMENT
OF OBJECTIVES
• RISKS ASSOCIATED WITH WORKING WITH OUTSIDE
AGENCIES ASSESSED AND CONTROLLED
• APPROPRIATE USAGE OF BUSINESS CONTINUITY
PLANNING
 IMPEDIMENTS TO ERM
• OVER OPTIMISM OR LACK OF
UNDERSTANDING OF PROCESS
INTRICACIES AND DYNAMICS
• CHANGE MGT OPPOSITION
• LACK OF IDENTIFICATION OF SOFT
RISKS
 BENEFITS OF ERM
• BETTER INFORMED DECISIONS
• INCREASED CERTAINTY OF OUTCOMES
• EFFECTIVE CHANGE MGT
• REDUCED FRAUDS
• INCREASED MGT ACCOUNTABILITY
• SMOOTHER GOVERNANCE PRACTICES
• ABILITY TO MEET STRATEGIC GOALS
• REDUCED OPERATIONAL, TACTICAL AND
STRATEGIC RISKS
PROCESS RISK MANAGEMENT
 PROCESS RISK MGT
• Risk is possibility of desired results not achieved
• For business decisions risk is events that have
strong effects on overall performance
• Performance monitoring systems have early
warning systems for risks or bottlenecks
• Risks categorized as financial (liquidity,
profitability ),or by origin (recession ,market
changes) or by position in value chain
 PROCESS RISK MGT
• RISK INVOLVES ELEMENT OF UNCERTAINTY
• IMPACT OF RISK IS A VERY SERIOUS CONSIDERATION
• RISK HAS TWO PRIMARY COMPONENTS
-PROBABILITY OF OCCURRENCE OF EVENT
-IMPACT OF EVENT OCCURRING IN MONEY
TERMS
• RISK IS A FUNCTION OF LIKELIHOOD AND IMPACT
• RISK CONSTITUTES A LACK OF KNOWLEDGE OF FUTURE
EVENTS(OUTCOMES)
• FAVORABLE OUTCOMES ARE CALLED OPPORETUNITIES AND
UNFAVORABLE RISKS
• CAUSE OF RISK ITSELF IS A RISK AND IS CALLED A HAZARD
• IN THIS CASE RISK IS A FUNCTION OF HAZARD AND
SAFEGUARD
• RISK INCREASES WITH HAZARD BUT DECREASES WITH
SAFEGUARD
 MOTIVES FOR PRACTISING
RISK MGT
• MANAGING RISK OF STAKEHOLDERS
• COMPLYING WITH REQUIREMENTS OF
REGULATORS,FI AND OTHERS WITH
INTEREST IN THE FIRM
• MANAGING OR AVOIDING COSTS
ASSOCIATED WITH BANKRUPTCY
• ASSAYING MORAL AND ETHICAL CONCERNS
• MODERATE THE IMPACT OF RISKS AND
UNCERTAINTY IN DAILY TASKS
 STRUCTURE OF RISK MGT
• TIME-DETERMINE THE NECESSARY/ AVAILABLE
CAPACITY FOR IMPLEMENTING RISK MGT AND
DECIDE AT WHAT MOMENTS RISKS WILL BE
ASSESSED
• MONEY-DETERMINE THE COSTS AND YIELDS OF
RISK MGT AND ASCERTAIN WHETHER COSTSFIT
WITHIN BUDGET
• QUALITY-DETERMINE THE QUALITY
CHARACTERISTICS REQD OF RISK MGT AND HOW
TO GUARANTEE QLTY CHARACTERISTICS
• INFORMATION-DETERMINE MANNER IN WHICH
RISKS ARE TO BE REPORTED AND RECORDED
• ORGANIZATION-ORGANIZATION STRUCTURE REQD
TO IMPLEMENT RISK MGT
 PROCESS RISK MGT
• PLAN FOR RISK
• RISK ASSESSMENT THROUGH
IDENTIFICATION AND ANALYSIS
• RISK ASSESSMENT THROUGH IMPACTS
• RISK ASSESSMENT THROUGH RISK
HANDLING STRATEGIES
• RISK RESOLUTION THROUGH
MONITORING AND CONTROLLING RISK
 PROCESS RISK PLANNING
• PROCESS OF DEVELOPING AND
DOCUMENTING AN ORGANIZED
COMPREHENSIVE STRATEGY FOR
IDENTIFYING AND TRACKING RISK
ISSUES,DEVELOPING RISK HANDLING
PLANS , PERFORMING CONTINUOUS RISK
ASSESSMENTS TO DETERMINE HOW RISKS
HAVE CHANGED
• PREPARE TO MANAGE RISKS CONSCIOUSLY
• CAREFUL RISK PLANNING
 RISK IDENTIFICATION AND
ANALYSIS
• PROCESS INVOLVES IDENTIFYING AND
ANALYSING AREAS AND CRITICAL
PROCESS RISKS TO INCREASE THE
LIKELIHOOD OF MEETING COST
PERFORMANCE AND SCHEDULE
OBJECTIVES
• RISK IDENTIFICATION IS THE PROCESS OF
IDENTIFYING AND DOCUMENTING THE RISK
• RISK ANALYSIS IS THE PROCESS OF
EXAMINING IDENTIFIED RISK ISSUES TO
REFINE THE RISK DESCRIPTION,ISOLATE
THE CAUSE AND DETERMINE THE EFFECTS
 RISK IDENTIFICATION
EFFORTS
• LOOKS FOR POSSIBLE SOURCES OF
TROUBLE IN ORG
• ADDRESSES QUESTIONS LIKE HOW
MIGHT OUR OPS FAIL? WHAT
WEAKNESSES CAN WE FIND IN OUR
INTERNAL CONTROL SYSTEMS?WILL
WE BE ABLE TO DELIVER GOODS BY
THE CONTRACTED DATE
 RISK IDENTIFICATION
EFFORTS
• IDENTIFY ALL POTENTIAL RISK ISSUES
• OBJECTIVE OR SUBJECTIVE SOURCES
• OBJECTIVE
-RECORDED EXPERIENCES FROM PAST
PROJECTS IN TERMS OF LEASONS LEARNT,
CURRENT PERFORMANCE DATA
• SUBJECTIVE
-EXPERIENCE BASED UPON
KNOWLEDGEABLE EXPERTS
 SOURCES OF RISK
• INTERNAL-RISKS ORIGINATING WITHIN
PROJECT . TWO MAIN CATEGORIES OF
INTERNAL RISK ARE MARKET AND
TECHNICAL
• EXTERNAL-RISKS INCLUDE RISKS
EMANATING FROM OUTSIDE THE PROJECT.
Eg COMPETITORS ACTIONS, CUSTOMER
BEHAVIOUR, SUPPLIER RELATIONS, LABOR
AVAILABILITY,SUB CONTRACTOR
PERFORMANCE
 RISK ANALYSIS
• DETERMINE THE OBJECTIVE
• IDENTIFY THE RISKS
• DETERMINE THE MOST IMPORTANT
RISKS
• IDENTIFY THE CONTROL MEASURES
• SELECT CONTROL MEASURES
 RISK ANALYSIS
• BEGINS WITH DETAILED STUDY OF
RISK ISSUES IDENTIFIED
• OBJECTIVE IS TO GATHER INFO
ABOUT RISK ISSUES
• RISK ANALYSIS DONE ON FOLLOWING
TOPICS
-COST EVALUATION
-SCHEDULE EVALUATION
-TECHNICAL EVALUATION
 TOOLS IN RISK ANALYSIS
• LIFE CYCLE COST ANALYSIS
• MONTE CARLO SIMULATION
• IMPACT ANALYSIS
• PROBABILITY ANALYSIS
• DECISION ANALYSIS
• WBS SIMULATION
• TECHNOLOGY TRENDING
• TOTAL RISK ASSESSING COST ANALYSIS
 TOOLS IN RISK ANALYSIS
• LIFE CYCLE COST ANALYSIS
• MONTE CARLO SIMULATION
• IMPACT ANALYSIS
• PROBABILITY ANALYSIS
• DECISION ANALYSIS
• WBS SIMULATION
• TECHNOLOGY TRENDING
• TOTAL RISK ASSESSING COST ANALYSIS
 USAGE OF RISK ANALYSIS
• ACHIEVE MORE CONTROL ON
ACTIVITIES
• IMPROVE SETTING OF PRIORITIES
• TAKE WELL FOUNDED DECISIONS
 RISK IMPACT
• DETERMINE CONSEQUENCES
ASSOCIATED WITH OCCURRENCE
THROUGH QUANTITATIVE ANALYSIS
 LEVELS OF RISK
• HIGH RISK – SUBSEQUENTIAL IMPACT
ON COST SCHEDULE HIGH
• MODERATE RISK – SOME IMPACT ON
COST SCHEDULE
• LOW RISK – MINIMAL IMPACT ON
COST SCHEDULE
• RISK RATINGS GIVEN
• RATING = PROBABILITY * IMPACT
 RISK PROBABILITY
• 1 HIGHLY UNLIKELY CHANCES
• 2 SLIGHT CHANCES
• 3 LIKELY CHANCES
• 4 HIGHLY LIKELY CHANCES
• 5 ALMOST CERTAIN CHANCES
 RISK IMPACT
• 5 HUGE-DISASTROUS BUSINESS
EFFECTS DIFFICULT TO RECOVER
• 4 LARGE-SIZEABLE IMPACT ON
BUSINESS BUT POSSIBLE TO
RECOVER
• 3 MEDIUM-MODERATE EFFECT ON
BUSINESS
• 2 LOW-MINIMAL IMPACT ON BUSINESS
• 1 NO EFFECT ON BUSINESS
 RISK HANDLING
STRATEGIES
• IDENTIFIES EVALUATES SELECTS AND
IMPLEMENTS OPTIONS INORDER TO SET
RISK AT ACCEPTABLE LEVELS
• INCLUDES SPECIFICS ON WHAT SHOULD BE
DONE , WHEN IT SHOULD BE
ACCOMPLISHED , WHO IS RESPONSIBLE,
AND ASSOCIATED COSTS AND SCHEDULE
• RISK HANDLING OPTIONS INCLUDE
ACCEPTANCE,AVOIDANCE, MITIGATION,
LIMIT,PREVENTION,SHARING AND
TRANSFER
 RISK HANDLING OPTIONS
• ACCEPTANCE/RETENTION = RISK EXISTS AWARE
OF CONSEQUENCES WILLING TO WAIT AND SEE
WHAT HAPPENS.ACCEPT THE RISK AND IMPACT
• AVOIDANCE = WILL NOT ACCEPT THE RISK AND
HENCE ACTIVITY NOT DONE
• RISK MITIGATION/CONTROL = TAKE REQD
MEASURES TO CONTROL RISK BY DEVELOPING
CONTINGENCY PLANS
• RISK LIMIT = PROCEED STEP BY STEP
• RISK TRANSFER = TRANSFER RISK TO OTHERS
eg INSURANCE
 RISK HANDLING OPTIONS
• PREVENTION = COUNTER MEASURES PUT
IN PLACE TO STOP THREAT OR PROBLEM
FROM ARISING OR TO PREVENT IT FROM
HAVING IMPACT ON BUSINESS
• SHARING = SEEK PARTNERSHIP TO SHARE
RISK
 CHOICE OF TRANSFER OR
RETENTION
• DECISION TO TANSFER OR RETAIN
RISK GOVERNED BY FIVE FACTORS
-DEGREE OF CONTROL OVER
RISK -COST OF FINANCING
OPTIONS -QUALITY/VALUE
OF SERVICES
-OPPORTUNITY COST
-TAXATION ISSUES
 RISK TRANSFER THROUGH
INSURANCE
• DIRECT PROPERTY LOSSES
• INDIRECT PROPERTY LOSSES-LOSS OF
INCOME TIED TO INTURRUPTED
BUSINESS OPERATIONS AND COSTS
ASSOCIATED WITH IMPLEMENTATION
OF DISASTER RECOVERY PROCEDURES
• LIABILITY-DEALING WITH LAWSUITS
FROM PUBLIC FOR PERSONAL INJURY
OR PROPERTY DAMAGE
 RISK TRANSFER THROUGH
INSURANCE
• PERSONNEL RELATED LOSSES-
EXPENSES INCURRED IN RELATION
TO INJURIES SUFFERED BY
EMPLOYEES ON JOB
• PERFORMANCE RELATED LOSSES-
LOSS OF INCOME WHEN A JOB IS NOT
COMPLETED
 MEASURES FOR RISK
HANDLING
• TYPE OF MSR EXAMPLE -
AVOIDANCE -AVD INVEST IN ORG

-SHARE -PARTNERSHIP
- MITIGATE -HIGH MARK UPS
- LIMITATION -UPPER LIMIT ACR
- ACCEPT -NEW PROD LANCH
- TRANSFER -INSURANCE -
PREVENT -SAFETY PROCESS
 RISK MONITORING
• MONITOR EVENTS TO CHECK IF ANY
UNTOWARD EVENTS ARE BUILDING UP AND
NEED TO BE HANDLED BEFORE THEY
BECOME A CRISIS
• MONITORING EFFORT IDENTIFIES
PROBLEMS AND LISTS STEPS TO BE TAKEN
TO CONTROL THEM
 RISK MONITORING
• PROCESS THAT SYSTEMATICALLY TRACKS
AND EVALUATES PERFORMANCE OF RISK
HANDLING ACTIONS AGAINST
ESTABLISHED METRICS THROUGHOUT THE
ACQUISITION PROCESS
 RISK CONTROL
• STRATEGY THAT SEEKS TO
AVOID,PREVENT,REDUCE OR
ELIMINATE RISK AND UNCERTAINTY
• INCLUDES MEASURES TAKEN TO
INCREASE UPSIDE POTENTIAL AND
TO INCREASE PROBABILITY OF
FAVORABLE OUTCOMES
 RISK FINANCING
• ENABLES ORG TO REIMBURSE
LOSSES THAT OCCUR AND FUND
PROGRAMS TO REDUCE RISK
• FINANCING RISK CAN ENTAIL
TRANSFER,MITIGATION,LIMITATION
 RISK CHAIN
• LOSSES OR GAINS CAN BE LINKED TO
A SET OF INTER LOCKING ELEMENTS
CALLED RISK CHAIN
• LINKS ARE AS FOLLOWS
 RISK CHAIN LINKS
• ENVIRONMENT LINK-REFERS TO GENERAL
CONDITIONS IN WHICH LOSS OR GAIN
EVENTS OCCUR
• HAZARD/RISK FACTOR LINK-WITHIN ENVTS
CERTAIN CONDITIONS ELEVATE CHANCES
OF LOSS OR GAIN OR POTENTIAL
MAGNITUDE OF LOSS OR GAIN
• EXPOSURE LINK-REFERS TO NATURE AND
CONDITION OF EXPOSURE +/-
 RISK CHAIN LINKS
• PERIL/OPPORTUNITY LINK-REFERS TO
PROCESS THROUGH WHICH THE
INTERACTION OF HAZARD/RISK FACTOR
AND EXPOSURE PRODUCES LOSS OR GAIN
• OUTCOME LINK-REFERS TO DIRECT AND
MEASURABLE IMPAQCT OF HAZARD/RISK
FACTOR ON EXPOSURE
• CONSEQUENCE LINK-REFERS TO LONG
TERM EFFECT OF THE LOSS
 FUNCTIONAL AREAWISE
RISK
• R & D - Late replacement of old products
• SALES - Sales decline,price crash
• PROCUREMENT - Supplier problems
• PRODUCTION - Below expectation output
• SHIPPING - Incorrect,late deliveries
• CUST.SERVICE – Warranty issues,recalls
• FINANCIALS – Share value decline,liquidity risk
• PERSONNEL – Severance cost,low productivity
RISKS ARISING FROM LEGAL
AREAS
• OPERATIONAL RISK MGT ASSERTS THAT AN
IMPORTANT RISK ARISES FROM
CONTRACTS,OBLIGATIONS,COMMITMENTS
AND AGREEMENTS
• NEED TO ASSESS RISK AT TIME OF
DRAFTING OF TERMS AND ADDRESS THEM
TO SAVE THE BLUSHES LATER ON
 PROJECT STEPS FOR RISK
IMPLEMENTATION
• INITIATIVE PHASE-DETERMINE WHY RISK MGT IS
REQD AND WHAT SHOULD BE ACCOMPLISHED
• DEFINITION PHASE-DETERMINE WHAT REQMNTS
SHOULD BE SATISFIED BY RISK MGT AND IF THEY
ARE ATTAINABLE
• DESIGN PHASE-DETERMINE THE FORM THAT RISK
MGT WILL TAKE
• PREPARATORY PHASE-PREPARE STRATEGY FOR
EFFECTIVE IMPLEMENTATN
• REALIZATION PHASE-IMPLEMENT RISK MGT AND
CREATE FOLLOW UP PLANS
• FOLLOWUP PHASE-USE/APPLY RISK MGT AND
ADAPT RISK MGT `1TO PROCESSES
 CSF IN IMPLEMENTATION OF
RISK MGT
• FORMULATION OF CLEAR OBJECTIVES-WHAT IS TO
BE ACHIEVED THRU RISK ANALYSIS
• ESPOUSING NEED OF RISK MGT THROUGHOUT
ORGANIZATION
• ACQUIRING CAPABILITY TO HANDLE
STRATEGIC,TACTICAL AND OPERATIONAL RISKS
• DEVISING RISK ANALYSIS AND CONTROL
MECHANISMS FOR ABOVE RISK CATEGORIES
• INCORPORATING RISK MGT INTO EXISTING WORK
METHODS
 STRENGTH OF RISK MGT
• SURFACE RISK EVENTS THAT OTHERWISE
WOULD NOT BE RECOGNIZED.
• CONSEQUENTLY THEY REDUCE THE
NUMBER OF SHOCKS MGRS ENCOUNTER
IN THEIR WORK EFFORT
• ENABLES MGRS TO CALCULATE THE
CONSEQUENCES OF UNTOWARD
EVENTS .IMPACT OF RISK INFO HELPS IN
DECISION MAKING
 STRENGTH OF RISK MGT
• GUIDANCE ON WHAT STEPS TO TAKE
TO REDUCE LIKELIHOOD OF
UNTOWARD EVENTS ARISING AND
WHEN THEY ARISE WHAT STEPS
THEY CAN TAKE TO MINIMIZE
NEGATIVE IMPACT
 WEAKNESS OF RISK MGT
• DO NOT PREDICT FUTURE EVENTS
WITH CONFIDENCE AS PATTERN OF
OCCURRENCE IS NOT STUDIED
ENTERPRISE RISKS

FOR

PRESIDENT SYSTEMS
 ORGANIZATIONAL
OPERATIONAL RISKS
• Cloning of our products by smaller companies in the unorganized
sector
• Periodic steep increase in steel and component prices leading to
reduced manufacturing contribution
• Introduction of new products which may not succeed in the
marketplace
• Inadequate understanding of exact market potential , requirement of
such markets and wallet share of competition
• Non competitive pricing resulting in reduced product sales
• Risk of collaborator or principal quitting business
 ORGANIZATIONAL
OPERATIONAL RISKS
• Lack of adequate technical or marketing support from principals
• Diversification into new segments without core competence and risk
assessments
• Excessively long sales
• Job responsibilities in process not clearly defined/understood
• Inadequate closures for qtr and non receipt of acr for period leading
to enhanced working capital requirement and liquidity crunch
• Excessive discounting leading to OA’s being executed at
uneconomic prices
• Need to assess operational risks for non standard OA
 ORGANIZATIONAL
OPERATIONAL RISKS
• Inadequate closures for qtr and non receipt of acr for period leading
to enhanced working capital requirement and liquidity crunch
• Excessive discounting leading to OA’s being executed at
uneconomic prices
• Need to assess operational risks for non standard OA

• Supply chain partner competency may not be upto the requirement

• Attrition of core competent people from mfg or R&D centres leading
to loss of capabilities
• Business continuity planning for operations and people needs to be
planned
 ORGANIZATIONAL
OPERATIONAL RISKS
• Supply chain partner competency may not be upto the requirement
• Attrition of core competent people from mfg or R&D centres leading
to loss of capabilities
• Business continuity planning for operations and people needs to be
planned
• Unavailability of data related to quality and mfg contribution from it
systems leading to incorrect assumptions
• True capacity of factories not known in terms of throughput in
number of units
• Inadequate information from it systems leading to deficiency in
management by fact
 ORGANIZATIONAL
OPERATIONAL RISKS
• Risks of increased set up and batch execution times for non std
products leading to ineffective capacity utilization
• Inadequate understanding of complexity of mfg issues and lack of
competence to mfg such items
• Under costing of items leading to mfg losses or less margins
• Compliance to international requirements such as sa 8000 not
evident
• Unprofitable partnerships with principals
• Industrial espionage
• Presence and occurrence of operational risks
 MANUFACTURING
OPERATIONAL RISKS
• Correctness of cost estimates
• Underestimation of complexity of mfg intricacies
• Escalation of rm prices and their effect on OA mfg contribution
• Oper exp inflation leading to lowered mfg contribution
• Supplier insolvency
• Availability of raw material
• Supplier and outsourcer process and qlty capability
• Other operational risks incl business continuity planning in the event
of force majeure
 MANUFACTURING
OPERATIONAL RISKS
• Worker strikes or go slow tactics
• Presence of undetected technical risks
• Faulty designs
• Unexpected machine breakdowns or operative trouble
• Power outages
 CONTRACT
MANUFACTURING SBU
• OPERATIONAL
Fixed price RISKS
mfg contracts valid for long periods which do not factor
price escalations
• Competition from low cost manufacturers
• Quality issues in delivery
• Delayed or short shipment
• Operational risks from outsourced or procurement processes
• Customer attrition to competition
 TPD SBU OPERATIONAL
RISKS
• Lack of pre sales support from principals
• Closure of principal due to force majeure or other reasons
• Withdrawal of product support or from catalog by principals without
provision for extended support for products currently in the market
• Indifferent spares coverage
• Product transfer prices not commensurate with the purchasing
power of the indian customer
• Product performance and reliability not as per the stated claims or
customer expectations
• Quality issues in shipped items
 STANDARD ENCLOSURES
SBU OPERATIONAL RISKS
• Under estimation of costs
• Rm or operational cost inflation
• Competition from low cost manufacturers
• Quality issues in delivery
• Delayed or short shipment
• Operational risks from outsourced or procurement processes
• Customer attrition to competition
• Under estimation of complexity of mfg processes required to
produce non std product
 RISKS IN PROCUREMENT
• Capability capacity competence not matching requirements
• Delayed deliveries
• Quality not as per requirement
• Unable to replicate quality
• Threat of closure with inadequate backup
• Not able to contain prices as per requirement
• No NDA disclosures for proprietary drawings and info
 RISKS IN OUTSOURCING
• Capability capacity competence not matching requirements
• Delayed deliveries
• Quality not as per requirement
• Unable to replicate quality
• Threat of closure with inadequate backup
• Not able to contain prices as per requirement
 RISKS IN DISTRIBUTION
• Capability capacity competence not matching requirements
• Inadequate commitment to president products as they might have
other priorities
• Also deal with products of competition
• Inadequate field and technical force
 RISKS IN TPD ALLIANCES
• Lack of marketing and technical support
• Inappropriate pricing for indian markets
• Untimely withdrawal of support for existing products
• Lack of information related to competitive products or current
installed base
• Risk of partner selling out