Risk Management Tools and Techniques

Size: px

Start display at page:

Download "Risk Management Tools and Techniques"

Francine Wilkinson
6 years ago
Views:

1 Risk Management Tools and Techniques

2 Introduction Risk management is a tool which is increasingly used in organizations and by public bodies to increase safety and reliability and to minimize losses. French and Saward (1983) describe a tools as any device or instrument, either manual or mechanical, which is used to perform work. Tools are the methodology which employs numerous techniques to achieve its aim.

3 Risk Analysis Techniques Two main categories of risk analysis techniques: Qualitative Quantitative Qualitative methods seek to compare the relative significance of risks facing a project in terms of the effect of their occurrence on the project outcome Quantitative techniques attempts to determine absolute value ranges together with probability distributions for the business or project outcome and, consequently, involve more sophisticated analysis, often aided by the use of computers.

4 Choice of techniques Norris (1992) and Simon et al (1997) management should consider: 1. The availability of resources for analysis human, computational and time 2. The experience of the analysts with the different techniques 3. The size and complexity of the project 4. The project phase in which the analysis takes place 5. The available information 6. The purpose of the analysis

5 How organization deploy the tools Organizations are using risk management concepts to consider a number of questions: 1. What risk am I facing, and how do they compare to those of my peers or competitors? 2. How are these risks changing based on changes in my business environment? 3. What level of risk should I take? 4. How should I manage those risks?

6 Categorization tools help organizations group and prioritize their risks, by industry or within an entity Such tools help management to ensure that they have captured all categories of organizational risks, not just traditional, financial hazards

7 Risk Categories Governance Integrity Compliance Organizational Risks Operational Information Financial Human Resources

8 Organizational Approaches Centralized risk management tends to focus on risks that affect the achievement of key corporate objective and strategies and significantly affect most if not all functions and processes. Decentralized risk management pushes the responsibility of risk management to those who live with it day to day.

9 Key Actions to Embed a Risk Structure in an Organization Board activities Management Activities Establish a common risk culture Create risk accountability/responsibility Embed risk activities into ongoing business process Measure and monitor risk

10 1. Brainstorming 2. Assumptions analysis 3. Delphi 4. Interviews Qualitative Techniques 5. Hazard and Operability Studies (HAZOP) 6. Failure Modes and effects Criticality Analysis (FMECA) 7. Checklists 8. Prompt Lists 9. Risk Registers 10. Risk Mapping

11 Quantitative Techniques 1. Scenario Analysis 2. Decision Trees 3. Controlled Interval and Memory Technique 4. Monte Carlo Simulation 5. Sensitivity Analysis 6. Probability-Impact Grid Analysis

12 Value Management Value management addresses the value processes during the concept, definition, implementation and operation phases of a project. It encompasses a set of systematic, logical procedures and techniques to enhance project value throughout the life of the facility/project Connaughton and Green (1996): A structured approach to define what value means to a client in meeting a perceived need by establishing a clear consensus about the project objectives and how they can be achieved

13 Value is the level of importance that is placed on a function, item or solution. The four traits of value are speed, quality, flexibility, and cost 1. Speed how quickly a firm can deliver a product to the customer or design and produce a product 2. Quality how well a product meets a customer s expectations 3. Flexibility how easily the firm can change a product to closely meet the customer s expectations/wants 4. Costs elements to be included in a life cycle costing are capital, finance. Operating, maintenance, replacement, alteration, expansion, and innovation costs, and residual values

14 Risk Attitude and Utility Theory Risk neutral Risk seeking (risk lover) Risk averse

15 Political Risk Country Risk Analysis 1. Government stability 2. Socio-economic conditions 3. Investment climate 4. Internal conflict and military intervention in politics 5. External conflict 6. Corruption 7. Religious and/or ethnic tensions 8. Policy system and management of economy 9. Law and order 10. Democratic accountability and quality of the bureaucracy

Risk Management is evolving From Risk as individual hazards Risk identification and assessment Focus on all risks Risk mitigation Risk limits Risks with no owners Haphazard risk quantification Risk

16 Risk Management is evolving From Risk as individual hazards Risk identification and assessment Focus on all risks Risk mitigation Risk limits Risks with no owners Haphazard risk quantification Risk is not my responsibility To Risk in the context of business strategy Risk portfolio development Focus on critical risks Risk optimization Risk strategy Defined risk responsibilities Monitoring and measurement Risk is everyone s responsibility

17 Role of the Risks Management Function 1. Setting policy and strategy for risk management 2. Primary champion of risk management at strategic and operational level 3. Building a risk aware culture within the organization including appropriate education 4. Establishing internal risk policy and structures for business units 5. Designing and reviewing processes for risk management 6. Co-coordinating the various functional activities which advise on risk management issues within the organization 7. Developing risk response processes, including contingency and business continuity programs 8. Preparing reports on risk for the board and the stakeholders

Project Planning & Management. Lecture 11 Project Risk Management

Project Planning & Management. Lecture 11 Project Risk Management Lecture 11 Project Risk Management The Importance of Project Risk Management PMBOK definition of Project Risk An uncertain event or condition that, if it occurs, has a positive or negative effect on the