Introduction to Risk Management PDF

UNIVERSITY OF LUSAKA  SCHOOL OF GRADUATE STUDIES  Topic : Introduction to Risk Management  Lecture : 1  Lecturer : DR.Eng. M.K.Nsefu 1  Risk Management Introduction Learning Objectives; 1. To outline the b...

UNIVERSITY OF LUSAKA  SCHOOL OF GRADUATE STUDIES  Topic : Introduction to Risk Management  Lecture : 1  Lecturer : DR.Eng. M.K.Nsefu 1  Risk Management Introduction Learning Objectives; 1. To outline the basic concept of risk and uncertainty 2. To define risk and uncertainty 3. To discuss the dimension of risk and perception of risk in the organisation.  Introduction to Risk Management  Risk affects every aspect of human life, we live with it every day and learn to manage its influences.  Mostly it is managed as an unstructured activity, based on common sense, relevant knowledge, experience and instinct.  Management of risk is one of the most important issues facing organizations today. 3  Introduction to Risk Management  If you can’t manage risk, you can’t control it. And if you can’t control it you can’t manage it. That means you’re just gambling and hoping to get lucky. (J. Hooten, Managing Partner, Arthur Andersen & Co., 2000) 4 Risk Definition 5  Introduction to Risk Management Risk  Is inherent in every business/Project  All projects are subject to risk, uncertainty and opportunity  Influences company success which is achieved by pursing opportunities  In projects limits or prevents achievement of objectives  As a serious threat may cause the project to be modified or abandoned  Is deemed acceptable if the possible gains exceed the possible losses. 6  Introduction to Risk Management  The future cannot be predicted. It is uncertain, and no one has ever been successful in forecasting the stock market, interest rates, or exchange rates consistently-or credit, operational, and systemic events with major financial implications.  Yet, the financial risk that arises from uncertainty can be managed. Indeed, much of what distinguishes modern economies from those of the past is the new ability to identify risk, to measure it, to appreciate its consequences, and then to take action accordingly, such as transferring or mitigating the risk. 7 Introduction to Risk Management 8 What is Risk 9  What is Risk  According to Chapman and Ward (1997) all projects involve risk-the zero risk project is not worth pursuing. Organizations which better understand the nature of these risks and can manage them more effectively can not only avoid unforeseen disasters but can work with tighter margins and less contingency, freeing resources for other endeavors, and seizing opportunities for advantageous investment which might otherwise be rejected as too risky. 10  What is Risk  Risks are not inherently bad. Sometimes, it is necessary to take risks to accomplish worthy and meaningful goals. This is especially true in microfinance where loan officers take risks every day by lending money to people without credit histories, without business records and often without collateral.  One has to take risks to operate a successful microfinance institution-but it is important to take calculated risks. 11  What is Risk Risk-based thinking gets organizations to formally and systematically consider the risks they face and how those risks can be eliminated or minimized. 12 What is Risk 13  What is Risk  A condition of risk is said to exist when a decision must be made on the basis of incomplete but reliable factual information.  Reliable information, though incomplete, is still useful to managers coping with risk because they can use it to calculate the probability that a given event will occur and then to select a decision alternative with favorable odds (Kreitner, 2009).  Risk is the future impact of a hazard that is not controlled or eliminated. It can be viewed as future uncertainty created by the hazard. If it involves skill sets, the same situation may yield different risk. 14  What is Risk  The two basic types of probabilities are objective and subjective probabilities.  Objective probabilities are derived mathematically from reliable historical data, whereas subjective probabilities are estimated on the basis of one’s past experience or judgment.  Decision making based on probabilities is common in all areas of management today. For instance, laundry product manufacturers would not think of launching a new detergent without determining the probability of its acceptance via consumer panels and test marketing.  A number of inferential statistical techniques can help managers objectively assess risks. 15  Case Studies CASE STUDY 1 – New medical office building- $30 million Risk description: In order to commission the building at the completion of construction, the utilities needed to be connected to the utility system (gas and electric). Throughout the project, the team could not get a commitment from the utility company for when they would complete the connection. This risk was never communicated beyond the project team and there was no analysis of the impact for a delay or an alternative plan developed to address the risk. Impact: The risk ultimately did occur and resulted in the need for temporary generators, an increase in the contractor’s general conditions and several months delay to the project completion. 16  Case Studies CASE STUDY 2 – New bridge construction - $600 million Risk description: During the design and planning stages of the project, a decision was made to rely on a geotechnical report that was 30+ years old and in a different location than the planned bridge foundations. The engineers designing the bridge understood this as a risk; however there was no process in place to capture this risk and quantify or communicate the risk to project leadership or to the team responsible for managing the construction phase of the project. Impact: The bedrock in the actual location of the bridge foundations was substantially different than the geotechnical report indicated. This resulted in a complete redesign of the foundations and several months delay on the project. The financial impacts were greater than $30 million. In both case studies, the risks were well known by the project teams and could have been avoided or mitigated if a risk management process would have been in place. Having a risk management process would have allowed the organisations to track, quantify, plan and communicate the risks to individuals with the capability to help mitigate or avoid the 17 risk. Introduction to Risk Management 18  Introduction to Risk Management What then is Risk Management?  APM defines project risk management as a structured process that allows risk events and overall project risk to be understood and managed proactively, optimising project success by minimising threats and maximising opportunities.  PMBOK, USA defines risk management as the process concerned with the identification, analysing and responding to uncertainty. It includes maximising the results of positive events and minimising the consequences of adverse events ability. 19 Introduction to Risk Management 20  Introduction to Risk Management What then is Risk Management?  Risk management is really about how firms actively select the type and level of risk that it is appropriate for them to assume.  Most business decisions are about sacrificing current resources for future uncertain returns.  In this sense, risk management and risk taking aren’t opposites, but two sides of the same coin. Together they drive all our modern economies: the capacity to make forward-looking choices about risk in relation to reward lies at the heart of the management process of all enduringly successful corporations. 21 Introduction to Risk Management 22 Introduction to Risk Management 23 24 Thank You 25